The need for Banking relationships

With the credit markets the way they are these days, you can't discount the power of a good relationship. I've opened about a dozen business bank accounts over the past 2 years. Each time that I do, it gets easier and easier. The requirements aren't getting easier, the relationships are just getting stronger.

Tip of the Day: Open a bank account today. You never know when that relationship will pay off in the future.

Bloggers Aren't Business Owners!

In a previous business of mine, we had a lot of clients that were real estate investors. They came to us looking for credit so they could put money down on their next property or have some working capital for their current projects. It became very apparent real quickly that most of them were “spending their nights and weekends fixing up the old place down the street”. (their words not mine.) This was a hobby to them. They had heard of people making good money in the Real Estate Game but this wasn’t their business. They work for "The Man" every morning at 8 and came home at 5. How could they be business owners?


In order for us to get them sufficient capital to accomplish their goals, their paradigm needed to shift. They had to start treating themselves as business owners. They were business owners in every sense of the word. There were just certain things they didn’t have in place to feel like business owners.

Here's my point - Real estate investors are business owners and SO ARE BLOGGER!

I knew my title would get some of you to read my post. I have spent the last few years trying to convince people like real estate investors AND bloggers to treat themselves as business owners.

So the question is, how do you treat yourself as a business?

• The Right Entity. Choosing an entity is a tricky task and shouldn't be taken lightly. I would HIGHLY recommend consulting with a CPA or Legal Council before choosing a structure. (OK - there's my disclaimer). The most common entity structures are: Corporations, Limited Liability Companies (LLC), Partnerships and Sole Proprietors. Each type of structure offers the business and the owner certain tax advantages as well as legal protection. I imagine that most weekend bloggers are sole proprietors. There's nothing wrong with this. There's no major paperwork that has to be files with the state and no separate tax returns that have to be completed, just an additional Schedule. It's easy. If you are a sole proprietor, PLEASE, PLEASE keep good records. You want to make sure you can justify expenses that are truly business related and those that are personal. Enough said.

• Bank Accounts. Make sure you set up a bank account IN YOUR BUSINESS NAME. This will help you from "co-mingling funds". (mixing personal and business money). this way you can get check with your business name and a debit card, maybe even a credit card. Your friends will think you are cool.

• Licensing. If you are a sole proprietor and you want to get a business loan, in most cases you are going to need to show a business license as proof of your existence. Here's a side note - Lenders are also looking for history, typically 2 years in business. The earlier you can get a license, the "older" your company looks.

• Accounting Records. Make sure you keep up with your bookkeeping. It might not be much when you first start out, but you will have some...especially expenses. Here's some examples, the money you spent on your domain name, your monthly hosting, memberships to "blogging related" groups, magazines and books for education (again, blogging related),your advertising, your car mileage, your monthly banking fees for your business accounts, your office space, your employees or 1099 writers, etc. The list goes on and on. It's extremely important for you to keep up with it. It might only take 10 minutes a day or 10 minutes a week. However long it is, just make sure it get's done. You can use bookkeeping software like Quicken or QuickBooks, OR you can just set up a simple spreadsheet until you grow a little.

Of course this list is far from being all-inclusive, but it's a start. I can't stress it enough that this is a business my friends and should be treated as one. You need to treat this as a business and take the necessary steps to make sure others view it as a business too. This will make your life a lot easier when tax time roles around or when you try to secure additional capital from banks. And of course, your friends will think you are cool. You're a business owner!

There's Another Way to Borrow

What happens when you go to the bank down the street and ask for a business loan or line of credit? Chances are they will sit you down, help you complete an application, PULL YOUR CREDIT, and then either approve you on the spot or say, "It's under review. You should have a decision in 7-10 business days". This is just a polite way to tell you that your chances of getting approved are slim-to-none. You'll get a letter in the mail that confirms this.

Why would a banker take the time to gather all your information and put you through the system? Here's why...they work on commission! It's as simple as that. They are commissioned sales people just like any other sales rep.

Does the banker really underwrite your file and make the decision? NO. The computer does. Regardless of your intentions, the computer cares about your credit score and a few other variables. You could have the next FaceBook or Google, but if your score isn't up to par, the chances of pulling down credit are just not that good. You could be full of passion (in my opinion, this is as important and credit history), but again, if you don't have the score, your chances are...well, you get my point.

I think it's amusing at times to see bankers who act like they are giving you their full attention and "will see what (they) can do.". Do you really think that giving the banker your Business Plan is going to help your case? Unfortunately, the answer is NO. Unless you are looking for a Large loan, you don't ever need a biz plan when you apply for under 100K at traditional lending institutions. The truth is, you don't need anything but your credit score. If you have a good credit score, you can get a loan. PERIOD.

Now, is there a solution? Of course there is. It's called Peer-to-Peer lending or Social Lending. These are platforms that allow the common folk like you and I to lend and/or borrow from other common folks. It takes the power out of the large institutions and puts in right in our lap. We underwrite the files and ultimately, we make the decisions as to who gets funding and who doesn't. It's a beautiful thing.

Stay tune for more information on P2P lending. I will direct you to some of the great Social Lending sites so you can try them out for yourself. I have!

A Lesson on Moving

A few years ago I needed a moving truck. I went to U-Haul’s website and began the process of booking a truck for the weekend of my move. I was pleasantly surprised at the ease of reserving. It seemed as though their online “Reserve a Truck” system was state of the art and very user friendly.

When the day came around to pick up the truck, I had my wife drive me to the pick-up location. She waited in the car while I went inside to finalize the paperwork. After about 20 minutes she came in to see why I hadn’t driven away in our reserved truck. We found out that the location that was supposed to have my truck didn’t have one in stock. I didn’t expect this because I gave U-Haul my credit card number when I reserved the truck 2 weeks prior to that day.

This wouldn’t have been a major problem if I had lived in a big city and could have just gone to another pick-up location, but at the time I lived in a small town which was 2 hours from the next U-Haul site. This now became a major problem because I had arranged for laborers to help load the truck.

To make a long story short, 5 hours later I pulled up to my house with the truck.

The lesson I learned:

A seemingly “good system” doesn’t work if it’s not predictable. Predictability in systems instills confidence in employees, customers and all end users. In my case, U-Haul had an online system that was easy to use. However, their system for fulfilling on their orders was unpredictable. I lost confidence in their “easy system” because of the unpredictable outcome.

Does Your Neighbor Pay You?

I was talking to one of my business colleagues last week who happens to own a CPA firm. We were talking about corporations and I brought up a situation I ran into a few days earlier with a client. I asked him how he would have structured the entity. His response was no surprise to me.

“I would structure it so that your client would pay as little as possible in taxes.” - CPA

Although not a surprise, I was intrigued. I wonder how an attorney would answer that question.

“I would structure it so that your client would be protected from lawsuits.” - Attorney

If you have ever attended an asset protection seminar, you probably have heard something like this.

“You need to set up one entity that owns another that owns another that is registered in Nevada and foreign filed in your state and has an agent in California who has another corporation that pays an LLC that your wife owns which distributes earnings to a 5th corporation which has your neighbors name on it and then he cuts a check once a week to your 6th and final entity and…” Well, you get the point right?

I heard a Business Credit consultant answer this same question.

“I would structure the corporation so that you can build credit on it.” – Credit Coach

Isn’t that interesting that different professionals could have such unrelated entity strategies? The basic frame work for each entity is going to be similar and yet different enough that forming it one way could affect your ultimate goal. Is your goal asset protection, tax savings, credit or a combination of all of these? Only you can answer that question.

What is your corporation doing for you?

Well Executed Plays

When I think of teams, I automatically think of sports. I’m a sports fanatic. I especially like team sports such as basketball, baseball and football.

If you are a fan of sports, you can learn a lot of lessons that can be applied to your business. There are a lot of similarities with corporate teams and sports teams.

Structure is important. A team leader must emerge. Improvement of team practices happen by suggestions from within the team but also from the sideline. It’s important to get an outsiders perspective on operations. It’s the small victories (2 points) that make you a winner. Well executed plays and a strong strategy set you apart from your competition. A loss today doesn’t mean you can’t win tomorrow. Momentum is power. Dedication is addicting. Everyone plays an important role. Double plays or big sales, usually involve more than just you.

Here are a few of my favorite sport quotes about teams.

"Michael, if you can’t pass, you can’t play." – Michael Jordan’s 9th grade Coach.

"One man can be a crucial ingredient on a team, but one man cannot make a team." – Kareem Abdul-Jabbor

"The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime." – Babe Ruth

"Talent wins games, but teamwork and intelligence wins championships." – Michael Jordan

"Individual commitment to a group effort, that is what makes a team work, a company work, a society work, a civilization work". – Vince Lombardi

As the team captain of your organization, you are responsible for your team’s success. Make sure you know the playbook by heart. Utilize all the talent that has been recruited for the purpose of winning. Lead. Enjoy Victory.

Simple Systems

Simple systems are the best systems. A lot of small business owners don’t have the money or the time to program or develop widespread systems. I have found that there are a lot of resources available at no cost and require virtually no time to implement.

One that I use frequently is the template section on Microsoft online. The web address is http://office.microsoft.com/en-us/templates. I literally have to monitor my time when I am on this site because there is so much to see. If you spend some time on the site, you will see that there are templates that can be downloaded for expense reports, time sheets, budgets, calendars and a hundred others.

You can create a number of small systems for your business by downloading some of these templates and putting them into place. Some of my favorites are those that can be downloaded into Excel. But they have templates that have created for any Microsoft product. I prefer Excel because it’s very easy to manage and create multiple worksheets within one file. It’s a great way to leverage someone else’s time to develop some effective and simple systems.

Financial Ratios

Here is a very common ratio that a small business can start using right away.

The Current Ratio is used by short-term creditors to determine a company’s ability to meet short-term financial obligations. Short-term creditors prefer a high Current Ratio. Higher current ratios are an indication of lower risk and consequently, lower current ratios suggest higher risk.

The current ratio is calculated by dividing current assets by current liabilities:
(If you don't know what Assets or Liabilities are, Check this out).

Current Ratio: Current Assets
Current Liabilities

Here are two examples:

EXAMPLE 1
Current Assets: $250,000 (this includes cash, inventory, accounts receivables, etc.)
Current Liabilities: $75,000 (this includes financial obligations that will be paid within the year)

$250,000 / $75,000 = 3.33 (This situation is less risky for short-term creditors)

EXAMPLE 2
Current Assets: $100,000
Current Liabilities: $125,000

$100,000 / $125,000 = 0.80 (This situation is more risky for short-term creditors)

One reason that you need to understand about this ratio is that creditors prefer a higher current ratio because it reduces risk BUT owners tend to prefer a lower current ratio because this could be an indication that more of the firm’s assets are working to grow the business.

Accrual vs. Cash

Before you being keeping "the books", There's a few things that you need to understand. I promise it's not that difficult.

Here's the first lesson.

There are two different methods of accounting for a company’s transactions: Cash and Accrual. You might have heard them referred to as Cash Basis or Accrual Basis. The only difference in these two methods is in the timing in which the transaction is recognized on the accounting books.

Here are two examples to help illustrate: (I told you I would make this easy)

Example 1

You are an electrician. You visit an office and install new lights in November. You leave an invoice for $500 to be paid in 30 days. The check arrives at your office in December and you make the deposit. If you are using a Cash Basis accounting method, you would recognize the $500 revenue in December, when you received the “Cash”. If you are using an Accrual Basis accounting method, you would recognize the $500 revenue in November when you performed the service.

Example 2 (the other side of the story)

You are an office manager. You receive a visit from an electrician who installs new lights in November. He leaves you an invoice for $500 to be paid in 30 days. You cut the check and put it in the mail in December. If you are using a Cash Basis accounting method, you would recognize the $500 expense in December, when you made the “Cash” payment. If you are using an Accrual Basis accounting method, you would recognize the $500 expense in November when you received the service.

Most small businesses use the cash basis accounting method. This is an easier method for companies that don’t have a lot of accounts or transactions.

Make sure you visit with a CPA or tax professional to determine which method to use when you are setting up your business...or you can just take my word for it and use the Cash method until you get big enough that it makes a difference.

Crappy Job on the Books!

As promised, here is an expample of a business (actually 2 businesses) that didn't take the time to update their accounting records.

This is a repeat post...

It only takes 30 minutes to 1 hour a day MAX, for most small business owners, to update their accounting records. This pre-selected time will ensure you have accurate records and will help you make better business decisions during the year.

I had a bookkeeping client a few years ago that didn’t keep up with his records. He operated a very small retail shop in my home town and only recognized about 10-15K per month in revenue. His books were in shambles and it didn’t take long before I realized he had been losing money. When I started, he handed me 2 years of bank statements and a box full of receipts. Fortunately for me, he didn’t use cash for any of his purchases so the receipts were duplicated in the bank statements and I didn’t have to rummage through the box to try and make sense of the mess. After about a week I had his books updated.

When I sat down with him to go over the financial statements, he immediately noticed that one of his major reseller accounts wasn’t being recorded. After a little investigation, we realized that this reseller had been selling my client’s products for 2 years. My client would drop ship the product(s) and then was supposed to invoice the reseller. Once the invoice was received, it was paid and the cycle continued. My client hadn’t invoiced the reseller for 2 full years.

The amount of money that should have been collected was about 1K per month, which isn’t a staggering number by itself, but is mind-boggling when compared to the total revenue collected each month. It represented about 5-10% of his total revenue.

Lucky for me, I approached the reseller and brought this to his attention. He had no idea. I offered to clean up the mess and consequently got another bookkeeping client. If the accounting records for both parties had been maintained each month, my first client could have collected an additional 1K per month and my second client wouldn’t have been stuck with a 24K bill which was due in full and not spread over 24 months.

Chalk this up for a lesson learned and keep up with your bookkeeping.

Stay tuned for easy to understand lessons on bookkeep for the small business owner.

Bookkeeping 101

Whether you want to admit it or not, every entrepreneur needs to learn some basic accounting procedures.

Here's why...

Accounting can be seen from 2 different views. The first is from the eyes of the non-accountant. Words that enter their minds are boring, mundane, an expense, required, structured, records, paperwork, confusing, taxes, CPA's, nerds (I can say that, I'm an accountant), etc. For the average free-spirited and creative entrepreneur, accounting rubs the wrong way.

The second set of eyes is from the accountant's point of view. Again, words that enter OUR minds are important, decision making tool, structure, decision making tool, analyze, decision making tool, accountability, decision making tool, etc. We are nerds. I will be the first to admit it. I'll also be the first to admit that all of us, in some form or fashion, have at one time, wanted to cross over to the dark side of entrepreneurship but our structured and nerdy ways of thinking won't let us. It's best if we leave that side of the biz to the creative type.

The non-accountants, however don't have that luxury. You have to cross over and see our world at some point. It's just the way it has to be. If you take some time to learn how to account for your transaction, you can literally turn your financial statements (the reports created from record keeping) into powerful... I really mean powerful decision making tools.

Here's how this blog is going to go from here on. In the next post, I'm going to share some examples of poor business decisions that could have been avoided if proper analysis had been done on the finance statements. After that, I'm going to teach about some bookkeeping essentials that will be easy to understand and apply. Believe me, you don't have to have a degree in this crap or be a genius to understand this. I'm going to make it easy. I'm going to make bookkeeping exciting and fun...okay maybe I've gone to far. I'm going to make it easy.

Stay tuned!

Ask Someone Who Knows

Does my business add value?

In order to answer that question I first need to define value so I better understand what it is that I am trying to increase or add…otherwise it’s a shot in the dark. Simply stated, and with a little help from Wikipedia, value is how much a product or service is worth to someone relative to other things.

This is a pretty general definition and is open enough for multiple interpretations. What does the phrase “…relative to other things”, mean? Are we comparing my service to air? If that’s the case, I’m not very valuable. Are we comparing it to water? Again, I add no value. What if we compare my service to my competitors, or someone servicing the same customer base? I don’t know! Value can be measured differently depending on how you complete your interpretation of the definition.

My revised definition of value in a business context is this. Value is how much a product or service is worth to someone relative to their previous state when they didn’t have that product or service.

Do our products and services improve lives or deteriorate them? Untimely the answer to this question will tell us if our business adds value.

Now, with all this said, here is the fact about answering this much-sought-after question “Does my business add value?” As a business owner, you can try to convince yourself that the answer you came up with is right, but the truth is, your customers are the only ones that can answer this for you.

So if you want to know if your business adds value, ask someone who knows.