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The Entrepreneur’s Guide to Personal Finance

The Entrepreneur’s Guide to Personal Finance 10
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Dr.JesperHunt,United States,Researcher
Published Date:16-07-2017
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1 2 3 4 5 6 7 8 9 10 11 The 12 13 14 Entrepreneur’s 15 16 17 18 Guide to 19 20 21 Personal 22 23 24 25 Finance 26 27 28 29 30 31 contents 1 2 3 4 The Entrepreneur’s Guide to Personal Finance 5 6 7 Prosperity and success are what many entrepreneurs envision when 8 they start their own business. However, it takes more than a vision for 9 your business to succeed. Capital, the money needed to start, operate, 10 and grow a business is important, as is managing your personal finances 11 while balancing the demands of your business. Fortunately, you have 12 options when it comes to funding your business and the opportunity to 13 gain the skills you need to effectively manage your finances both at work 14 15 and at home. 16 This guide on personal finance for the small business owner was made 17 possible through a relationship with Money Management International 18 19 (MMI) in partnership with the Citi Foundation. In this guide, we hope to 20 provide you with viable ways to turn your ideas into a plan, market and 21 finance your business, and become even more capable of succeeding at 22 your business ventures. 23 24 25 26 27 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 In this eBook, we’ll explore how to 24 plan your business, which will give 25 26 you direction and help relieve some of 27 your fears about the risks of becoming 28 an entrepreneur. You will also spend 29 some time learning about personal 30 finance and how your personal financial 31 situation relates to securing a loan for your business. contents 1 2 3 4 5 6 Table of Contents 7 8 9 Chapter one: Is small business ownership right for you? 10 11 Chapter two: Your business model 12 13 Chapter three: Your idea and testing the market 14 15 Chapter four: Finances 16 17 Chapter five: Business structure and taxes 18 19 Additional Resources 20 21 22 23 24 25 26 27 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 Chapter one: 10 11 12 13 1 14 15 16 17 18 19 20 21 Is small business ownership right for you? 22 23 What ideas do you have about small business ownership? Does it sound risky? Do you think of the famous Bachman-Turner Overdrive 24 lyrics: “It’s the work that we avoid, and we’re all self-employed; we love to work at nothing all day...”? 25 26 Rock songs aside, the truth is that owning a business is work. Small business owners typically wear many hats. Take a freelance photog- 27 rapher, for example. It may seem that he just makes a living by snapping photos, but he’s also responsible for marketing, sales, website 28 design, invoicing, and more. Even if he hires out some of the work to subcontractors, he is still ultimately responsible for the results, as his livelihood depends on them. 29 30 In the article “How to Decide if Entrepreneurship is Right for You,” Colleen DeBaise describes the commitment entrepreneurs must 31 make to their business as follows: “Starting a business is a lot like becoming a parent. Not only do you have to prepare for your start-up emotionally and financially, but you have to be committed to its constant needs until it’s mature enough to hum along on its own. And even then (much like a child) it will always need you in some capacity, no matter how old it gets.” Just as with anything else, there are pros and cons to entrepreneurship, and you need to take some time to decide if owning a small business is right for you. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 Owning a small business is more interesting work. Presumably you want to start a business because it’s something about which you’re passionate. This is very appealing for people 9 who are stuck in a job that they hate or that simply doesn’t challenge them. 10 11 Entrepreneurs can set their own schedules. Depending on the type of business you want 12 to start, you can enjoy a more flexible schedule than an employee. 13 Entrepreneurs work harder, but they also directly benefit. While an entrepreneur might 14 have to put in 12-hour workdays, some salaried employees start to wonder if being salaried is 15 really that much of a benefit when they’re working late several days a month — for the same 16 amount of money. With the small business, if you decide to burn the midnight oil to ship out 17 another order, your bank account sees the results. 18 Unlimited earnings and growth potential. The U.S. Small Business Administration reports 19 that on average, self-employed people earn higher incomes than employees. It’s important to 20 note, however, that there’s a wider variance in incomes among the self-employed, and earnings 21 To start, let’s examine are lower at first, then grow and surpass the income of traditional employees. 22 how being a small Greater potential rewards come with more risk. According to the U.S. Small Business 23 Administration, roughly 50 percent of small businesses fail within the first five years, typically 24 business owner compares for reasons like insufficient capital (money), poor inventory management, poor credit arrange - 25 ments, and personal use of business funds. While nothing, including a day job, is secure, small 26 with being an employee business owners have to be prepared to handle a variable income, meaning that there might be 27 some months when you’re making a lot more money than others. Planning is critical to keep your 28 business running smoothly. 29 There are no guarantees, either as a salaried employee or as a small business owner, but there are 30 ways to increase your chances of succeeding as an entrepreneur through careful planning. 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 Have you thought about what kind of business Turning your ideas into a business plan 7 you want to start? Chances are, you have 8 a few ideas, but before you get too much 9 further, let’s look at the components of a good business plan. 10 11 The following ten questions are adapted from 12 the book StartupNation: Open for Business and 13 will help you to formulate your plan: 14 What’s your business idea? 15 16 What model suits you best? 17 What’s your role going to be? 18 Who’s on your team? 19 20 Does your idea address a need? 21 What’s different about what you offer? 22 23 Is there a market for your product or 24 service? 25 How much are customers willing to pay? 26 How much money do you need to get 27 started? 28 29 How will you get start-up funds? 30 You can probably answer the first question, or 31 at least jot down some ideas. Keep a dedicated file or notebook to answer these questions as you read through this eBook. Also, know that your plan will be a living, breathing document that you’ll edit as you develop your business. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 There is no such thing as a one-size-fits-all plan. From Inc.com: 5 6 7 “There are scores of websites these days on the Internet 8 9 that offer to sell business plans for 20 or more, designed 10 11 to let you enter your company name and specifics and 12 generate a plan. These are about as valuable as the paper 13 14 they’re printed on…The reason is that each business is 15 unique and, therefore, each business plan should be a 16 17 unique document to be truly worthwhile to the business.” 18 19 Read the full article, “How to Write a Great Business Plan,” on Inc.com. 20 21 22 23 24 25 26 27 28 29 30 31 contents 1 2 3 4 5 6 Chapter two: 7 8 Your business model 9 10 11 12 What model suits you best? 13 2 14 Before we get into specific business models, think about how much time you want to commit to your business. 15 Will it be a part-time gig, a full-time career, or something you do only on the weekends or during holidays? 16 17 For example, a stay-at-home-parent might have some free time as the kids get older, but not enough to commit 18 to a full-time business, so part-time is more practical. A full-time employee might like his or her job, but wants to 19 make extra cash before the holidays selling handmade ornaments, so the business would be seasonal. 20 21 Ramit Sethi, New York Times bestselling author of I Will Teach You To Be Rich and the blog of the same name, 22 writes: 23 24 “Think of earning money as an opportunity to make a series of small bets in order to rapidly find one that’s 25 profitable. If you want to scale up and go full-time, great But most people don’t ever need to do that. It’s nice making extra money on the side and giving yourself more opportunities to do the things you love.” 26 27 If you want to make your business your primary focus, it’s a good idea to start it as a part-time business in the 28 beginning, then transition it to full-time once you have enough business to support you. This will allow you to 29 test your ideas before making the leap to full-time. 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Business models: Pros and Cons Thanks to technology, there are several business models available to 4 entrepreneurs today. Consider the following models, along with the 5 pros and cons of each: 6 7 8 9 10 Home-based and/or eCommerce. Traditional brick-and-mortar. 11 A home-based business is run from your house and typically makes use of technology for These businesses include retail stores, offices, or any other location that involves buying, 12 day-to-day operations. eCommerce businesses sell products or services online through a renting, or using real estate outside of the home. 13 website, either their own or an established one like eBay or Etsy. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Pros: Cons: Pros: Cons: 29 30 31 Lower start-up and operation costs; Local government restrictions might not More social interaction; can attract Greater risks and higher overhead costs can fit work around life commitments; allow customer traffic; home distractions walk-in customers who might for rent or purchase of space; requires Web-based businesses can operate on can impede work; work can be isolating; otherwise not know about your full-time commitment to ready the a global levelsellers on eBay will have may need to outsource some work if business; minimizes distractions with space; may require hiring and managing to compete with established sellers. you’re a one-person operation; online busi- a dedicated work space. employees; may require initial inventory nesses might face a lot of competition, for purchase. example, new sellers on eBay will have to compete with established sellers. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Business models: Pros and Cons 4 5 6 7 8 9 10 Franchise. Multi-level marketing (MLM). 11 In this business model, the sales force is compensated for their sales and the sales of others When you buy into a franchise, you usually pay an upfront fee plus a percentage of your profit 12 they recruit, creating a hierarchy where the higher up you are, the more money you make. to the franchisor. Essentially, you’re paying for an established name and business model. Unfortunately, the ones at the top are far more successful than the ones at the bottom, who 13 often lose time and money. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Pros: Cons: Pros: Cons: 29 30 Likely to be less risky because you’ll Upfront fees can be high; guidelines Usually have limited start-up costs; Most people lose money because the 31 receive a business model; the name is are strict and limit your control over the possible work-from-home business process seemed easier than it is in reality; established. business; you have to pay the franchisor a with flexible schedule; salespeople selling to people in your social network cut of your profits. receive a structured business plan to (such as friends and family members) and follow. trying to recruit them can create tension and awkward situations; some MLMs are scams and every model needs to be carefully vetted. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 What’s your role going to be, and ... who’s on your team? 6 7 8 9 10 11 12 13 14 15 After considering your time commitment and business 16 model, you probably have a better idea of what your 17 role will be and who will be on your team. If you want to 18 run a part-time eCommerce business from home, you’re 19 most likely taking on multiple roles and working by 20 yourself, or maybe with a partner. If you are opening up 21 a retail store, you will be the owner, and you’ll probably 22 need employees. This means that you’ll also be the 23 manager, unless you hire someone to fill that role. 24 It’s important to consider what your role will be so that 25 you can determine costs for outsourcing, if applicable, 26 and for any necessary employees you may hire. Both of 27 those factors affect your bottom line. 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 Your idea and testing the market 6 7 Chapter three: 8 9 3 10 11 12 Does your idea address a need? 13 14 Remember Tom’s “Jump to Conclusions Mat” from the movie Office Space? The idea was that 15 the mat would have different conclusions written on it that you could “jump to.” This is a good example of an idea that doesn’t address a need. Why would a person need to literally 16 jump onto a written conclusion? Did they have a question? If so, are the conclusions even 17 going to be relevant? 18 19 After telling his coworkers about his big idea, the character Michael sums it up nicely, “That’s 20 the worst idea I’ve ever heard in my life, Tom.” 21 Think about what need your idea addresses. Your customers have a problem, and you are 22 going to solve it. If you aren’t solving their problems, they aren’t going to buy. Let’s take 23 a day care provider, for example. Child care is a very real need for working parents — they 24 can’t get around it, someone has to watch the kids while they are at work. It’s an absolute 25 necessity. How does your idea solve a problem? 26 27 You might have a 28 What’s different about what you offer? wonderful business idea, 29 Let’s say you are interested in becoming a child care provider, and we’ll assume that there 30 but before investing too are already a few day care providers in your area. That doesn’t mean you give up, that 31 much time and energy, means you have to set yourself apart. What can you offer that the others aren’t? you have to find out if Some customers may not be as concerned with your past experience or specific your potential customers qualifications; they’re concern is with their own needs — in this case, a safe and enriching will bite. environment for their children. Get into your client’s head, or better yet, talk to 25 people who are potential clients and find out what matters most to them. Ask 25 mothers what they want in a day care, and you’ll already be far ahead of your competition. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Is there a market for your product or service? 4 5 Is there a market in your area? Can your potential customers pay? You might want 6 to open a scuba shop, but if you aren’t near a body of water, your geography is off. 7 Similarly, if you want to run a business that specializes in marketing services for non- 8 profits, you need to do some real research to find out if your target customer is willing and able to pay. 9 10 11 Are there customers in your area, and can they pay for your services? 12 13 Again, this means seeking out people for informational interviews. Use your network, 14 reach out to people, and offer to buy them a cup of coffee for their time. But be sure 15 to make it strictly informational, and refrain from selling them on your idea. Most 16 people are happy to help others, but no one wants to be ambushed by a sales pitch. 17 18 CAUTION: 19 20 Many would-be entrepreneurs get caught up 21 doing unimportant tasks that distract them 22 from the real work at hand, which is talking to potential customers. Ramit Sethi of I Will 23 Teach You To Be Rich writes about the perils 24 of spending hours working on a website or 25 setting up a Twitter account. 26 27 “Stop building complex marketing strategies for clients you don’t have...complex 28 marketing strategies like SEO, blogging, and viral marketing appear both easy and 29 discrete, when in reality they’re often an excuse for you to avoid the hard work of finding actual people who will pay you for your services. Complex marketing 30 strategy encompasses dozens of subtasks. Where will you be after subtask 11? In all 31 likelihood, you’ll have given up. Honestly, are you defaulting to high-level, almost impossible-to-finish strategies as a way of avoiding getting down to the real work?” Read the full article: “Want to earn more money? How to find your first 3 paying clients.” The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 How much are customers willing to pay? 8 It’s a good idea to give pricing some thought, but don’t get 9 too caught up in the details when you’re starting to write 10 a plan. Often people spend too much time on the less 11 important aspects of starting a business (“Should I accept 12 Visa or American Express cards‽”) and not enough on the 13 critical parts, like getting customers. 14 When thinking about pricing, decide how you’ll be paid. 15 If you sell a product, you’ll be paid per item. That’s pretty 16 straightforward. If you sell a service, however, you could 17 be paid hourly or by the project, or even paid to be on 18 retainer. When you start a service business, hourly is often 19 a good place to start. It mitigates risk for the customer, 20 and allows you to figure out how much time goes into a service. If you start with a project rate and don’t budget 21 enough time to complete the project, you’re losing money. 22 Once you’ve starting working for a few clients, you’ll have 23 a better idea of what it takes to complete a service, and 24 then you’re better equipped to put together package deals 25 and charge project fees. 26 27 To determine your initial pricing, go with the industry standard in your area. If you want to start a day care, find 28 out what others are charging. This doesn’t mean you have 29 to stay at that price, in fact, you’ll probably want to raise it. 30 After all, you’ve conducted informational interviews with 31 potential clients, and you know what they want. You’ll offer features and benefits that your competition isn’t offering, which means you can charge more. CAUTION: Be careful about charging less than the competition. While that might seem like a good way to draw in customers, you’ll cheapen your value and attract customers who likely value the lowest price above all else. You need customers who are willing to pay for value. contents 1 2 3 4 5 Finances 6 7 8 Without financing squared away, 9 your business can’t afford to get off 10 the ground Let’s dive in deep to Chapter four: 11 figure out how much money you’ll 12 need, and how to get it. 13 14 4 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 contents 1 2 3 4 5 6 How much money do 7 8 you need to get started? 9 10 11 First, you need to determine start-up costs. How much money will it take to get your business off the ground? Make a list of every expense 12 you’ll have for the first six months. Some expenses will be ongoing 13 costs, such as inventory and rent payments, and others will be one-time 14 costs, such as purchasing a piece of equipment. 15 16 After you’ve made a list, decide whether each expense is essential 17 or optional. Cut the optional items from the budget. You can always 18 purchase them later once your business is making a profit. 19 20 Finally, next to the essential expenses, write down whether each 21 expense is fixed or variable. Fixed means that the price won’t change 22 in the foreseeable future, such as rent payments, and variable means 23 the expense will be higher in some months and lower in others, such as inventory (especially if you have a “busy” season) and shipping costs 24 (since shipping costs are determined by how many items you sell). 25 26 27 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 If you’ll need a loan to start your business, you’ll 6 need what’s called debt financing, which is How will you get start-up funds? 7 borrowing money for a period of time, usually 8 with interest. 9 To prepare to apply for a loan, the Small Business 10 Administration recommends that you gather the 11 following documents: 12 13 • personal background information, including previous addresses, names 14 used, criminal record, and education records 15 • current resume 16 17 • business plan 18 • personal credit report (The lender will obtain your credit report, but you 19 need to request your own personal credit report before applying for a 20 loan to resolve any errors on the report.) 21 22 • business credit report (if you are already in business) 23 • business and personal income tax returns for the previous three years 24 • financial statements (if you’re an owner with more than a 20 percent 25 stake in your business) 26 27 • one year of personal and business bank statements 28 • collateral (Requirements vary greatly – some loan programs don’t 29 require collateral.) 30 31 • legal documents, when applicable, such as business licenses and registrations, articles of incorporation, copies of any contracts with third parties, franchise agreements, and commercial leases Note that requirements will vary depending on the lender and loan program. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 Personal credit 5 6 and business credit 7 8 Many people do not realize that personal credit and business credit are closely tied. Without an 9 established business credit history, lenders will 10 use your personal credit to determine whether or 11 not to lend you money. Evaluating your current 12 financial situation to establish a plan for improving 13 your credit also will improve your chances of being 14 approved for a business loan. 15 Also, realize that many people are turned down 16 the first time they apply for a small business loan. 17 There are a few main reasons people are denied 18 credit, and we’ll examine each one to help you 19 increase your chances of qualifying for a small 20 business loan. 21 22 23 Reason 1: 24 25 Unreasonable purpose 26 for requesting credit 27 28 A lender will want to know that you have a good reason for borrowing money. This is why it’s crucial 29 to have a business plan that will show that your 30 business will fill a need, there’s a market for your 31 product or service, and that you are borrowing money to cover only the essential expenses. Remember, the less money you ask for, the greater your chances of getting approved for the loan. If you are denied a loan because the lender believes your purpose is unreasonable, you’ll need to either cut expenses further or do more legwork to prove that your business idea will be profitable. contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 When you dispute a credit report error, both the credit reporting company and the 18 Reason 2: 19 information provider (the company that provided the information to the credit 20 bureau) have a responsibility to correct inaccurate or incomplete information. To 21 dispute an error and get a sample of a credit dispute letter, visit the Federal Trade Errors on applicant’s credit report 22 Commission website and read “How to Dispute Credit Report Errors.” 23 Lenders often require a borrower’s personal guarantee in case of default. This 24 means that your personal credit history will help determine whether or not you 25 are granted a loan, which is especially true for new business owners who don’t 26 have a business credit line to show the lender. Review your credit reports to make sure they are accurate. The Motley Fool offers the following advice 27 on reviewing for errors: All lenders will run a credit check on an applicant, so it’s important to review 28 your report even before you apply for a loan. You get one free credit report “There are two kinds of credit report blunders — information that’s outright inaccurate, and boo-boos 29 each year from each of the three credit bureaus. You can do this the following that reflect the errors of your ways. Common reporting errors (the not-your-fault stuff) can include three ways: 30 accounts mistakenly attributed to you, application notices that you didn’t fill out, and out-of-date 31 home address or employment information. Errors can also include omissions, such as the presence 1.- Order your reports online at AnnualCreditReport.com of a delinquency that you’ve already remedied, or an old collection action that is still being reported 2.- Call 1.877.322.8228 to request your credit reports. as overdue. The other kind of uh-oh is the one you brought upon yourself. There’s no denying self- inflicted credit record wounds (though you can try, and you might be successful if you catch the credit 3.- Complete the Annual Credit Report Request Form and mail it to: reporting agency on a good day).” Annual Credit Report Request Service P.O. Box 105281 Read the full article, “How to Fix Credit Boo-Boos” on The Motley Fool website. Atlanta, GA 30348-5281 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents