Planning to Start a Business

This past year I worked with more than 30 people who want to start a business or buy their first business. Statistically, only 1 in 4 new businesses will still be in business in two years. Those who survive typically have a well prepared business plan, understanding the true market and sales potential, starting with enough of their own money, and dogged determination to survive long hours and a demanding lifestyle.

A good business plan is short and focused on conclusions reached from researching the basics of market place conditions, identifying the real customers, verifying that there are enough customers, a good estimate of startup costs and operating budget for the first year. Sales projections need to be supported with solid assumptions about the market.

Planning to Staying in Business

 “Good fortune is what happens when opportunity meets with planning.” Thomas Alva Edison

The action word in Edison’s statement is “planning” an activity not the end result. One reason staying in business is hard is lack of adequate preparation. Businesses that lack the resources and knowledge to execute their business model and seize the opportunity quickly run out of money. The act of planning means you have though through the desired project as well as thought about what could go wrong. Unexpected events often become death traps for new business ideas. Likewise, as Edison points out lack of information can result in missed opportunities.

Common Financial Ratios for Year End Reviews

Use financial ratios to compare year to year performance. Ratios will indicate a trend of better or worse than last year. Calculating these ratios will require a Balance Sheet and a Profit and Loss statement


BALANCE SHEET RATIOS (Liquidity)

• Current Ratio (Solvency) divide Current Assets by Current Liabilities to measure dollars of assets per dollar of debt shows ability to pay debts.
• Quick Ratio (Liquidity) divide  Cash plus Accounts Receivable by Current Liabilities to measure CASH available to pay debts show ability to quickly pay debts.
• Debt-to Worth (Safety) divide Total Liabilities by Net Worth to measure Dollars of Liabilities per dollar of net worth
• Working Capital divide Current Assets minus Current Liabilities by Sales to measure ability to pay short term debt
• Cash divide Cash plus equivalents by Total Assets to measure CASH as a percent of total assets

INCOME STATEMENT RATIOS (Profitability)

Health Care Reform

Here is a useful article entitled “After the Supreme Court’s Health Care Reform Decision:  What Employers Now Need To Do” supplied by the law firm of Schwabe, Williamson & Wyatt:  http://www.schwabe.com/Articles/WhatEmployersNowNeedToDo_July2012.pdf

Perhaps it will answer some questions.

Small Business Advisory: Crowdfunding

Posted by the North American Securities Administrators Association, June, 2012


On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, a series of legislative provisions intended to facilitate capital formation in the United States. Part of this legislation included the CROWDFUND Act, which makes significant changes in current federal and state securities laws.


The CROWDFUND Act will allow entrepreneurs to raise capital by offering to sell interests in their businesses over the Internet. Under the CROWDFUND Act, a small business will be allowed to raise $1 million in a 12-month period by selling its securities to investors without registering that offering with federal or state securities regulators. However, the Act places limitations on how and to whom a small business can sell its securities. The Act directed the Securities and Exchange Commission to adopt rules within 270 days to implement a new exemption to allow securities sales through crowdfunding.

Business Plan Step One - The Budget

My preference when starting a business plan is, first develop a cash flow budget.  New business,  growing business or buying a business every action requires some investment of money with the purpose of making a return on that investment.  Therefore, before writing a business plan I want to have an understanding of what financial commitment will be necessary to enable this business to be profitable and finance eligible.

Purpose of a Cash Flow Budget
Preparing a cash flow budget is to understand how money will move through the business over a period of time. Most businesses can plan on a monthly basis while other like construction or manufacturing may need to plan on a weekly basis.

Cash flow budget is to reveal the money needed to fund seasonal sales and operating cycles.  For example, a retailer may need to spend money to buy inventory several months before the inventory is received and sold.  Or, for a landscape business how much of the money earned in the summer must be saved to survive the winter?

Cash Flow helps schedule business activities such as adding labor when sale are strong.

Cash Flow identifies financing needs and structure. A line of credit for short periods, or term loans for capital equipment purchases.

Cash flow planning is all about when money goes out and when money comes in. This is not a profit & loss model, nor concerned with non cash items like depreciation

Compare your budget to actual revenues and expenses. Determine if you are reaching your goals, costs are as expected. If not you can take corrective actions to reduce planned expenses and increase sales activities.

Crowd Funding?

This nice summary of the business and regulatory aspects of Crowdfunding was published in Xconomy June 12, 2012. It might serve useful when inquiries arrive on our doorstep. Note that a business plan is a requirement.

JOBS Act: Important Benefits for Startups Not on the IPO On-Ramp 

Written by David Westenberg on Jun 12, 2012 03:01 am

The JOBS Act is probably best-known for creating an “IPO on ramp” intended to reduce the cost and complexity of going public, but the act also contains important benefits for startups that are years away from an IPO, or never plan to go public. By loosening decades-old restrictions on private fundraising, permitting a new financing technique known as “crowdfunding,” and increasing the maximum number of stockholders a private company may have, the act should make it easier for startups to obtain financing and remain private if they so choose.

Elimination of Ban on General Solicitation

Current SEC rules prohibit general solicitation and general advertising to attract investors in private placements. The JOBS Act requires the SEC to amend its rules to permit such activities in placements conducted pursuant to Rule 506 (the SEC rule that allows companies complying with its requirements to raise unlimited amounts of capital http://www.sec.gov/answers/rule506.htm) as long as all purchasers qualify as “accredited” investors. (Accredited investors are high income and high-net-worth individuals and qualifying institutions.) A company must take reasonable steps to verify that purchasers are accredited investors, using methods to be determined by the SEC.

This change does not go into effect until the SEC amends its rules, which is supposed to occur by July 4, 2012 (90 days after enactment of the JOBS Act), but could be delayed.

New Crowdfunding Exemption

The JOBS Act requires the SEC to adopt rules to permit private U.S. companies, without registration, to engage in “crowdfunding” transactions, subject to the following restrictions:

• Within any 12 month period, the maximum offering size is $1 million.

• The amount any individual investor may invest must not exceed (1) the greater of $2,000 or 5 percent of the annual income or net worth of the investor, if either the annual income or net worth of the investor is less than $100,000, and (2) 10 percent of the annual income or net worth of the investor, not to exceed a maximum aggregate investment of $100,000 by the investor, if either the annual income or net worth of the investor is equal to or more than $100,000.

• An intermediary, either a broker or “funding portal,” must be used in the transaction. The intermediary must register with the SEC and any applicable self-regulatory organization; ensure that investors understand the risks of the investment and can bear the burden of possibly losing the investment; conduct a background check on each officer, director, and 20 percent stockholder of the company; make sure that no investment limits are exceeded; and comply with any other requirements the SEC may prescribe.

• Companies have to file with the SEC, and provide to investors and potential investors, an anticipated business plan, the financial condition of the company, a description of the intended use of the proceeds, and a description of the ownership and capital structure of the company.

• Investors can bring rescission claims (claims for refunds) for material misstatements and omissions. Claims may be brought against the company, the company’s directors, and certain officers, and any person who offers or sells the security in the offering.

• Companies need to disclose a target offering amount and the deadline to reach the target offering amount. Companies must provide regular updates regarding their progress in meeting the target offering amount.

• Companies may not advertise the offering, except for notices that direct investors to the intermediary. Companies may not compensate anyone for promoting the offering through the intermediary’s communication channel without taking proper steps to ensure that the promoter discloses that compensation in each promotional communication.

• Companies must file financial statements and ongoing reports with the SEC, subject to rules, exceptions, termination dates, and other requirements to be determined by the SEC.

• Investors may not resell securities for one year, beginning on the date of purchase, except to the company; to an accredited investor, as part of an SEC-registered offering; to family members; or in connection with death or divorce.

• Crowdfunding is available only to U.S. companies (and not foreign companies) that are not already an SEC reporting company.

Crowdfunding will not become available until the SEC issues rules to implement it. The rules are supposed to be adopted by December 31, 2012 (270 days after enactment of the JOBS Act), but this also could be delayed.

Higher Stockholder Threshold for Mandatory SEC Reporting

The JOBS Act increases the stockholder threshold at which a private company must register its securities and become an SEC reporting company. The former limit was 500 holders of any class of equity security; the new limit is 2,000 persons, or 500 persons who are not accredited investors.

For purposes of the new threshold, securities held by persons who received the securities pursuant to an employee compensation plan—such as a stock option plan—in transactions exempt from SEC registration are excluded. Securities issued in crowdfunding transactions will also be excluded, once the SEC adopts crowdfunding rules. The increase in the registration threshold and the exclusion from such calculations of securities issued in employee compensation and crowdfunding transactions should allow some large private companies to remain private longer, and may enable companies to avoid creating new classes of equity security as a workaround to the old 500-person limit. The change may also encourage some companies to grant equity more broadly within the company, or to stop including restrictions on grants that were intended to keep the company below the former 500 person limit.