 
### Catching the American Dream

By Garth Wilcox, CPA

Smashwords Edition

Copyright 2010 Garth Wilcox

All rights reserved.
Table of Contents

Chapter 1 – Getting Started

Chapter 2 – Financing

Chapter 3 – Financial Management

Chapter 4 – Time Management

Chapter 5 – Employees

Chapter 6 – Marketing

Chapter 7 – Income Taxes

Chapter 8 – Risk Management

Chapter 9 – Adversity

Chapter 10 – Decision Making

Chapter 11 – It is Worth It!

### Preface

"The American Dream" is a phrase that has been around for decades. It probably takes on different meanings for different people, but for nearly everyone it conjures up feelings of prosperity, property ownership, and happiness. For some it may mean winning the lottery or a huge amount of money on a game show. For others, it may mean a steady job with benefits. For me, it has a more traditional approach to prosperity and includes the ideas of hard work, frugality, being productive, and being creative. It means taking part in the free enterprise system that has made America great for more than 200 years. It is all about managing an enterprise that creates products or services that will improve your customers' lives and compensate you for what you know and do.

This book is meant to be a practical guide to small business management; to give you the tools you need and the knowledge and information to run a small business profitably. Moreover, it is a motivational and inspirational tool to help you achieve your dreams. It is not a guide to "easy money," nor does it tell you how to get something for nothing. It does tell you how to earn your prosperity. Anything worthwhile will take effort to achieve. There is no better feeling in the world than to know you have earned your own financial security. Now is the perfect time to start enjoying all of the fruits of your labors.

The word "management" is synonymous with "decision making." Business management is basically making decisions and then making sure those decisions are carried out. The broad term business management can be broken down into several smaller aspects of management such as financial management, personnel management, marketing, risk management, production management, information management, and time management. Often times the small business owner is responsible for all of the different aspects of management.

This book is geared toward an individual who is preparing to start his or her own business, but many of the principles found here can also be applied to existing small business owners or managers who want to improve their management skills. The emphasis is on managing resources to accomplish results. **There are many who chase the "American Dream," but few who catch it.**

Chapter 1 – GETTING STARTED

"The secret to getting started is breaking your complex, overwhelming tasks into small manageable tasks, and then starting on the first one." – Mark Twain

There has never been a better time in history to be in business. This is an exciting time. With today's technology there are more ways than ever to market your product or service, purchase inventory and supplies, and get the information needed to manage your business. You are living in the information age. You can reach people all over the world! Technology seems to have no limits and it will continue to get even better. The technology we have today will seem primitive in a relatively short period of time. You will need to embrace technology in every form or the world will leave you behind in no time. Technology can make you more efficient in all aspects of management, but you need to be careful not to let it be a time waster instead of a time saver.

### CHOOSING A BUSINESS

The first step in starting your own business is deciding what type of business fits you best. For some the decision is easy. For others it may be more difficult. Often times a person starts his or her own business in the same line of work that he or she already has been involved in. For example, an auto mechanic working for the dealership may decide to open his own repair shop. Or a person working in the cabinet making shop may decide to open his own cabinet making business. It is a natural transition and experience is the best teacher. Alternately, you may have a hobby that you enjoy and can find a way to turn the hobby into a business. But sometimes you just need to look around and find a niche that no one is filling, do some research on the business and come up with a plan to start a business. To have a successful enterprise, you must clearly define what you want to accomplish.

There is some type of business opportunity out there for everyone. **Everyone has skills that can be marketed.** Look around, be creative, and find out what works best for you. Choose something that you like to do. That is what makes business ownership so fun and exciting. You get to do something you love to do and get paid for it.

### SELECTING THE PROPER LEGAL ENTITY

One of the first decisions you will need to make is the best form of legal entity for your business. There are several to choose from: Sole proprietorship, partnership, Limited Liability Company, Corporation, or S-Corporation. Each of these entities has advantages and disadvantages both from a legal standpoint, and from a taxation standpoint. The form of entity you choose can have an impact on the way you are protected under the law and also how much you pay in income taxes.

Sole Proprietorship

A sole proprietorship is the simplest form of business. It really is not considered a legal entity, but is merely an extension of the person who owns it. The owner has possession of the business assets and is directly responsible for the debts and liabilities incurred by the business. There is no legal protection from liability in a sole proprietorship. The income or loss from the business is reported on the owner's personal income tax return and profits are subject to self-employment tax as well as federal income tax and state income tax.

The sole proprietorship does not require any specific legal organization except the normal business licenses and permits. If you choose a business name other than the owner's name, you may need to register an "assumed business name" with the state authorities.

Partnership

A partnership is an entity with two or more individuals who join together to own the business. In a general partnership each individual partner has ownership of the partnership assets and responsibility for liabilities. The authority in running the business and the way the profits and losses are split usually depends on the individual's percentage of ownership in the partnership. However, these can be modified in the partnership agreement if all the partners agree.

A general partnership resembles a sole proprietorship other than there is more than one owner. The partnership creditors typically are able to go after the personal assets of the partners to settle a debt.

A limited partnership is comprised of one or more general partners and one or more limited partners. The limited partners do not take part in running the business nor are they liable for debts and liabilities of the partnership. Limited partnerships are effective when an owner wants to give up some ownership without giving up control. For example, if the owner wanted to start gifting a portion of the business to his or her children without giving them control over the business or the right to sell the assets, he or she might do it through the use of a limited partnership.

A partnership is a legal entity recognized under the law. A partner can sign contracts in behalf of the partnership. The partnership can borrow money, but most creditors require a personal guarantee of the general partners. Although not required, it is a good idea to have a legal document such as a partnership agreement drawn up by an attorney to spell out the rights and responsibilities of each partner. Generally, when a partner dies or withdraws from the partnership, the partnership ceases to exist.

A partnership is required to file a tax return, but the taxes are typically not paid at the partnership level. The partnership profits and losses are _passed through_ to the owners and are reported on their personal tax returns. The general partners' share of the profits is subject to self-employment tax where the limited partners' share is not. If the partnership experiences a net loss, it flows through to the partners and can offset income from other sources. These losses generally can be deducted even if they exceed the partner's basis in the partnership.

Corporation

A corporation is a totally separate legal entity that exists under the authority of state law. The owners of a corporation own stock in the corporation, but the entity itself owns all the business assets and is responsible for the debts and other liabilities of the corporation. This provides the stockholders with the ultimate legal liability protection because the most they can lose is the amount they have invested in the stock. None of their personal assets can be used to satisfy a liability of the company.

The corporation must file legal documents such as articles of incorporation and by-laws with the Secretary of State. These documents should be prepared by a competent attorney to make sure the incorporation is valid and effective. The state must approve the corporate name. The name must include the word corporation or the abbreviation, Inc. A corporation is perpetual and does not cease to exist when ownership changes. In large corporations, shares of stock are bought and sold all the time. The shareholders can easily sell or transfer their ownership in the business. Corporations need to have an annual shareholder meeting and keep minutes to document the decisions that have been made such as amendments to the by-laws, officers' salaries, and major purchases.

The corporation must file an income tax return annually. In a regular corporation (C corporation) the business must pay federal and state tax on its earnings. Then if corporation disperses those earnings to the owners in the form of dividends, the shareholders must pay tax on the dividends. This "double taxation" is the biggest disadvantage of a C corporation. However, the earnings are not subject to self-employment tax and at the current time the federal tax rate on dividends is lower than for ordinary income. C corporations also have some advantages when it comes to income taxes. First, more earnings can possibly be taxed in the lower tax brackets because the income is spread out over more taxpayers. Second, it is easier to deduct fringe benefits for shareholder employees. On the down side, if the business experiences a net loss, the loss cannot be deducted on the personal returns of the shareholders, but may be carried forward or back to offset income from other tax years.

S Corporation

Setting up an S corporation is similar to organizing a C corporation to the extent that you need to have articles of incorporation and by-laws. Then the owners of the corporation file a form with the IRS to elect to be taxed as an S corporation (also referred to as a small business corporation). In order to qualify for S status, the corporation must have no more than 100 shareholders and have only one class of stock. Shareholders must be U.S. citizens or residents and all shareholders must consent to making the S election. Shareholders cannot be other corporations, partnerships, LLCs, LLPs, or IRAs.

By electing S status the earnings of the company are not taxed at the corporation level, but rather _pass through_ to the shareholders similar to a partnership. Thus the S corporation escapes the double taxation consequences of the C corporation. The S corporation earnings are not subject to self-employment tax although the IRS requires that officers of the corporation be paid a reasonable wage which is subject to employment taxes. So there is a possibility of sheltering a portion of the income from self-employment tax. Net losses from the business can flow through to the shareholder to offset income from other sources, but only to the extent that the shareholder has basis in the corporation.

Limited Liability Company

A Limited Liability Company or LLC is a relatively new form of business that has become very popular in recent years. It takes on some of the characteristics of a corporation such as the limited liability and yet it has some of the flexibility of a partnership. The LLC is formed by filing articles of organization with the state authorities. The articles include the name of the company which must include the words Limited Liability Company or the abbreviation, LLC. The articles also include the purpose for which the LLC is organized, the names of the members of the LLC, and the roles of the members in the business relationship. It is recommended that you use a competent attorney to draft the articles of organization to make sure the liability protection is there in case of any potential legal action.

The income tax consequences of an LLC can vary. A single member LLC is generally treated the same as a sole proprietorship. It is a disregarded entity for tax purposes. The income is reported on the owner's personal tax return. If there is more than one member of the LLC, the company is generally treated like a partnership. However, an LLC with one or more members can elect to be taxed as a corporation. In addition, the member or members may elect S status to be taxed as an S corporation. You really have some options with an LLC because it could be treated the same as any of the other entities that have been mentioned.

Making the Choice

You need to seek the advice of a competent attorney and business-oriented accountant to determine which entity will best serve your needs. The information I have given here is an overview of the general differences between the entities. There are many more things to consider depending on your particular situation, the type of products or services you sell, your exposure to liability, and other factors.

In some instances, it is preferable to have more than one entity. This may facilitate taking advantage of tax laws that favor one entity over another. For example, it is not a good idea to have appreciating property such as real estate in a corporation. In a C corporation, the increase in value of the property is subject to double taxation and corporations do not get a lower tax rate for capital gains as do individuals. Also, if the corporation is dissolved whether it is a C or S the property must come out of the corporation at fair market value which could trigger recognition of gain on the property even if it is not sold. So if property is involved, it may be a good idea to set up an LLC to own the property and a separate corporation to operate the business. That way the corporation can rent the property from the LLC, the rental income flows through to the owners and is not subject to self-employment tax. This can also protect the property from liability claims since it is in a separate entity from the operating entity.

Whether you have a corporation or an LLC as the operating entity, the liability protection must be preserved by keeping the company affairs totally separate from your personal affairs. If you get involved in a lawsuit, the "corporate veil" can easily be pierced if the court finds that your company is nothing more than an alter ego of the company owners. It is extremely important to do everything "by the book" even if you are the sole member of the company.

Most importantly, you must keep the company separate from the individual. Be sure to always conduct company business in the name of the company and personal business in the name of individual. Transfer the title of assets that are transferred to the company when the company is funded. Use the company name on stationary and business cards. Don't co-mingle funds. Keep separate bank accounts and use the business account only for business purposes.

### CHOOSING A NAME

The name of your business can have a dramatic effect on how you are viewed in the marketplace. You want a name that tells the customer what type of business it is, maybe the geographic location, or a catchy, easy to remember name. Sometimes businesses will choose a name that will get them listed first in the phone directory. Be creative and dare to be different. Don't name your business too similar to other companies that do the same thing or that are in the same area. It creates confusion and you will spend a lot of time answering phone calls from the other company's customers. Once you think of a name, do a search on the internet to see if someone else has that name or anything similar.

Be original in choosing a name. Some names are simply over used. For example, there are many businesses in south east Idaho that use the word "Teton" in their name. The Teton Peaks are part of a famous mountain range in western Wyoming that is visible in some parts of eastern Idaho, including Teton county or the city of Teton on the border of Madison and Fremont counties. But in the city of Idaho Falls, there are more than 50 businesses with the word "Teton" in their name and you can't even see the Tetons from Idaho Falls. I wonder how many of those business owners even know where the word "Teton" originated.

Remember, if you form a corporation or an LLC, you must include the word "corporation" or "Inc." or "Limited Liability Company" or "LLC" in the name. When you file your articles of incorporation or your articles of organization, the Secretary of State's office needs to approve the name before you start using it. If the name is similar to another company in your state, it may not be approved without permission from the other company.

### BUYING AN EXISTING BUSINESS

There are some advantages to buying an existing business rather than starting from scratch. The biggest advantage is the fact that you already have customers and you know what to expect as far as sales and profitability. This may make it easier to obtain financing. The disadvantage is that you will most likely have to pay more for an existing business. In any case, there are two ways to go about buying an existing business: a stock purchase or an asset purchase.

Stock Purchase

When you purchase the stock in an existing business, the original entity (assuming it is a corporation) stays intact and continues to exist. It keeps the same name. The title to the assets held by the corporation remains with the corporation. This is a very simple way to buy a business and it is usually preferred by the seller for tax purposes, but there can be some very significant disadvantages to the buyer. First of all, when you buy the stock in the company, any contingent liabilities out there are retained by the company. In other words, you are on the hook for any potential and unknown lawsuits or debts that may arise in the future, but were the result of past actions by the company. This even goes for back taxes that the company owes. For example, I have a client who purchased an existing business and she just received a notice from the IRS that the payroll taxes had not been paid two years prior to the purchase. So the business which she now owns has to come up with the money to pay the taxes. I think she has grounds for legal action against the seller because this liability did exist at the time of the purchase, but it was not disclosed in buy-sell agreement. Ethically the previous owner should pay it, but the IRS claim is against the company, not the previous owner.

Secondly, there is no current tax advantage to buying stock in the company. You get no tax deduction for that purchase until you eventually sell the company. At that point you can deduct the purchase price from the sales price and you are taxed only on the difference if you have a gain.

Asset Purchase

The other way to purchase a business is to purchase only the assets of the business. You set up a totally new entity with a new tax ID number and have the new entity purchase the assets owned by the existing business including the equipment, the receivables, and the customer base. This way you are not subject to any liabilities that are a result of past actions and you get the tax advantage of claiming depreciation and amortization on some of the assets purchased. This is much more favorable to the buyer.

Whether you do a stock purchase or an asset purchase, you need to know what you are buying. You will need appraisals on the property and equipment, and you will need to verify that the numbers on the profit and loss are accurate. The buyer should ask the seller for copies of previous 3 years tax returns because the tax return will show the business in the worst possible light. With the tax return, you may need to make some adjustments to find out what the true profitability is. For example, the IRS lets you take an accelerated depreciation deduction for equipment in some cases much greater than what the equipment actually loses value. But the tax return gives you at least a starting point to finding out what the business is making so you can determine what kind of return you can expect on your investment.

### FRANCHISING

One way to get a jump start on a new business venture is to buy a franchise of an existing company. A franchise is a legal and commercial relationship between the owner of a trademark, trade name, or advertising symbol and an individual seeking the right to use that identification in a business. The franchise governs the method of conducting business between the two parties. The franchisee buys the right to use the trade name and sells goods or services supplied by the franchisor. The franchisor provides business expertise, marketing plans, management guidance, employee training, financing assistance, and site location assistance. The franchisor also buys advertising in behalf of the independent franchise owners.

The advantage to buying a franchise is that the success rate for businesses associated with a franchise is much higher than it is for independent businesses. The down side is the cost to purchase the franchise and the franchise agreement usually requires ongoing franchise fees, usually based on a percentage of sales.

### GET EDUCATED

When you take on the challenge of managing a business you need to learn as much as you can about your products and services, plus you need to learn how to manage the business. By reading this book you are taking the first step toward learning business management, but education is a life-long process. You never stop learning. You need to have a yearning for learning, a craving for knowledge, and a thirst for information. There is a lot of great information on the internet. Just do the research and find a way to do what you want to do.

A formal education such as a college degree is a good start. It lays the foundation for knowledge and it teaches you how to learn. But most of the learning you do in your particular field comes from experience. It would be very difficult to start a business in a field in which you have no experience. Experience can be gained only by working in the industry or one that is very closely related. Work for someone else and pay attention to how they manage their business. Glean the positive strengths and attributes from your employer and reverse the weaknesses. If you have a brand new product or a brand new idea to market, obviously you won't have experience in that field, but if you have been working in something similar it is helpful. To be very successful, you need to go beyond just having experience and achieve a certain level of expertise. This comes from reading books and magazines, doing research, and getting to know as much as you possibly can about your industry. Stay informed about new products, technology, and your markets. But remember, all the knowing does no good unless you put it into practice.

Some people can take a hobby they love and turn it into a successful business. I know of a man that loved hunting so much that he started a business as a hunting guide. He had the knowledge he needed from past hunting experiences and he loved to find out more about hunting techniques. He loved to find new places to hunt and he already had much of the equipment needed to turn his hobby into a profitable business. But he still needed to learn how to keep track of his costs so he would know how much to charge. He needed to learn how to market his business because without customers, there would be no income. And he needed to know how to structure his business to protect himself from any potential liabilities. He took the initiative and took the time to learn how to manage his business by reading, talking to consultants, and finding information where ever he could. He now operates a very successful business doing something that he absolutely loves.

Here is another example of a young man who is good at what he does, but didn't understand the business side of things. The young man worked for his father in the construction business. He was an excellent builder. His work was superb. The father's business was successful because he had good clients, he did good work, and he watched his costs. The father decided to retire and sold the business to the son. Son was to make monthly payments to the father. The clients were still there and the work was still excellent, but the costs got out of hand and in two years the son had lost what it had taken the father thirty years to build up. The father is now working for someone else at a time when he should be enjoying retirement.

Owning your own business is not easy, but it is **worth it!**

Chapter 2 – FINANCING

One of the biggest challenges of starting a new business is finding the financial resources to purchase the inventory and equipment necessary to start a new business. In addition, there are a lot of startup costs besides just inventory and equipment. Many startup companies fail to realize how much money it takes initially and therefore don't get the necessary funding in place before launching the business. This has led to many business failures. Having access to credit is vital to the survival of a new business. The best way to plan for the financial needs of your company is to write a business plan.

### WRITE A BUSINESS PLAN

There are two purposes for having a business plan. First, it should serve as a road map to the business owner. Second, almost any lender will want to see a business plan before committing any funds to a new business. A business plan does not have to be lengthy to be effective but it does need to be well thought out. All business plans include certain key elements, which address the important issues in most business start-ups. If these basic elements are included in the plan, in an articulated and concise manner, then the plan has a chance to succeed. Be sure to indicate early in the plan why the plan is being presented. If you are seeking money, say so and state the amount and the general purpose. Don't keep the reader in suspense as to why they are spending their valuable time reading your document.

There are a few key elements in any business plan. These elements are not always necessary depending on the situation. Some situations may require even more than what is presented here.

Introduction or Executive summary

The introduction should include a brief business history and a summary of the purpose of the plan. It may also include the resumes of key people involved in the business.

Product

What does the business sell or produce or what service does it offer? What is unique about the product? Why do your potential customers need it? Investors like to see a real product or service, preferably something people can't live without.

Competition

Who else is doing what you are doing or planning to do? How are you similar and how are you different? If you have a clear understanding of your competitors, it indicates that you have done your homework and have researched and analyzed your competition. Find out as much as you can about their business. Find out what the customers like and dislike about them. Tell why you can provide better service, better prices, and better products.

Target Market Segment

Tell who is going to buy your product, where they are located, and why they will buy from you. How will you attract them to you? What is your marketing strategy to reach those who need your product or service? The more clearly you can define your market segment, the more precisely you can tailor your approach.

Amount of Financing Needed

Be realistic in determining how much money is needed to get the business up and running. If you ask for too much, you will likely get turned down. If you ask for too little, it is a recipe for failure.

Uses of Financing

Give details of how the money will be used. Do your homework to find out how much things cost and provide a detailed list of what the money will buy. List the amount of inventory that will be carried. Detail what equipment is needed and how much it costs. Include an amount for contingencies because no matter how well you research the business environment, there will always be unexpected expenses that could not be foreseen. Be sure to include salaries and other overhead for a specific period of time until the business is generating enough sales to cover the overhead. Most businesses don't start off making a profit from day one. It takes time to build up your customer base.

Risk Management

List details of how you plan to limit risk of loss, market risk, and product risk. A lender will want to be reassured that an investment is safe with you.

Financial Projections

A projected Statement of Cash Flow is vital to a lender and to the business manager so they both know what to expect as far as future cash needs of the company. A cash flow projection is similar to a profit and loss statement, but there are some differences. (For a detailed discussion on how to calculate cash flow, see Chapter 3).

Personal Financial Statements

A personal balance sheet will likely be needed from each of the owners of the company to show their personal assets, liabilities, and net worth. Most banks or investors require a personal guarantee from the business owners before committing their funds.

### SOURCES OF FINANCING

If you are not independently wealthy, you are going to need some type of financing for your business. You will need money to buy equipment and inventory and pay the initial expenses of starting the business. A good rule of thumb is to plan on paying expenses sooner than you think and plan on receiving money from sales later than you think.

There are two types of financing for new business: debt and equity. "Debt financing" means borrowing money from banks, friends, neighbors, and relatives. Debts have a predetermined repayment schedule and interest rate regardless of the profits from the business. "Equity financing" means giving someone ownership in the company in exchange for capital investment. The investor then usually gets a share of the profits. Venture capital is a type of equity financing.

Banks

Conventional banks are the most common way to borrow money. Their interest rates are relatively low because they are not willing to take a lot of risk. If they can't get sufficient security for the loan, they will not lend. They are especially leery of new companies with no track record. You will need to have some of your own money invested in the business so they don't assume all the risk.

Small Business Administration

The Small Business Administration is set up to help small businesses obtain financing. They work with the banks and other lenders and provide loan guarantees to give the banks the comfort level they need to loan money. The SBA has developed a number of financial programs to address the various needs of small business. They recognize that small business is the backbone of our economy. The SBA will require a business plan. They will want to see that you have done your homework and that you have the skills necessary to make your business successful.

Economic Development

Many communities have economic development organizations to attract small businesses to the area for the purpose of creating jobs. They are usually private non-profit associations put together by interested individuals, companies, and municipalities. They provide low-interest financing, business coaching and other services to help stimulate the local economy by creating job opportunities.

Lease Financing

Leasing equipment for your business is a form of financing. Leasing companies will generally accept a somewhat higher degree of credit risk because they are looking only at the value of the equipment for collateral if you cannot make the payments. Because of the increased risk, they are usually somewhat more expensive than traditional financing. The advantage to leasing is that the payments are usually lower than loan payments. The disadvantage is that you never build up any equity in the equipment and when the lease expires you are forced to buy or lease something new. With traditional loans, when you come to the end of the loan payments, you still own the equipment and you have the option of keeping the old equipment or buying new.

Trade Credit

Another source of financing for your company is from the vendors or suppliers with whom you do business. After you establish a business relationship with suppliers, many will extend credit on purchases. Establishing good relationships with trade creditors is essential because it allows you to use the goods and services in your operations and sell your product to your customers, in some cases before you pay for them. It is important to stay on good terms with your suppliers because if you are late on payments, they may terminate the credit terms you have established.

Angel Investors

Very often, individuals who are successful in their own business and have accumulated substantial wealth may be interested in investing in some other business venture. They may want a piece of the company in exchange for their investment. This is called equity financing. Or they may want a fixed rate of interest plus a share of the profits, or in other words, a combination of debt and equity financing. They may even want to participate in the management of your company. An individual may be able to react to an opportunity much more quickly than a bank. Since they are taking a great deal more risk than they would by putting their money in the bank, they will be looking for a much greater return. The biggest advantage to angel investors is the mentorship that comes with them. It is somewhat of a partnership with money people who are willing to offer advice and business contacts. Sometimes that is more valuable to an entrepreneur than money. Accredited angel investors may organize into alliances to invest in emerging companies.

Venture Capital Companies

Venture capital is a type of equity financing that addresses the funding needs of entrepreneurial companies that cannot get capital from other more traditional sources. In other words, it is an option of last resort. Venture capital investments are generally made as cash in exchange for shares and an active role in the company. The price of venture capital financing is usually very high because they are willing to take higher risks in exchange for the prospect of higher returns. However, like angel investors, they are often experienced and can provide management assistance in areas where your skills may be lacking. They can also provide valuable contacts and relationships in your industry. They are usually looking for larger enterprises that have a chance of going public through an Initial Public Offering (IPO) on the stock market.

Sale of Stock

If your company is a corporation, you may be able to sell stock in your company to other investors. As stock holders, they don't have any say in how the company is run although they do have a right to vote for a board of directors. This method of equity financing is not very common in the arena of small business because, unless your company's stock is traded on the national exchanges, there is no secondary market for the investor to sell his or her stock and recoup the investment. However, you may be able to work out an agreement with an individual stockholder whereby you agree to buy back the stock in the future for a predetermined price.

Self-funding

Self-funding simply means: using your own money to start your business. If you don't have a lot of money in the bank, there is a concept known as an "ultra light startup". This means starting a business from scratch with very little capital that you furnish out of your own pocket. Then you use the profits from your business to grow the business. There have been many entrepreneurs who have started a business from his or her own garage, basement, or spare bedroom and have made it grow into a flourishing business without borrowing money. This is the best possible scenario because you get to keep all the profits from the business and use them to continue to build equity. However, this is not possible for all types of businesses because of logistical concerns. For example, if you are selling retail products to the general public, you need to be in a high traffic location which costs money. But if you are selling over the internet and only need a small space to store inventory, an ultra light startup may be right for you.

There are endless possibilities to the ways you can finance the needs of your business. I have discussed a few of the most common, but there are others and you need to do some research to find out which is right for you. No matter which method you choose, I would advise you to get out of debt as quickly as possible. Debt payments are relentless. They are there no matter what. Interest never sleeps. It works day and night, holidays and weekends. My grandfather used to say, "Those who understand interest earn it—those who don't, pay it." When the economy softens and your sales weaken, debt payments are still there. We have just experienced the worst recession in our economy in the last 70 years. The companies that were not packing a lot of debt were the ones most likely to survive. Now when the economy starts rolling again those companies will have a lot fewer competitors. If you must borrow, borrow conservatively and only for business purposes. Personal consumption must come from prior earned money.

Getting financing for your own business is not easy, but it is **worth it!**

Chapter 3 – FINANCIAL MANAGEMENT

As the chief financial officer of your business, it is up to you to keep track of every dollar spent, make decisions concerning where the money is spent, and make sure that what is spent produces a return. This chapter gives you some tools and methods that you can use in your business to help you track your costs, analyze them, and make sound decisions. If you don't manage your money, it will manage you.

I have seen businesses fail simply because of a lack of financial management. When you start your own business you tend think you have a lot of money because your deposits to the bank are much larger than they were when you were an employee. Money spends really easy when you have it. But you have to remember that it is not all your money. You first need to pay your suppliers, your employees, your landlord, your lenders, your taxes, and a host of other costs and then what is left over is yours to do with what you want.

### ACCOUNTING SYSTEM

In order to keep track of your finances, you must have an accounting system that gives you real-time information to aid in decision making. **You can only manage that which can be measured.** At the same time, you must learn to measure only what really matters. I suggest using a computer program such as QuickBooks to keep the books because, if all the transactions are posted and up to date, you can pull up reports at any time that will tell you where you stand.

A good accounting system is like a road map that can tell you where you have been, where you are now, and where you need to go in the future. You can look at your sales figures to see what products are selling or see how current year sales compare to the previous year. You can see how your expenses compare to your budgeted expenses so you can make decisions on where to cut back. You can track your accounts receivable with an aging report to let you know what accounts need attention. You can even track your inventory to see what items need to be ordered and by what quantities. You can print out a year-to-date Profit and Loss report to see if you are making a profit. And you can print out a current Balance Sheet to check your current financial position. An accounting system is a management tool.

To have an effective accounting system, you need to understand enough about bookkeeping to set up your accounts correctly and then the transactions must be recorded and up to date.

Basic Bookkeeping

There are six different basic types of accounts used in bookkeeping: Assets, Liabilities, Equity, Income, Cost of Goods Sold, and Expense. Whenever a transaction is recorded on the books, it affects two accounts. This is called double entry bookkeeping. Every transaction will have a debit to one account and a credit to another account. This keeps the books "in balance."

Asset accounts include cash, accounts receivable, inventory, equipment, land, and other investments. Asset accounts normally have a debit balance. Liability accounts include accounts payable, payroll taxes payable, and loans payable. Liability accounts normally have a credit balance. Equity accounts show the amount that the owners have invested in the company. This includes the amount the owners originally put in to the company to start up and it also includes any earnings the company has received which have not been withdrawn by the owners. Equity accounts normally have a credit balance.

The assets, liabilities, and equity accounts are referred to as "balance sheet" accounts because the assets equal the liabilities plus equity. Another way to say the same thing is that assets minus liabilities equal owner's equity. Think about it this way: if you own a piece of equipment (asset) and you owe money to the bank on the equipment (liability), then your equity in the equipment is the amount that the asset exceeds the liability.

Assets = Liabilities + Owner's Equity or Assets – Liabilities= Owner's Equity

The income accounts consist of sales of products or services. Income accounts have a credit balance. Cost of Goods Sold (or COGS) is the cost of merchandise you have bought for resale. However, it is not considered a cost until it is actually sold. When you purchase merchandise, it is inventory (an asset) until you sell it; then it becomes COGS. The COGS account has a debit balance. Expense accounts include things such as rent, utilities, wages, supplies, repairs, and any other operating costs of running the business. Expense accounts have a debit balance. Income, COGS, and expense accounts are called "Income Statement" accounts. To determine your net income for any given period of time you take the total sales minus the cost of goods sold to get the gross margin. Then you subtract the expenses to get the net income.

Sales – Cost of Goods Sold = Gross Margin – Expenses = Net Income

Chart of Accounts

Here is an example of a basic chart of accounts:

Balance Sheet Accounts:

Assets:

101 Petty Cash

102 Cash in Checking

103 Cash in Savings

110 Accounts Receivable

120 Inventory

150 Land

151 Buildings

152 Equipment

170 Accumulated Depreciation

Liabilities:

200 Accounts Payable

208 Payroll Taxes Payable

225 Short-term Note Payable

295 Long-term Note Payable

Owners' Equity:

300 Capital Stock (or Owner Contributions)

305 Additional Paid in Capital

319 Dividends (or Owner Draws)

320 Retained Earnings

Income Statement Accounts:

Sales and Cost of Sales:

400 Sales

500 Cost of Sales

Expenses:

600 Salaries and Wages

602 Owner's Salary

604 Advertising

608 Automotive Expenses

610 Bad Debts

612 Bank Charges

618 Contract Labor

640 Depreciation Expense

650 Freight

662 Insurance

668 Interest Expense

702 Payroll Tax Expense

708 Rent Expense

710 Repairs

718 Supplies

This chart of accounts is neither all inclusive nor is every account mandatory. Accounts may be different depending on the type of business, the amount of detail you need, and the type of legal entity. Account numbers are not necessary, but can be helpful.

Once you have set up your bookkeeping system, and get the accounts classified in the correct account type, the system will automatically post transactions to the proper account type. But if it is not set up correctly, it will be impossible to get meaningful information from your accounting system.

As I mentioned, each transaction will affect two accounts – one with a debit, and one with a credit. Let me illustrate with the following examples:

You receive a loan from the bank. Increase cash (debit to an asset account), and increase the loan payable (credit to a liability account).

You buy a piece of equipment with cash. Increase equipment (debit to an asset account), and decrease cash (credit to an asset account).

You pay the monthly rent. Increase rent expense (debit to an expense account), and decrease cash (credit to an asset account).

You put your personal money into the business to help pay expenses. Increase cash (debit to an asset account), and increase owner's equity (credit to an equity account).

You buy inventory. Increase inventory (debit to an asset account), and decrease cash (credit to an asset account).

You sell some merchandise on credit. Increase accounts receivable (debit to an asset account), increase sales (credit to a sales account), AND decrease inventory for the cost of the items sold (credit to an asset account) and increase COGS (debit to the COGS account.)

You receive payment on account. Increase cash (debit to an asset account), and decrease accounts receivable (credit to an asset account).

Once again, you don't need to remember this every time you post a transaction. You just need to set things up right in the first place and then check your reports from time to time to make sure things are being posted properly. The most common error I see is, when a piece of equipment is purchased, it is posted to an expense account rather than an asset account. Or when loan payments are made it is posted as an expense rather than a reduction to a liability account.

Internal Control

A good accounting system should incorporate internal controls to make sure every transaction gets recorded on the books and to insure that employees and customers don't take company assets without paying for them. There should be a process in place to record a sale at a certain point in time. It may be when the customer orders the product, or when the product is shipped. In a retail establishment it is when the customer goes through the checkout stand, but in other types of businesses, it is often not clear when to record a sale.

For example in my accounting practice, clients are billed when they pick up work from the office. If we mail it to them, it is recorded when it is put in the mail. But in the case where there was a client consultation, either in person or on the telephone, there is no output, and no precise time when the work leaves the office. In those occasions, it is up to the accountant to record how much time was spent with the client to make sure the consultation is billed. In my sod business, when a customer orders sod, it is recorded on a pocket calendar. Then it is billed when the sod is cut. Each month, we compare the calendar notes with the invoices to make sure everything is billed.

If you have employees, you need to have a separation of duties so that no one employee records the transaction and handles the cash. In a retail establishment, the cash register records each transaction and the till should balance out to the cash register at the end of a shift. This keeps employees hands out of the till. But in other types of business, there should be two people involved in receiving money; one to record the transaction, and another to take it to the bank.

Internal controls also protect other company assets besides cash. There should be policies in place regarding employee use of vehicles, supplies, and other property. There should be checks and balances in place if an employee is allowed to have a company credit card. You should also consider using purchase orders to authorize purchases on account.

### CASH FLOW

Cash flow is immensely important to having a sustainable business. Without cash, the business cannot survive.

To determine the cash flow of the company, start with an Income Statement (also known as a Profit and Loss Statement), and then make some adjustments to the numbers. For example, when you buy inventory, you have a cash outflow. But so far you have just purchased an asset. On the Income Statement you don't include that as an expense until you sell it. So if your inventory increases, you have a negative cash flow that is not fully reflected on the Income Statement. Another example is when you purchase equipment; you have a cash outflow, but it doesn't have any effect on income until you recognize depreciation on the equipment. At that point the depreciation affects the Income Statement, but it is a non-cash expense so it has no bearing on cash flow. There are many other occasions where the cash flow does not follow exactly what the Income Statement shows.

Here is a simple way to reconcile cash flows with the Income Statement:

Start with your net profit (or loss) for a certain period of time.

Add sources of financing such as new loans or capital contributions by the owners.

Subtract any payments of principal on loans.

Subtract increases in equipment.

Subtract increases in inventory or add decreases in inventory.

Subtract increases in accounts receivable or add decreases in accounts receivable.

Add increases in accounts payable or subtract decreases in accounts payable.

Add non-cash expenses like depreciation.

Subtract any dividends or draws by the owners.

After making these adjustments, the number you come up with will be your net cash flow. Then you add (or subtract if it is negative) that number to your beginning cash balance to come up with the ending cash balance. Once you have determined the net cash flows from a certain period of time, now you can project those numbers into the future to predict the future cash needs of the company.

There are a number of other ways to predict future cash needs of the company. For example, you can estimate the amount of sales needed each month just to break even. Also, you can estimate the return on investment when you buy a piece of equipment if you can predict the amount of additional cash inflow (or the reduction of cash outflow) which results from buying the equipment. And there are ways to manage your accounts receivable so that you don't have a ton of cash tied up with your customers.

Break-even Sales

In order to determine the amount of sales needed to break even, first you need to understand the difference between variable costs and fixed costs and the relationship between the two. Variable costs go up in direct proportion to the amount of sales you have. In other words as sales increase, so do your costs. For a business that buys and sells products, the most common variable cost is the cost of goods sold. Other variable costs might include selling costs and shipping costs. For a manufacturing firm, variable costs also include the direct materials and direct labor used to produce the product.

Fixed costs are more constant and remained fixed regardless of sales volume and are sometimes referred to as overhead. For example, rent on the building is the same whether you sell one widget or 100,000 widgets. Other overhead costs include management salaries, insurance, supplies, utilities, repairs, maintenance, and equipment payments. Don't forget to include your own salary as an overhead cost. Even if you don't take a salary out of the company at first, you have an **opportunity cost** – the amount you could be making somewhere else.

Calculating break-even sales is a two step process. First calculate the **contribution margin** as a percentage of sales. Contribution margin is a percentage calculated like this: Sales minus variable costs, divided by sales.

Sales – Variable Costs / Sales = Contribution Margin

For example, say your sales are $10,000 and your variable costs are $8,000. This means the contribution margin is 20%.

$10,000-$8,000 / 10,000 = .2

The second step is to determine the amount of fixed costs and divide that number by the contribution margin. For example, if your fixed costs are $3,000 per month and your contribution margin is 20%, then your break-even sales are $15,000 per month.

$3,000 / .2 = $15,000

This is a very simple calculation to determine how much in sales are needed each month just to keep the doors open. In the example above, even though sales are $10,000, it is not enough to cover expenses. We have $8,000 in variable costs and $3,000 in overhead, so we are going to be short by $1,000 per month. So here are the choices: Increase sales to $15,000 per month, or decrease overhead to $2,000 per month, or increase the margin to 30%. Or you can have a combination of any or all the above. In any case, you know that if things stay the same you will need to plan for a cash flow shortage of $1,000 per month until things change.

Internal Rate of Return

When buying a piece of equipment or making some other investment in your company, you do it with the expectation that the investment will increase your net cash flow in the future. The amount of cash flow increase per year, compared to the initial outlay of cash, is called the internal rate of return (IRR). In order to determine the IRR, you need to estimate the expected future cash flows that result from that piece of equipment. These future cash flows can come in the form of additional cash inflows (such as increased sales) or a reduction in cash outflows (such as reduced labor costs).

For example, let's say a farmer wants to buy an irrigation system for his farm. The initial cost of the system is $70,000. He will put $10,000 down and pay $13,000 per year for 5 years (including interest). With the interest, the total cash outlay is $75,000. The system will save labor costs of about $1,500 per year, it will save pumping costs of about $1,000 per year, and he expects to get a better yielding crop resulting in increased revenue of about $10,000 per year. The expected life of the system is 25 years. The question is: Is it a good investment? The only way to know is to set up an amortization schedule and plug in the expected future cash flows. In this example, year 0 will have a negative cash flow of $10,000 (the down payment). In years 1 through 5, there will be a negative cash flow of $500 per year ($10,000 increased sales plus $2,500 cost savings minus $13,000 payment). Then from year 6 through year 25, it will produce a positive cash flow of $12,500.

When the cash flows are plugged into a financial calculator or an amortization program, the rate of return on the investment turns out to be 29.929%. This is an excellent rate of return. But for the first five years, he is going to need to budget for the negative cash flow.

Payback Period

The payback period is a simple calculation to tell you how long it will take for the investment to pay for itself. In the example above, the irrigation system has a payback period of 6 years. To calculate the payback period, take the total cash outlay ($75,000) and divide it by the annual cash inflows ($12,500).

75,000 / 12,500 = 6

### ACCOUNTS RECEIVABLE

The best possible scenario for keeping a viable cash flow is to have all your customers pay for your products or services at the time they are delivered. But this is not possible in all businesses. In some industries customers expect to have credit extended to them or they won't do business with you. If you are in a business in which you must carry accounts receivable in order to compete, then it is very important that you manage your receivables. This is one area that can drag a business down in a hurry if it gets out of hand. You must take a proactive approach. Think about it this way, if you are working on a 20% profit margin on the products you sale, for each customer that doesn't pay, you will need to sell 5 times as much product just to break even because you still have your costs regardless of whether you get paid or not.

Credit Application

Have your customers fill out a credit application listing a couple of credit references and the bank where they do business. This alone may weed out some of the slow payers. Then check out the references. Make some phone calls and verify their information. Set firm policies about due dates and finance charges and give the customer a copy of your policies when they apply for credit. Make sure the customer clearly understands your credit policies. In some cases it is a good idea to get a credit card number that you can bill if they haven't paid by the due date. The credit application should also include necessary contact information such as current mailing address, physical address, and telephone numbers.

Follow Up

The key to keeping customers current on their bill is to stay in contact with them. The old saying, "The squeaky wheel gets the grease," is absolutely true when it comes to collecting on accounts receivable. Send an invoice with the product. Customers are more willing to pay for something while it is fresh on their minds. If you don't receive payment immediately, mail statements each month to specify any current charges, the finance charges, the aging, and the total balance due. Send a preaddressed return envelope to make bill paying as convenient as possible. But don't rely totally on mail because it is too easy to ignore. Call the customer. First, ask if they were satisfied with the product to see if there is a legitimate reason for non-payment. If not, then refer to the credit application and remind them that they need to stay current on their account or you will be unable to continue to extend credit to them. If they don't respond in a reasonable amount of time, keep calling until you collect.

If possible, have someone other than a salesman call the customer at first. The salesman needs to remain on good terms with the customer. But after a certain amount of time, maybe you won't care whether or not the customer buys from you again.

### KEEPING COSTS DOWN

One way to maintain a competitive edge is to keep your costs down. You can't always control the income side of business, but you can control your costs. Make sure you are getting the most bang for your buck. Analyze expenditures to see where any savings might be. This is another good reason to have an accounting system that allows you to track expenses, run comparative reports, and analyze data.

Purchasing decisions should be based on logic—not emotion. Every purchase should make sense in terms of producing a return. Sometimes your "wants" are favored over your "needs". There is nothing wrong with fulfilling your wants if you can afford it. After your business gets established, you have excess cash flow, and after your obligations are met, then go ahead and reward yourself. That's what it is all about. That's why you go into business and make the sacrifices necessary to be successful. But timing is the key. Don't spend it before you have it. The old adage that you need to spend money to make money is true to some extent, but it is possible to overspend. You can't borrow your way out of debt, and you can't spend your way to prosperity.

As your business begins to flourish and prosper, let it grow at a sustainable rate. I have seen many businesses get a little taste of success and suddenly they get hungry and they think that if a little is good, a lot is better. So they try to grow the business faster than they can manage it. That is a recipe for disaster.

Making sound financial decisions is not easy, **but it is worth it.**

Chapter 4 - TIME MANAGEMENT

Time is a limited resource. If you waste it, it is gone forever. You can't get it back. One of the challenges of owning your own business is the propensity to waste time. You no longer have a supervisor watching over you to make sure you stay productive. You will need to be a self-motivated self-starter. Famous newscaster Paul Harvey often said "Self-government without self-discipline doesn't work." The same thing is true in business. Self-employment without self-discipline doesn't work. Self-discipline is the art of doing what you need to do, not just what you want to do.

Spend time working on your business rather that just working in your business. Being successful is about doing what needs to be done when it needs to be done. The only way to achieve your full potential is to manage time wisely. As you manage your time, remember the 5 P's of success: Planning, Preparation, Production, Perseverance, and Prosperity.

### SETTING GOALS

One way to make sure you stay on task is to set goals that are specific and have a completion date. Set long-term and short-term goals and write them down. **A goal that is not written is merely a wish.** Put your written goals in a place where you can refer to them often. Short term goals should help you work toward long-term goals. Break things down by the day, week, month, or year so you stay focused on your goals. For example, if you have a goal to be debt free within 5 years, set weekly, monthly, and yearly goals all directed toward the final goal.

Make your goals difficult enough to push yourself, but easy enough to achieve. Be realistic as to what you can accomplish. There is no better way to build self-confidence than to set goals and achieve them. On the other hand, it is very discouraging if you have goals that are impossible to achieve. Start with little things and work your way up to the super achievements. Making a goal and then working to achieve it is like making a promise and keeping it. It builds character and establishes integrity.

### STAY ORGANIZED

How much time gets wasted simply because you can't find where you put something? I know the feeling. This is a lesson I have had to learn the hard way. Keep things organized whether you are doing paperwork, or working with tools. There should be a place for everything, and everything should be in its place. Create a filing system to keep paperwork neatly organized. If paperwork gets piled up on your desk, it will be impossible to find a document when you need it. Then you end up with overdue bills, tax payments, and customer orders. As a result, you end up paying extra for finance charges, interest, and penalties and you start losing customers. Good organizational skills not only help you manage your time, but they also reflect a positive image to your customers.

Task Lists

Keeping a list of daily and weekly tasks is a wonderful way to organize your time. It keeps you focused on what needs to be done. Put things in order of priority and write down the due date. Some tasks may need to move up the priority list as the due date gets nearer. Don't leave anything until the last minute because something will always come up when you are up against a deadline. Priority should be based on what is most urgent, not on what you like to do most. Plan ahead. A lack of planning usually turns into an emergency. Focus on things that are important before they become urgent. I have seen so many business managers running around putting out fires and they don't really accomplish anything. They are like a dog chasing its own tail.

### KEEP IT IN BALANCE

When I talk about using time wisely, I'm not saying that you need to spend every waking minute working. The beauty of good time management is that you can plan for rest, relaxation, family time, recreation, physical fitness, and spiritual fulfillment. I am suggesting that you reduce or eliminate wasted time. Idle time is when you really aren't accomplishing anything. You are not working, but you're not resting either. **There is a difference between resting and idleness.** If you organize your time and use it wisely while you are working, it will free up more time for the other things that are important in life. Balance is the key. Maybe because I'm an accountant, I look for balance in all things. Anything taken to an extreme can be detrimental to you physically and mentally. Any strength overused becomes a weakness. Use moderation in work and play and all things important. Balance enables you to be effective when it is time to work.

### TIMING

In the business world, timing is everything. There is a time to go all out, and a time to hold back. There is a time to prepare, and a time to act. I'm reminded of the story of two wood choppers who would go to the woods every day to chop wood. The first chopper would always be the first to get out and start chopping wood. But the second chopper would always bring home just as much or more wood at the end of the day. One day, the first chopper decided to wait and see what the second was doing every morning. He soon found out that the second chopper was spending more time sharpening his axe. As the Boy Scout motto says: "Be Prepared." Being prepared is simply a matter of having things done ahead of time.

However, all the preparation in the world does no good unless you put a plan into action. You need to have specific goals as to when you are going to make things happen. Nike says, "Just do it." I say "Do it now." If you wait until "someday", that day will never get here.

There are three types of people in the world. There are the wishers, the dreamers, and the doers. You can become whichever one you want. The wishers want things, but they take the path of least resistance. The dreamers dream of all the things they are able to do to reach their potential, but they never do it. The doers have dreams too, but they are willing to take the steps necessary to achieve their potential and make their dreams come true.

Seasonality and Cycles

In world of business there are ups and downs. Some trends are seasonal—short term cycles that are fairly predictable. Then there are longer cycles or fluctuations in markets, in consumer demand, and in the competitive environment. This is especially true if you are involved in farm commodities, fuel, precious metals, or the stock market. But it is also true in any business. For example, if there is an oversupply of labor, it is easier to hire good employees. If there is weakness in the American dollar, it is more difficult to import foreign products. We even saw a major fluctuation in the real estate market in recent years.

In the past, real estate has always been pretty steady with a moderate increase in value over the years. But more recently, we have found out that real estate doesn't always go up. A lot of people got caught up in the buying frenzy in 2006 and 2007. They bought houses they couldn't afford because they thought they could easily sell and turn a profit. The banks were more than eager to lend because they figured their security interest in the property would always increase in value. Some people just wanted to own a piece of dirt so they could make some fast money. They soon found out that the buying frenzy had thrown the market out of balance. The rapid increase in construction and property values was not sustainable. There were some other factors that helped trigger the crash in real estate, but the fundamentals were just not there to support the growth.

There are opportunities in these cycles. The markets are always trying to find an equilibrium where supply equals demand and if anything upsets that equilibrium, the markets react accordingly. The key to taking advantage of these opportunities is paying attention to the things that are happening around the world and in your own community, and try and anticipate emerging trends that will affect your business in the future. This is what is meant by "staying ahead of the curve."

For example, in 2009 the cattle market was trending on the low side because both beef producers and dairy producers had been selling off cattle. The sell-off had put undue pressure on the beef market, but with the reduced herd sizes, it seemed that there might be an under supply of beef in the future. The American dollar was relatively low compared to other currencies so the export market was picking up. Feed costs were also trending lower which made it more profitable to put the gain on cattle. With all these factors combined, it seemed like an excellent time to buy some young stock, feed them for a few months, and sell them. As it turned out, that is the way it played out.

Market Bounce

It seems that if supply and demand get out of balance, and as the markets move to find that equilibrium again, sometimes there is an overcorrection and the markets get out of balance in the opposite direction. I refer to this as "market bounce." I see this all the time in the housing market. It seems that there is always a buyer's market or a seller's market. I think when the economy starts to improve, we will see a big bounce in real estate because new construction has slowed to a crawl, yet the population continues to grow. So when people start buying housing again, it could go from a buyer's market to a seller's market in a hurry. This happens in other markets as well. Any volatility in market conditions creates opportunities to take advantage of market bounce.

When trying to anticipate market trends, pay attention to what the government is doing that might affect markets. Every time the government acts there is some type of reaction whether it is intended or not.

In my opinion, now is the perfect time to launch a new business. The American economy has been in recession for a couple of years and is on the verge of recovery. Many of the weaker businesses have not survived the recession so the competition has been thinned out. "Survival of the fittest" occurs in business as well as in nature. The costs to start a new business, such as equipment or real estate, are probably pretty low right now. Additionally, the government's attitude toward a small business is very favorable because small businesses have the ability to create jobs in a hurry. You need to weigh all these factors and others that will affect your particular business and make a decision as to the right time to launch your business and then just go for it.

Making the most of your time is not easy, but **it is worth it.**

Chapter 5 - EMPLOYEES

One of the most challenging aspects of business ownership is that of hiring employees. As the personnel manager of your company, it is your job to recruit, select, orient, train, motivate, inspire, compensate, and retain good employees. You will need to become familiar with employment laws and you will need to withhold and pay the appropriate employment taxes. You may not need employees at first, but as the business grows, so will its need for employees. Your company's growth will be limited without employees. You will want to find employees who complement your strengths and compensate for your weaknesses.

### HIRING

When you are in need of new employees, there are various ways to recruit. An established business generally has prospective employees dropping off resumes all the time. But an up-start company needs to get the word out through advertising or using employment agencies. When you advertise a job, include as much information as possible about the job requirements, education requirements and the pay scale to eliminate applications from unqualified workers. Have potential recruits fill out an application and provide a resume in order to screen out some of the candidates. Narrow down the number of applicants to a manageable amount through some process of elimination.

Interview

The job interview is used to gather as much information about the candidate as possible. You should talk about education, previous experience and compensation expectations. Learn to read between the lines and ask questions that require more than a yes or no answer. Go over the application and ask them to clarify anything that seems to be lacking. Ask why they are leaving their current employment, if applicable. Ask questions that the candidate may not expect because most potential employees know what answers you want to hear.

For example, I know of a trucking company owner who would ask this question when interviewing candidates for a truck driving position: "If you were driving along a winding mountain road with a steep embankment on the side, how close could you get to the edge without going over?" If the truck driver said he could drive within a foot or six inches without going over, that was usually the end of the interview. However, if the truck driver said, "I would stay as far away from the embankment as I possibly could," then the interview would continue and the driver would have a good chance of getting hired. That type of question reveals more about the person's maturity level than job skills.

Be careful not to ask any questions about race, gender, age, marital status, religion, national origin or any other protected categories in your jurisdiction. Even an indirect question may lead to problems if a candidate feels he or she has been discriminated against.

Be sure to ask the candidate if he or she has any questions for you. The type of questions they ask will also tell you a lot about them.

The job interview is also used to sell your company to the candidate. Good employees have a choice about who they want to work for.

Testing

Depending on the type of job, you may be able to develop a short quiz to test the skills of the candidate. For example, if you are recruiting an office assistant, you might get them to write a business letter from some outline notes, demonstrating their use of the computer, their business writing style, and their speed. If you are recruiting a bookkeeper, your accountant may be able to help you develop a bookkeeping quiz to test their skills. If you are recruiting a truck driver, you may be able to use some questions from the commercial driver's license test.

Selection

After conducting interviews, it is time to make a decision. You want an employee who has the skills needed to do the job, but you also want someone who will fit into the culture of your company. You want someone who will enjoy the work and who will be enjoyable to work with. If you hire someone who has experience, you won't need to spend as much time and money on training and they may bring some good ideas from their previous work, but they may be more expensive to hire. On the other hand, if you hire someone who has little or no experience, it may be easier to train them to do things your way and they will have a lower starting salary, but it will take more time and effort to train them.

### TRAINING

After selecting an employee for the job it is time to train him or her, not only in the job skills, but in company policies and procedures. Sometimes it is hard to know how much training they need until you are familiar with the knowledge they already have. You don't want to be redundant, but at the same time, you don't want to leave anything out. Managing employees does not mean telling them every move to make. You can't expect employees to do everything exactly the way you do them. Sometimes this is good. Train employees well, and then let them use some of their own creativity to accomplish the task. This is an area where micromanaging might do more harm than good. Training should be more focused on results than processes.

Employment Manuals

One way to train new employees is to have a Training Manual and a Policies and Procedures Manual. The Training Manual should contain the job description and an explanation, in as much detail as possible, of how to do the job and what is to be accomplished. Most of what they learn will come from doing rather than reading, but if they read about it first, it will be a lot easier to learn. If the employee doesn't understand something in the manual, encourage him or her to ask questions. Safety training should also be addressed in the Training Manual. For jobs that have some element of danger, regular safety meetings should be held. There should be a separate Training Manual for each job description in the company while the Policies and Procedures Manual should contain general information that applies to all employees.

A Policies and Procedures Manual (also known as the Employee Handbook) is a statement of the policies of the business and how the business is to be conducted. It sets forth your expectations for your employees and also describes what they can expect from the company. It should help develop the personality or culture of the company. Develop a Mission Statement so the employees are working toward the same goals.

The mission statement is like a "constitution." It is the guideline upon which all policies and procedures are based. It should be an expression of your company's principles and values and state its purpose. If you want to have a successful enterprise, you must define your objectives and spell out what you want to accomplish.

It is essential that your company Policies and Procedures Manual be as clear as possible. Misunderstandings can create legal liabilities for your business. In legal disputes, courts have considered an Employee Handbook to be a contractual obligation. It may be wise to have the employees sign a statement confirming that they have read and understood the Employee Handbook.

The actual policies in the manual will vary from company to company, depending on its size, the number of employees, and the benefits offered. But, regardless of the size or complexity of your business, you should have at least a minimum list of policies for your employees to spell out what is expected of them as far as dress standards, attendance, use of company property, confidentiality, safety rules, dealing with customers, etc. It should state specifically what is not tolerated in the company and the grounds and procedure for dismissal. It should also spell out criteria for advancement opportunities within the company and compensation issues such as holiday pay, vacation, sick leave, family leave, and employee benefits.

On-the-job Training

Employees should have a clear understanding of what needs to be accomplished. Focus on results rather than methods. Learn how to delegate. Set some guidelines, but don't dictate every move. Give the employees stewardship over their job. Identify what resources are available to accomplish the task. Set deadlines and periodically ask for a report on how the assignment is going. The follow-up is as important as the assignment of the task. If employees know there is accountability, they are more motivated to accomplish what is expected of them.

### MOTIVATION

One of the most rewarding things about achieving your own potential is being able to help others achieve theirs. If you can help your employees be successful, you will be more successful. If your employees know that you're on their side and you want to help them join the ranks of the achievers, then it will be a lot easier to motivate them, train them, and even discipline them.

Employee Interviews

Employees need to feel important. They need to feel that their opinion is important. They need to see that someone is noticing when they are doing a good job. If you hold regular employee interviews, you can instill these feelings in them along with the desire to do better. Ask if they have any ideas about how to make the business better. You never know, they might just come up with some great ideas. But at the very least, they feel like you have confidence in them and their opinions are important. They may question why things are done in a certain manner and this gives you an opportunity to explain so they have a greater understanding of how a business is run.

Listen to your employees. Don't feel threatened if an employee comes up with a good idea. A good manager doesn't come up with all the great ideas, but he or she knows how to recognize a great idea and knows how to give proper credit for those ideas in order to inspire the employees to keep thinking. When employees are part of the decision-making process, they take ownership of the ideas and they become interested in making their ideas successful.

Show concern for the employees by asking how things are going away from work. Don't get too personal, but just let them know that you are interested in them. If you need to correct them or discipline them, let them know that you are doing it to help them become more successful, not just to exercise authority over them. They won't care how much you know until they know how much you care.

Create a culture in the organization to help employees feel a part of something special. Listen to employees concerns. Sometimes they just need to vent. Create trust by keeping promises and following through on commitments. Never betray a confidence or talk about other employees except in a positive way. Set an example by living by company rules.

Positive Reinforcement

See your employees as who they can become, not just who they are. Then help them see it too, and it will inspire them to do their best. Use positive reinforcement. Let them know that you notice when they do something well. Employees respond to the proverbial "pat on the back". They need to feel appreciated. Teach and encourage with constructive criticism.

Employees don't respond well to destructive criticism. I know of one employer who likes to motivate with intimidation and fear. Employees are really afraid of him. Although the employees perform well while he is watching, there is no loyalty and the employees are afraid to approach him with any creative ideas. I think he has a military background because he barks orders like a drill sergeant. The employees all call him "Boss," but what they really mean is boss spelled backwards (double s. o. b.). As you can imagine, the business has a very high employee turnover rate.

Financial Incentives

The ultimate show of appreciation is a financial reward or bonus for achieving certain goals and expectations. Bonuses should be based on achievements that can be measured. They should be available to all employees equally. If a bonus is based on subjective opinions, or if it is perceived to be not fair to all, it will discourage more employees than it inspires. Rewards should not create a competition between employees because competition destroys the spirit of cooperation necessary for the entire company to be successful. Don't measure one employee against another, but rather measure an employee's progress against his or her own past performance. Or reward an entire team if the team surpasses its own expectations. **If you want to encourage performance, measure it. If you want to accelerate performance, reward it.**

### PAYROLL TAXES

Whenever you have employees, you will need to contend with payroll taxes. Some of the taxes are withheld out of the employee's earnings, some are paid only by the employer, and some are paid by both the employee and the employer. Whether the taxes are paid by the employer, or withheld from the employee, the taxing authorities consider payroll taxes to be "held in trust" by the employer for the benefit of the employees. In other words, it's not your money, and if you fail to pay the payroll taxes, the IRS and state taxing authorities take a very dim view of it.

FICA

FICA taxes (also known as social security) is withheld out the employee's wages and then matched by the employer. So half comes from the employee and half comes from the employer. For 2010, the tax rate is 6.2% of the gross taxable wages for each (12.4% total) based on the first $106,800 of wages. The tax rate has remained unchanged for many years, but the wage base is tied to inflation and has increased nearly every year except for 2010. Recent legislation lowered the employee's share of FICA to 4.2% for 2011. Social security taxes are used to fund old age, survivors, and disability payments. The amount of social security benefits that a person receives after reaching retirement age is directly affected by the amount of social security earnings received during their lifetime.

Medicare

Medicare taxes are also paid by both the employer and the employee. For 2010, the rate is 1.45% for each (2.9% total) but there is no wage base limit. Medicare taxes are paid on all taxable compensation even if the amount exceeds the social security wage base. Medicare taxes are used to fund the Medicare program offering hospital insurance to the elderly. The tax rate has remained unchanged for many years.

Federal Withholding

Federal withholding is a tax that is withheld only from the employee. It is really just a "pre-payment of taxes they would owe when they file their tax return by April 15th of the next year. If the amount withheld exceeds the tax liability on the tax return, they get a refund. If the amount withheld is less than the tax liability, the remainder is due with the tax return, and there could be penalties for not having enough prepaid. The amount to withhold depends on the employee's filing status and the number of exemptions they are able to claim. The IRS publishes an Employer's Tax Guide (Circular E) each year containing withholding tables to determine the amount to withhold based on the employees earnings for each pay period, the amount of exemptions claimed, and the employee's filing status. The withholding tables are designed to approximate the amount of income tax the employee will owe by the end of the year and then take a portion of it out of each paycheck. You should have the employee fill out a W-4 form each year to tell you their filing status and the number of exemptions they are claiming.

Federal Withholding taxes as well as the FICA and Medicare taxes are reported quarterly on form 941. If the amount of tax due is less than $2,500, it can be paid with the 941. If the amount of tax due for the quarter is $2,500 or more, you must make deposits through the Electronic Federal Tax Payment System (EFTPS). The deposit interval depends on the size of your payroll. Some employers are on a monthly deposit schedule and some are on a semi-weekly deposit schedule.

State and Local Withholding

State withholding is similar to federal withholding because it is withheld from the employee's wages and it is an attempt to pre-pay the amount of tax due with the employee's state tax return. Most states also use withholding tables and the due dates vary from state to state. A few of the states don't have an income tax, and therefore there is no need to withhold state tax.

Some localities also have an income tax and require withholding. There are very few because most localities have other ways to raise revenue other than income tax. But check with the authorities in your area to see what the requirements are.

Federal Unemployment

Federal Unemployment (FUTA) is a tax levied only on the employer; it is not withheld from the employee's wages. The tax rate for 2010 is 6.2% of the first $7,000 of each employee's wages. However, if you are also subject to state unemployment you get a credit for up to 5.4% of taxable wages. If you apply the 5.4% credit, then the federal rate is effectively 0.8% of the first $7,000 of wages.

State Unemployment

State Unemployment (SUTA) taxes are also levied only on the employer. The tax rate varies from state to state and even from one employer to another. Most states have a minimum tax rate and have an "experience factor" rate. The experience factor raises the tax rate on employers who have a history of laying-off employees. The states also have a wage base but it is usually much higher than the federal wage base of $7,000. For example, Idaho has a wage base of $33,300 for 2010. In other words, only the first $33,300 of each employee's wages is subject to SUTA tax in Idaho.

The FUTA tax and SUTA tax are used to provide unemployment compensation to workers who have lost their jobs.

All of the employer-paid taxes effectively raise the cost of hiring personnel and must be factored in when making decisions about hiring, bidding jobs, and setting prices. Normally your actual labor cost is from 10% to 35% higher than the wages you pay depending on the employment tax rates, workers compensation rates, and other fringe benefits provided.

### EMPLOYMENT LAW

As an employer, you will need to be familiar with federal and state laws governing minimum wage, unemployment insurance, workers compensation insurance, equal employment opportunities, job safety, and family and medical leave. You are also required to verify that each employee is legally eligible to work in the United States. This will include completing Form I-9 (Employment Eligibility Verification Form) for every employee. Each new employee should also fill out a Form W-4 so you can determine the correct amount of tax withholdings.

### EMPLOYEE vs. INDEPENDENT CONTRACTOR

If you hire an independent contractor, rather than an employee, you obviously will save money on the employment taxes and possibly workers compensation. This has led to a lot of abuse in this area. Employers have treated workers as independent contractors only to save taxes even though an employer-employee relationship clearly exists. The IRS has been taking an aggressive approach trying to classify workers as employees if that is truly the case. The states have recently joined in the worker classification battle because they are not collecting the unemployment taxes for those workers who are misclassified as independent contractors.

The real issue in determining whether or not a worker is an employee comes down to control. If the employer can control what will be done and how it is to be done, the worker is an employee. On the other hand, independent contractors are usually in business for themselves, such as accountants, lawyers, and construction contractors, and they usually perform those services for more than just one client.

The IRS has come up with a 20 factor test to determine whether or not a worker is an employee. No one factor by itself is determinate, but some factors may carry more weight than others. Once again, the thing they are looking for when applying these factors, is the issue of control.

Instructions. A worker who is required to comply with a supervisor's instructions is usually an employee. An independent contractor usually applies his or her own method to complete a task.

Training. Formal or informal training at the employer's expense usually indicates an employer-employee relationship. Independent contractors pay for their own training.

Integration. Integrating the worker's services into the business operations generally shows that the worker is subject to control.

Services rendered personally. If the worker must perform the services personally, it indicates control by the employer. An independent contractor can hire other workers to complete a task.

Hiring, supervising, and paying assistants. An independent contractor hires, supervises, and pays his or her own assistants (if any). An employee doesn't.

Continuing relationship. The longer the relationship, the more likely the worker is an employee.

Set hours of work. An independent contractor controls his or her own hours to complete a task.

Full-time required. A full-time position indicates an employer-employee relationship, whereas an independent contractor works when he or she chooses.

Working on the employer's premises. The weight of this factor might depend on the nature of the work, and working off premises does not necessarily suggest that the worker is not an employee, especially with the rise of telecommuting.

Order or sequence set. Only a nonemployee is free to determine his or her own approach, pattern, priority, and schedule.

Oral or written reports. Regular accountability of progress is usually a sign of control.

Payment by the hour, week, or month. Independent contractors are typically paid by the job, not in a regular pattern.

Payment of expenses. Reimbursement of expenses tends to support an employer-employee relationship. Independent contractors generally pay their own expenses and bill the employer as part of the contract price.

Tools and materials. Employees use the employer's tools and materials, independent contractors provide their own.

Significant investment. If the worker invests in facilities that he or she uses in performing services, the worker is probably not an employee.

Realization of profit or loss. A worker who is subject to the risk of economic loss due to a liability for expenses is an independent contractor.

Multiple assignments. If a worker performs more than minimal services for more than one business at a time, the worker is likely an independent contractor.

Making services available to the public. This flexibility and freedom of control signals independent contractor status.

Right to discharge. An independent contractor generally cannot be fired as long as he or she meets the contractual obligations.

Right to terminate. A worker who can end the working relationship without incurring liability is an employee.

The existence of a contract by itself does not determine whether or not a worker is independent. But a contract or consulting agreement that is coordinated with the 20 factor test can specify key control issues.

The responsibility for classifying the worker properly lies with the employer and the penalties for misclassifying workers can be severe. The IRS can force the employer to pay the taxes that should have been withheld and they can impose penalties.

Don't let the 20 factor test deter you from hiring an independent if it is warranted. When a new business is first starting out, many times it is not feasible to hire an employee for certain tasks because there is not enough work to keep a full-time employee busy. In these cases you can either hire part time employees, or farm things out to independent contractors. For example, bookkeeping services can be done by an independent bookkeeper rather than an employee. If the bookkeeper uses his or her own office and computer, sets the working hours, and works for other businesses, he or she really is independent.

### MANAGING EMPLOYEES

Whether you hire employees or independents, the issue of matching the right person with the right job can be challenging. Here are a couple of basic principles of personnel management that might help things run more smoothly and efficiently.

Work assignments

When managing workers and assigning tasks, follow this general rule: **assign a task to the lowest paid person who can handle the task.** Give the more difficult tasks to the higher paid workers. This won't always be possible because you also need to keep everyone busy and productive. But in general, your labor resources are used more efficiently if you don't have the higher paid personnel doing menial tasks. For example, when I first started working for an accounting firm during tax season, I was given all the simple returns to prepare because I was the lowest paid person there. I became the "kiddie tax" expert because I prepared the tax returns for the children of the major business clients. It was rather fun because I could crank out 20 or 30 tax returns in a day. But as I became more experienced (and higher paid), I was given tax returns that were more and more difficult. After a few years I was working on major partnership and corporation returns that could sometimes take all day to complete one tax return.

Keep employees productive

Every business experiences slow times when there is not a lot of work to do. You need to have something available for the employees to do during these times. If you are paying them to be there, they might as well be doing something productive. During times like this, ignore the previous paragraph and keep everyone working regardless of their pay scale. For example, in my farming operation, whenever we are not in the middle of planting, harvesting, irrigating, plowing or any other priority task, I have the workers go to the shop and sweep the floor or service equipment. There is always a pile of broken sprinkler pipe outside the shop that can be fixed. You just need to have some non-priority task that can be worked on whenever things are slow.

Being the personnel manager of your company is both challenging and rewarding. Without employees, your business can only grow so much. But, employee issues can take up a lot of your time. Finding and keeping the right employees for your business is not easy, **but it's worth it.**

Chapter 6 - MARKETING

There are many different ways to market your product or service. Marketing is more than just advertising. It also means understanding your customer's needs and communicating how to meet those needs. It means knowing the competition and learning how to do things better. It means retaining customers and giving them a reason to recommend you to someone else. While marketing is not the only element crucial to the success of a business, it is one of the major ones. Without customers, no business can succeed.

While trying to understand the customers' needs, look at your business from the customer's point of view. Treat customers the way you want to be treated. Success comes from meeting your customer's needs and solving their problems. You must figure out how to meet those needs better than anyone else, and you must sell yourself and your ideas. Create value to your customers by providing solutions where no other solution exists and you will be rewarded.

### ADVERTISING

Advertising in today's business world can take many different forms. From the traditional newspaper, magazine, and yellow pages ad to the high tech internet based advertising. You need to find the media that works for your business. A lot will depend on whether your target market is local, national, or international. Find where your potential customers are and target your advertising to reach the most people for the least cost. Find out who makes purchasing decisions and find where they shop to fulfill needs.

In any form of advertising you need to look at it from a cost-benefit stand point. In other words, the advertising needs to generate enough business to pay for itself—not just gross income, but gross profit. Also, with any advertising there is a **point of diminishing returns** where one more dollar of advertising does not produce another dollar of profit. In order to make decisions about where to spend your advertising dollar, you need to find out what is working and what isn't. Sometimes that is difficult because you don't always know where new customers are coming from. You need some method to evaluate the performance of your advertising decisions.

Questionnaires and surveys will give you some idea of the effectiveness of your advertising. For example in my accounting practice, I have a new client information sheet that all new clients fill out. It asks for contact information, social security numbers, and other information needed to prepare tax returns. At the bottom of the new client information sheet, is the question, "How did you find out about us?" And then there are some check boxes for Yellow Page Ad, Newspaper Ad, Referral, Welcome Basket, and Internet. Then I ask the client to please specify the ad source, the referral source, or the website. This has been very effective for this type of business. I have found that referrals have been the best source of new business, then the yellow pages, and then the website. Not all businesses can do a new client information sheet, but there are other ways to gather information about your advertising.

Immediate response advertising will tell you a lot about how much business an ad is drawing. This means running a special for a limited time or using coupons. If you get a response to the ad, you know people are seeing it. If you advertise on the internet, there are ways to track how many hits, clicks, or impressions your ad is getting.

Print Media

Print media includes newspapers and magazines. If you know what your potential customers are reading, this can be an effective source of new customers. Paid advertising in the local newspaper can be expensive, but if your target market is local, it may be effective. The problem with newspaper advertising is that potential customers might see the ad when they are not really looking for your product or service. Newspaper advertising is most effective when the ad is repeated several times so the customer will know where to look when the need for your product or service arises.

There are ways to get some free publicity in the print media by writing articles, or getting newspapers or magazines to "cover a story" on your business. One way to attract attention to your business is to send a press release to the media outlets in your community, or to the trade press that covers your industry.

Magazines are a great way to get your ad to a more specific audience. For example, a cattle rancher decided to start a side business of a "dude ranch" where, for a fee a person can spend a week with the ranch hands riding horses and herding cattle. He started advertising in the _Western Horseman_ magazine because that's the kind of publication horse riders read. Over the last several years, the number of guests has increased tremendously and he has had the opportunity to meet hundreds of wonderful people from all across the nation and beyond. Now the dude ranch business generates more income than the cattle sales. And as a side benefit he gets free labor to herd the cattle all summer long. On the down side, some of the dudes are harder to herd than the cattle. But overall, it has been a successful venture.

Direct Mail

Direct mail lets you send advertising material directly to your target market. The trick is compiling a list of recipients who may be interested in your product. It's pretty effective and inexpensive, but there are a couple of down sides. First, many people throw away lots and lots of junk mail without even really looking at it. Second, a poorly-produced piece of direct mail is worse than no direct mail at all. Pay attention to spelling and presentation.

Distribution

Distribution means taking a sample of your product and distributing it directly to places where your target market may be. This works especially well if you sell your products to other businesses. In my accounting practice, I tried a variation of this by using a "Welcome Wagon" type business to give a free calculator in their gift basket to all new move-ins in the area. The calculator had my name, address and phone number imprinted on it. It seemed like a good idea because new move-ins might be looking for a new accountant, but I have been a little disappointed in the results. It might be because I live in a college town and a lot of the new move-ins are college students who can't afford a CPA. I'm going to try to narrow the distribution to new small businesses in the area.

Signs and Location

Outdoor advertising can be effective for certain types of business. Location is important if your target market needs to find your business easily.

Internet

In recent years the internet has totally changed the marketing landscape. You can create your own website, or you can advertise on other websites. You can even sell products directly from your website 24 hours a day whether you are there or not. You are not limited to a certain geographical area. The world is your market. You can live in a remote location and sell to the masses. The real trick is getting traffic to your website. Internet advertising must be created in a way that customers searching for your product are pointed in your direction by the search engines.

Social networking is the newest craze in getting information out to potential customers via the internet.

Federal Government

Today, the United States Government is the largest consumer of goods and services in the world. There are many misconceptions about the government market. Many believe that selling to the Federal Government is like finding a pot of gold at the end of the rainbow. Others avoid government procurement opportunities because they are certain all the rules and regulations are there to trap the unwary company that dares to venture into this market. Both of these views should not be the basis for any company's decision to sell or not to sell to the government.

A company electing to enter this market should recognize that the objective of the federal procurement process is to acquire necessary supplies and services in a timely manner and at a fair and reasonable price.

There are many ways to find out when different agencies are going to make a solicitation for an open bid. First, review the Commerce Business Daily. The CBD is a daily listing of U.S. Government procurement invitations for bids. Second, every government installation and purchasing activity maintains a bidder's list of prospective suppliers. The bidder's list indicates which businesses want to sell their products or services to the government installation. A bidder's list registration form can vary from agency to agency. Third, a business can increase its opportunities by registering the company's profile on the Central Contractor Registration System. CCR is a computerized database that connects government agencies with a need to small businesses that can service and fulfill that need. The forms and information for all the government procurement opportunities can be found on line.

### PRICE POINTS

Making decisions about how much to charge for your product or service is a major part of marketing your product. In order to make this decision, you need to know two things: your costs, and how the competition is pricing the same or similar products or services.

Know Your Costs

As mentioned in Chapter 3, you must track variable costs and fixed costs to manage your finances. It is absolutely imperative that you know these costs in order to set a price on your goods or services. The biggest mistake I see is not fully including the overhead and not understanding how overhead gets allocated to the cost of each product. For example, I know of a man in the business of building construction. As a rule he would bid jobs at cost plus 10%. It sounds like a reasonable profit for that industry. But what he failed to do is include the overhead as part of his cost. He included only the direct materials and direct labor. As a result, he was bidding jobs too low. He was building a lot of buildings, but when all was said and done, he was losing money.

Know the Competition

What your competition charges for their products or services will have a huge impact on where you set your price points. Unless you can differentiate your product, give better customer service or target a more elite market, you will be able to charge only what your competition charges. You will need to know the competition and understand the dynamics of the competitive field. In other words, you need to know not only where the competition is now, but also where it is going. Research your markets. Develop a specialty in which your business can excel. Be ready to pounce on new market trends that result from a shift in cultural, economic, or technological circumstances that signal new market opportunities.

Market research may require some detective work on your part. In some cases you can find out what the competition is charging simply by visiting their place of business or looking at their ads. In other cases you may need to call them and ask them for a price quote. Sometimes potential customers will tell you what they have been paying elsewhere. For example, in my sod business, when a customer calls and asks for a price quote, sometimes I will ask them if they have already gotten any other quotes and if so I ask how we compare.

Small businesses have a distinct advantage when it comes to market research because they are close to their customers. Customers can give you valuable information about the competition. They can tell you what they like and dislike about your competitors. This gives you an opportunity to focus on the things the competition is not doing well. This may help you find a market niche that is underserved. Listen to your customers. They can tell you what their real needs are so you don't have to try to create a need.

Stay one step ahead of the competition. I am reminded of the story of the two old cowboys riding through the forest one night. One cowboy said to his partner, "Let's stop for a minute so I can change my shoes." His partner said, "Why do you want to do that?" The cowboy said, "Because we are getting into bear country and if a bear jumps out and spooks our horses, we will probably be on foot. I want to have on my running shoes instead of these cowboy boots." His partner said, "Wait a minute. If a bear jumps out and spooks our horses, there is no way you can outrun that bear. It's impossible. It can't be done." The cowboy said, "Well if a bear is chasing you and me down the trail, I don't really need to outrun the bear. All I need to do is outrun you." It is the same in business. You don't need to be perfect; you just need to be a little better than the competition.

It is not always wise to compete on price alone because the competition can just undercut you. This starts a vicious price war which no one wins (except the customer). The best strategy is to meet the competitor's price and then do a better job by paying attention to detail, giving outstanding service, and doing the extra "little things" that make a big difference. You can't go up against a large company and do things the same way they do. You must find something you can do better.

### WORD OF MOUTH

What your customers say about you can be the most effective and the cheapest form of advertising. If your customers have a positive experience, they might tell their friends. If they have a negative experience, they will certainly tell their friends. If your customers don't have a good experience, you not only lose the prospect of bringing in new customers, you might just lose the existing customers. Getting one thing wrong can negate everything else you are doing right. If a customer is not satisfied, correct the situation if it can be corrected. If not, apologize sincerely and explain why it's not possible. You can't please everyone all of the time, but you can please most of the people most of the time. Some people are just chronic complainers and they just need someone to listen to them.

Employees must be trained to make sure the customer's needs are truly satisfied and that they enjoy meeting those needs. I have patronized businesses where you can see the employees cringe when you walk in because they don't want to help you. It makes me want to turn around, walk out, and go somewhere else. (This is one of those little things that doesn't really cost any more, but it makes a big difference.) Learn to under-promise and over-deliver. Always follow up and return phone calls. Even if you can't satisfy the customer's needs, they appreciate a response.

Honesty and Integrity

You must develop a reputation for honesty and integrity or your customers will go somewhere else. My grandfather used to say, "You can shear a sheep many times, but you can only skin him once." In other words, if you treat your customers fairly, they will come back many times, but if you get greedy and try to rip them off, that's the last you will see of them.

When I talk about treating customers fairly, I'm not suggesting that you need to let customers take advantage of you. Every transaction should be a win/win situation. You can very politely and tactfully tell your customers "no," if the deal isn't fair for both sides. Tact is the ability to tell someone where to go and make them feel good about being on their way.

Some business owners don't have a solid concept of fairness. They think it is a "gray area." Although I agree that people have different perceptions of fairness, I have a couple of guidelines to help me determine what is fair and what is not.

First of all, to be fair and honest, you need to do what you say, when you say, for the price you say. If the customer isn't satisfied with what you tell him up front, there will be no deal, no problem. If you change the agreement by cutting corners or adding additional charges, the customer has every reason to be upset. Don't make promises you can't or won't keep.

Unfortunately, there are times when unforeseen circumstances arise and adjustments need to be made. So, my second guideline is to look at an unforeseen circumstance as if the opposite would have happened. Then how would you feel. If there is downside risk, there should also be upside potential. For example, several years ago, I had an agreement with a grain dealer to plant a certain variety of wheat. He wanted to use it for seed for the next year's crop. We had a handshake deal and he was to pay a certain price per bushel. So I planted that particular variety of wheat and I took extra precautions to keep the weeds out because it was to be used for seed. I harvested it and put it into storage for winter. In the meantime, the wheat market went down. The next spring, when farmers started planting wheat, it became evident that they weren't going to plant this variety of wheat. The grain dealer knew he had to take my wheat, but he wanted to pay a price much lower than what we had agreed because of the unforeseen drop in the wheat market. So I asked him, "If you were in my shoes, would you think that was fair?" He couldn't answer. Then I took it one step farther and asked, "If the market would have gone up, would you have given me a higher price than we agreed?" This time his answer was a definite "no". So I asked, "If I have no upside potential, then why do I have downside risk?" He knew I was right, but he still wouldn't pay the full amount we agreed to. We settled somewhere in the middle. The moral to this story is, **get it in writing.**

The way you market your product or service depends on the type of business you have, the type of customers you are trying to reach, and the competitive environment. There are almost as many ways to market, as there are products. You are not just selling products and services; you are selling solutions to your customers needs. You need to be innovative and creative. When you are first starting a business, you need to do things out of the ordinary. You need to take the jobs no one else wants. When I first started the sod businesses, none of the competitors wanted to do the small jobs, but we did because we had **excess capacity.** We didn't forego a more profitable job to take on the small job. It didn't pay a lot, but it was better than nothing. You must be flexible. Small businesses can respond to change much faster than the larger competitors. Find a competitive edge and exploit it.

Marketing your product or service isn't easy, **but it's worth it.**

Chapter 7 – INCOME TAXES

A major factor in business decision making is the taxes that are based on net income. When using the "cost-benefit" approach to make decisions, the analysis should be made net of taxes. In order to do this, you must have at least a basic understanding of income taxes. This also gives you an opportunity to do some tax planning to try and minimize the tax liability. Actually, what you really want to do is **maximize what is left after taxes.** You don't want to spend money just to save taxes. Buying tax deductions is a net loser. I have had clients ask how to completely avoid income taxes. My response is, "That's easy. Just don't make any money." I have some clients that have been practicing that tax strategy for years (although not by choice). But it is not a very desirable approach because you can't stay in business that way.

Although it is difficult to avoid taxes completely, there are some things that can be done to defer taxes, change the character of income so it is taxed at a lower rate, change expenses from personal to business expenses, take advantage of tax credits, and even out income spurts so you can stay in the lower tax brackets. The taxes affecting small businesses that are based on income are Federal Income Tax, State Income Tax, and Self-Employment Tax.

This chapter is not meant to be an all-inclusive tax course. Tax law is far too complicated to cover completely within the scope of this book. I just want to point out some of the more common tax saving strategies available to small business to give you some questions to ask your accountant. Obviously these strategies won't work for everyone because of differences in business structure, size of business, location, and family situations. Also tax law is constantly changing, so the information presented here may change the next time congress is in session. In addition, most new tax laws coming out of congress now are temporary. Tax law is a moving target. There is always an exception to the general rule. In fact, now days it seems there is an exception to the exception to the exception to the rule. **The general information in this book is not meant to replace up-to-date tax advice from a qualified professional.**

### BUSINESS INCOME AND DEDUCTIONS

The IRS definition of income is anything you receive, including money, goods, or services that are not specifically excluded from income by the Internal Revenue Code. From that income, you can deduct any ordinary and necessary expenses that are incurred in the production of that income. Income taxes are based on your **net income** (gross income minus deductible expenses).

Federal Income Tax

To determine your federal tax liability, you aggregate the net income from business with all other sources of income—wages, interest, dividends, capital gains, rental income, etc. to arrive at **Adjusted Gross Income** (AGI). There are a few personal (non-business) expenses that are deducted as adjustments to AGI. From the AGI, you deduct personal exemptions and either the standard deduction or itemized deductions to arrive at your **taxable income**. In other words, not all of the adjusted gross income will be taxed because of the deductions available to reduce taxable income.

The deduction for personal exemptions is a fixed amount per person claimed on the tax return. For 2010 the personal exemption amount is $3,650. For example, a husband and wife filing a joint return for 2010 and claiming 3 children as dependents would have 5 personal exemptions for a total deduction of $18,250. The personal exemption amount generally changes each year depending on inflation.

You are also entitled to a standard deduction or itemized deductions. The standard deduction is also a fixed amount depending on filing status. For 2010, the standard deduction for a single taxpayer is $5,700. For a married couple filing jointly, the amount is $11,400. For a married person filing a separate return the amount $5,700. For an unmarried person with dependent children, the amount is $8,400. There are additional amounts added to the standard deduction for persons age 65 or older and for persons who are blind. In our example of the married couple with 3 children, in addition to the personal exemption deduction of $18,250, they can also claim a standard deduction of $11,400. In other words they will owe Federal Income Tax only on their income that exceeds $29,600.

You also have the option of deducting itemized deductions instead of the standard deduction if it is more beneficial. Itemized deductions include but are not limited to, medical expenses that exceed 7.5% of AGI, property taxes, state income taxes, home mortgage interest expense, charitable donations, and other miscellaneous deductions such as employee business expenses. Some of the miscellaneous deductions are deductible only to the extent they exceed 2% of AGI.

The tax rates for Federal Income tax are graduated and depend on income and filing status. The rates range from 10% to 35%. In 2009, a married couple would be in the 10% bracket for the first $16,700 of taxable income (after deductions). They wouldn't be in the 35% bracket until their taxable income exceeded $372,951.

State Income Tax

All but six states have an individual income tax. Alaska, Florida, Nevada, Texas, Washington, and Wyoming do not tax individuals based on their income, but some have taxes on corporations. The remaining states have an income tax that is similar to the Federal Income Tax. Most start with the federal adjusted gross income and then have state additions and subtractions. Most states try to conform to federal law for simplicity, but in recent years there have been some federal tax breaks that some of the states couldn't go along with.

State tax rates are generally lower than federal rates, but most use a graduated rate to tax higher income individuals at a higher rate than lower income individuals. The state of Idaho has 6 tax brackets ranging from 1.6% to 7.8%. Married couples with taxable income over $52,837 are taxed at the highest rate.

If you deducted state income taxes as a federal itemized deduction, generally you need to add it back to arrive at state taxable income. Therefore, it is possible to have a situation where it is more beneficial to itemize deductions on the federal return, but take the standard deduction on the state return.

Self-employment Tax

Self-employment tax is levied only against your net income from a trade or business or from farming or fishing. Your net business income is the gross receipts minus the ordinary and necessary expenses to generate that income. For self-employment tax purposes, you don't get to take out personal exemptions, itemized deductions, or the standard deduction. Therefore, you are taxed on all of the self-employment income regardless of filing status or the number of dependents.

Self-employment tax is the equivalent of Social Security and Medicare taxes that are withheld from your pay when you work for someone else (see Payroll Taxes in chapter 5). But the self-employed person pays both the employee share and the employer share of the tax. The tax rate is 15.3% of net self-employment income. Like the payroll taxes, there is a cap on the taxable amount for the social security portion of self-employment tax. For 2010, it is $106,800. There is no cap for the Medicare portion. In other words, the first $106,800 is taxed at 15.3% and any additional income is taxed at 2.9%. Recent legislation has lowered the self-employment rate to 13.3% for 2011 only.

For the purposes of federal income tax, you get to take a deduction for half of the self-employment taxes as an adjustment for AGI, so the self-employment tax can save you some federal income tax assuming you have taxable income.

It is important to know what your tax rates are, because if you know your **marginal tax rate** , you can easily determine how much each additional dollar of income will cost you in taxes. Also you can determine how much an additional expense might save in taxes. The marginal tax rate is a percentage that is determined by the amount of additional tax due on each additional dollar of income. To determine the full marginal tax rate, you add together the federal tax rate for your income bracket, your state tax rate for your income bracket, and the self-employment rate. The **effective rate** may be lower than the marginal rate because you will have some of your income taxed in the lower brackets. For decision making purposes, use the marginal rate because, once you have used up the lower brackets, each _additional_ dollar is taxed at the rate of your highest bracket.

As an example, if you are in the 15% bracket for federal tax, the 6.7% bracket for state tax, and 15.3% for self-employment tax, then your total marginal tax rate is 37%. For each additional dollar earned, 37 cents will go to taxes. For each additional dollar of expense, it will save you 37 cents in taxes.

### TAX STRATEGIES

As mentioned before, the methods for maximizing what is left after taxes involve 5 basic principles of tax strategy:

1. Defer income, accelerate expenses. This strategy allows you to pay taxes later rather than sooner. It can save taxes if you are likely to be in a lower bracket in the future. Currently, the generally sentiment among tax professionals is that tax rates will go up in the future. This could be a time to reverse this strategy and accelerate income and defer expenses.

2. Change the character of income. Under current tax law, tax rates for long-term capital gains are lower than the rates for ordinary income. This is not a big item for small business unless you own real estate or other investments that appreciate in value. However, if you can change income subject to self-employment tax to income that is not subject to self-employment tax, it can mean big savings to the self-employed.

3. Change expenses from personal to business. Be careful with this one because only ordinary and necessary expenses qualify as business expenses. You must have a legitimate business purpose for travel expenses, vehicle expenses, and the home office deduction.

4. Take advantage of tax credits. Tax law is written to encourage certain behaviors and discourage others. Currently there are a number of business tax credits to encourage energy efficiency, hiring disadvantaged people, hiring the unemployed, investing in research and development, and paying health insurance premiums for employees.

5. Even out the income. Many businesses are cyclical in nature and will have years when income is high and years when income is low or even a net loss. If you can accelerate income in the low years and accelerate expenses in the high years, it can save taxes overall.

Each of the following strategies utilizes one or more of these basic principles.

Use Entities

As mentioned in chapter 1, choosing the right legal entity or entities can have an effect on taxation. For example, say you own a building as part of your business. If you have an LLC that owns the building, and you rent the building from the LLC. You get a tax deduction and the LLC has taxable income that flows through to the owner of the LLC. It looks like a wash on the outside, but rental income is not subject to self-employment tax. The amount of rent must be reasonable and in line with rents of other properties in the area. You have just changed the character of some of the income from self-employment income to investment income. This works even better if you have two entities, one to own property and one to operate the business because technically, you can't self-rent property. This strategy is theoretically sound because in a small business, part of what you make is because of what you do, and part is from what you own. The income from what you own should properly be investment income, but unless you structure your business in multiple entities, you pay self-employment tax on your full earnings.

An S-Corporation can also shelter some of your income from self-employment tax. S-Corporation income flows through to the shareholders and is not subject to self-employment tax. The officers of the corporation must take out a reasonable salary (subject to FICA and Medicare), but any income that is left over flows through without causing self-employment tax. The amount of a reasonable salary depends on the business, the amount of time you spend in it, and what you have invested in it. The IRS has been cracking down on S-Corporations that don't pay the officers reasonable compensation.

Hire the Kids

As the owner of a small business, you can hire your kids to do odd jobs, and pay them a reasonable wage. If they are your own children under the age of 18, their wages are not subject to FICA, Medicare, Federal Unemployment, or State Unemployment. In addition, if their total income from all sources is less than the standard deduction amount for single taxpayers ($5,700 for 2010), they won't even owe any income tax on their earnings. As the employer, you get a tax deduction saving you self-employment tax, federal income tax and state income tax. It must be a reasonable wage for actual work performed, so keep good records.

As an added benefit, you get to teach your kids how to work and they learn the value of a dollar. Also, the child now has "earned income" which makes him or her eligible to contribute to an IRA.

This strategy only works for a sole proprietorship, not a corporation. It may work for a partnership if the only partners in the partnership are the parents of the child.

Hire Your Spouse

If you hire your spouse to work in the business, his or her wage is subject to employment taxes so there is no tax savings there. However, there are some other tax benefits that may apply. For example, you may be able to put more money into a retirement account for the spouse. Also, you can provide health insurance benefits that cover the entire family. You can even set up a medical reimbursement plan to help with some of the out-of-pocket medical expenses. This changes personal medical expenses into deductible business expenses.

On the down side, these employee benefits must be nondiscriminatory—you must provide the option to participate to all eligible employees. But in certain circumstances where you have no other employees or a limited number of part-time employees, it can be a great tax benefit.

Use Retirement Plans

I am a great fan of retirement plans. Not only do you have tax benefits for the money you put into the plan, but you also have a nest egg to use after you quit working. The income will be taxed when you take a distribution out of the plan, but in theory, that won't happen until you are retired and you will probably be in a lower tax bracket by then. As a self-employed person, you have more options as far as the type of plan to use, and generally you can contribute more to a self-employed plan each year than to a traditional IRA. Only put into a retirement plan, money that you don't expect to need until retirement, because if you withdraw the funds before age 59 and a half, the money is subject to income tax plus a 10% tax penalty (with a few exceptions).

Cash Method of Accounting

Most small businesses are eligible to use the cash method of accounting. Under this method, income is recognized when it is received and expenses are deducted in the year they are paid. Businesses with average annual receipts in excess of $1,000,000 may be required to use the accrual method of accounting. Under this method, income is recognized when it is earned, and expenses are deducted when they are incurred.

Using the cash method of accounting give you some opportunity to accelerate expenses by prepaying ordinary and necessary operating expenses prior to the end of a tax year, thus accelerating some of the expenses that would normally be paid in the next tax year. This only works for operating expenses. Inventory can be deducted only when it is sold whether you are using the cash or accrual basis. You can also use the cash method to defer some income. For example, if work performed in December is billed out at the end of the month, and you don't receive payment until January, it is not taxable until January even though it was earned in December.

This tax strategy only defers taxes. It doesn't reduce overall taxable income. By prepaying next year's expenses, you will have fewer deductions next year. But, it does delay the tax payment and if this strategy is employed to even out the ups and downs, it can save taxes by keeping you out of the upper tax brackets.

Home Office Deduction

It is becoming more common for small business owners to run their business from their home. With modern communication systems, telecommuting, and the internet, many businesses can be managed from the spare bedroom. If this is the case for your business, you are entitled to deduct a portion of the utilities, maintenance, rent, property taxes, mortgage interest, and depreciation as a business deduction, thus reducing both income and self-employment taxes.

To qualify for the home office deduction, you must use a designated area of your home in one of the following manners:

1. Exclusively and regularly as your principle place of business.

2. Exclusively and regularly as a place where you meet patients, clients, or customers in the course of your trade or business.

3. On a regular basis for storage for inventory or product samples.

4. As a daycare facility.

The amount of the deduction is a percentage of the expenses based on the square footage of the business area in relation to the total square footage of the home. This deduction works best in a sole proprietorship. The home office can be in a rented home or a home owned by the business owner.
Section 179

Normally when you buy equipment or other assets to be used in a trade or business, you deduct the cost of that asset over several years in the form of depreciation expense. Internal Revenue Code Section 179 allows you to elect to expense (subject to certain limitations) the cost of qualifying property rather than take depreciation. The Small Business Jobs Act of 2010 allows you to expense up to $500,000 of equipment placed in service during 2010 and 2011. Since section 179 is primarily for small businesses, it is limited for companies or individuals that buy more than $1,000,000 worth of equipment in the tax year. There is also a "business income limitation." You cannot use section 179 to create or increase a net business loss, although for this purpose, an individual's W-2 earnings are considered business income.

Section 179 is allowed in any of the legal entities. However, for _pass through_ entities such as LLC's, partnerships, and S-Corporations, the business income limitation is applied at the entity level and again at the individual level.

Qualifying property is generally equipment, not real estate. However, for 2010 and 2011, the Small Business Jobs Act of 2010 temporarily expanded the definition of qualifying property to include qualified leasehold improvements, qualified restaurant property, and qualified retail improvements. The Section 179 expense for qualifying real estate improvements is limited to $250,000 (an exception to the exception). Special rules also apply to vehicles.

Bonus Depreciation

Certain _new_ equipment qualifies for additional first year depreciation (aka bonus depreciation). It can't be _used_ equipment. Its original use must start with the taxpayer. Bonus depreciation allows you to expense 50% of the cost of qualifying new equipment in the year of purchase. You can't use Section 179 and bonus depreciation to "double dip". You can use a combination of 179, bonus depreciation, and regular depreciation for the same asset, but the total deduction cannot exceed the cost of the asset.

If Section 179 and bonus depreciation are used in combination, Section 179 is applied first, then bonus depreciation. For example, say you bought a new piece of equipment for $100,000. You decide to deduct $30,000 as Section 179, leaving $70,000. Then you can take 50% bonus depreciation and write-off another $35,000, leaving $35,000 to deduct over the life of the asset (including the current year).

One advantage to bonus depreciation over Section 179, is that it can be used to create or increase a net loss. The only time you would want to do this is if you have non-business income from other sources to offset the loss or if you can carry the loss back to offset a prior year's income. Otherwise you would want to "elect out" of bonus depreciation.

Section 179 and bonus depreciation serve only to defer taxes. By taking accelerated depreciation in the first year, you forego depreciation deductions in later years. However, there is a planning opportunity to use them to also change the character of income. If you sell an asset that has been expensed through depreciation, you will recognize gain on the property to the extent the sales price exceeds the adjusted basis. Adjusted basis is the original cost of the equipment minus the amount of depreciation taken. The gain from the recapture of depreciation is ordinary income, but is not subject to self-employment tax.

For example, say you buy a new truck for $30,000. It qualifies for bonus depreciation. So in the year of purchase, you get a tax deduction of $18,000 ($15,000 bonus depreciation and $3,000 regular depreciation). The deduction reduces federal, state, and self-employment tax. Now let's say you sell the truck the next year for $25,000. In the year of sale you get a half year of regular depreciation or $2,400—also deductible for self-employment tax. Now you have a gain on the sale of the truck because the adjusted basis is now $9,600 ($30,000 original cost minus $20,400 depreciation). You need to recognize a gain of $15,400 ($25,000 sales price minus $9,600 basis), but the gain is not subject to self-employment tax. Using bonus depreciation has saved approximately $887 in self-employment tax.

The above example is only to illustrate how the use of accelerated depreciation can save taxes. I am not recommending that you sell an asset after only one year because as in the example, the tax savings do not make up for the loss in the value of the asset. But reducing tax is another factor to consider when making asset purchasing decisions.

Domestic Production Deduction

There is a tax deduction available to businesses that manufacture or produce goods or commodities. Qualified production activities also include the production of certain types of film and video, computer software, and energy, as well as certain agricultural processing, construction, engineering, and architectural activities. The production must take place within the United States and the company must have employees. The tax deduction for 2010 is 9% of the lesser of the qualified production activities income or the taxable income. The deduction cannot exceed 50% of the W-2 wages paid and allocable to domestic production gross receipts. This is a fairly complicated deduction written into tax law, but it can save a producer a significant amount of tax. The nice thing about this deduction is that you don't have to spend additional money to get the deduction. After deducting the cost for the materials, labor, and overhead used to produce the product, this gives you an additional deduction without additional expenses.

### TAX CREDITS

There are a number of business and individual tax credits available to reduce income taxes. Tax credits are different from tax deductions because they are a dollar for dollar reduction in taxes. A tax deduction reduces income, but a tax credit reduces taxes. If your marginal tax rate is 35%, a $100 tax deduction saves you $35 in taxes. A $100 tax credit saves you $100 in taxes. A non-refundable tax credit can only be used to offset taxes where a refundable credit can be refunded whether or not you have taxable income.

The following paragraphs contain an overview of a few of the more common tax credits available to small businesses.

Energy Related Business Credits

The Plug-in Electric Vehicles Credit is a tax credit for plug-in electric drive motor vehicles that applies to qualifying new (not used) vehicles that are purchased (not leased). The credit is available to both businesses and individuals. To qualify, vehicles must be placed in service in tax years beginning after 2008, but before 2015. The credit is $2,500 for a vehicle powered by a traction battery with a capacity of 4 kilowatt hours. An additional credit of $417 is allowed for each additional kilowatt hour of battery capacity until the credit cap is reached. The cap is $7,500 for lighter vehicles; for heavy vehicles with gross vehicle weight ratings in excess of 10,000 pounds, the caps range from $10,000 to $15,000.

The Alternative Fuel Vehicle Refueling Equipment Credit is a business tax credit for up to 30% of the cost of installing alternative fuel vehicle refueling equipment. This credit can be claimed when a gas station or any business installs ethanol, compressed natural gas, or hydrogen refueling pumps, among other types of refueling equipment, for business use. It also includes the cost of installing equipment to recharge batteries in electric-powered cars. The annual per-location cap on the credit is $30,000.

The Contractor Tax Credit for Building Energy-efficient Homes is a tax credit of $2,000 per home for building qualifying new energy-efficient homes. The credit can also be claimed for substantially reconstructing and rehabilitating an existing home and making it more energy-efficient.

Employment Related Tax Credits

The Work Opportunity Tax Credit is a credit for wages paid to employees in one of 12 targeted groups. The amount of the tax credit varies by target group but generally it is 40% of the qualified first year wages up to $6,000 if the individual is retained for at least 400 hours. If the individual is retained less than 400 hours but at least 120 hours a 25% tax credit is available on qualified first year wages up to $6,000. There is an exception for summer youth employees where the maximum amount of wages to which the tax credit may be applied cannot exceed $3,000. The twelve target groups are, unemployed veterans, disconnected youth, members of a family receiving assistance under the Temporary Assistance to Needy Families Program, qualified veterans, qualified ex-felons, designated community residents (formerly known as a high-risk youth), vocational rehabilitation referrals, summer youth employees, recipients of food stamps, recipients of supplemental security benefits, long-term family assistance recipients, and Hurricane Katrina employees.

The HIRE Act exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. In addition, if the qualifying employees are retained for at least 52 continuous weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52 week threshold is reached.

There are also a number of personal tax credits that, even though they are not business credits, they are affected by income limitations and should be taken into account when tax planning takes place. For example, the Earned Income Credit phases out when income reaches certain limits. The additional child tax credit may be affected if income is below a certain level. The College Tuition Credits are phased out for higher income taxpayers. And the Retirement Saver's Credit is phased out when income reaches a certain level. So, all these things need to be taken into account when planning strategies to save income tax.

Obviously, this brief overview of tax credits includes only the general rules. You will notice the word "qualifying" used frequently in the descriptions of the tax credits and tax deductions. Also, many of the deductions or credits are "phased out" for higher income taxpayers. You will need to consult with a professional tax advisor to find out who qualifies or what qualifies for the deductions and credits.

Paying taxes can be a significant challenge to the self-employed. When you work for someone else, income taxes are withheld from your check every payday. You don't even see that money so you don't miss it. When you are self-employed, the same amount of tax is being paid, but now it is you who has to write the check. If you don't set aside the tax money on a regular basis, paying taxes becomes painful.

Understanding the tax implications of business decisions is an important part of managing the business. The tax savings can be significant. Tax savings shouldn't be the only thing driving a decision, but it should be one of the factors. The advice of a qualified business-oriented tax professional who understands your business, your family situation, and your economic situation is paramount when it comes to applying the "tax effect" to business decisions. Understanding income taxes is not easy, **but it's worth it.**

Chapter 8 – RISK MANAGEMENT

"Risk is the price you pay for opportunity."--Anonymous

There are inherent risks associated with going into business. It is part of the program. But, one of the fundamental principles of business is that where there is more risk, there is also more potential for reward. The same is true of investing. If you put your money in the bank, the rate of return is quite low, but the investment is relatively safe. If you put your money into something more risky like the stock market, there is usually a better return, but there is also more risk that the investment could lose money. When you work for someone else, there is very little risk. If you don't get paid, you soon look for another job. But, your earning potential is limited. When you own your own business, there are no guarantees. You could put in a lot of time and actually end up losing money. But, the potential for earnings is unlimited.

Although a business may be risky, it is not the same as gambling. I often hear people say that a farming business is just like gambling. I beg to differ. The difference between business risk and gambling is this: with gambling, in order for someone to win, someone else has to lose. With business, this is not so. In business, everyone can be a winner. The business makes money on its sales, and the customer gets something of value in return. It is not necessary for someone to lose.

Risk management is one of the most neglected aspects of many small businesses. Although it is impossible and cost prohibitive to eliminate all risk, steps need to be taken to reduce risk to a manageable level. Where there is no risk, there is no reward.

### RISK MANAGEMENT PLAN

There are different types of risk in business. There is market risk, product risk, risk of loss and other unexpected risks. There are also ways to manage each of these risks. But keep in mind, as you reduce these risks or shift the risk to an insurance company, it comes at a cost. To deal with risk, you will need to have a Risk Management Plan in place to identify the risks, quantify the risks, formulate a strategy to contain the risk, implement the strategy, and monitor the strategy.

Identify the Risks

Each small business has its own characteristics and will have different types of risk. There is risk of loss due to accidents, fires, or forces of nature. There is product risk due to obsolescence, competitive products, or theft. And there is market risk due to supply and demand issues, changing markets, or competing companies. These are some of the more significant risks, but there are all types of unexpected risks in business and a plan must also create suitable risk responses to the unexpected risks.

Quantify the Risks

In addition to identifying the possible risks, you must also identify your maximum exposure to loss for each of the risks. If your exposure is limited, you may want to assume some of the risk yourself. If your exposure is large enough to be detrimental to the business, you will want some tools in place to manage the risk. For liability issues, such as personal injury, your exposure is nearly unlimited and a claim could cripple the company to the point of extinction. The exposure to losing a vehicle or a piece of equipment is simply the cost of replacement.

You also need have some sense of probability of a certain event happening. If there is a very low probability, you need to consider to what extent it needs to be managed. For example, if you don't live in a flood plain, what is the likelihood of experiencing a flood? If the probability is extremely low, you may not want to insure against flood damage. But you will want to have some sort of plan in place to move or protect valuable assets just in case.

Formulate Strategies to Contain the Risks

A good strategy for containing risk will include insurance coverage, contingency planning, employee training, internal controls, and diversification. A strategy should focus on loss prevention as well as loss replacement.

Implement Strategies

Strategies are useless unless they are actually put into practice.

Monitor the Strategies

The risk management plan should be reviewed often to make sure it addresses any new exposure to risk. The implementation of internal controls, safety training, and marketing strategy should be reviewed often to make sure the strategies are still working.

### TOOLS OF RISK MANAGEMENT

Although you can't totally eliminate risk, there are several tools available to small business to help contain risk and make it manageable. These tools include insurance, using contracts, having good internal controls, diversity, the use of entities, and contingency plans.

Insurance

The most common tool used in risk management is insurance. There is a wide variety of insurance policies available to manage different types of risk. Policies are available to replace buildings and equipment. There are general liability policies to protect against liability claims. If you are involved in manufacturing or producing a product to be used by consumers, you should have a product liability policy in place. You may even consider an umbrella policy to cover anything that is not covered by another policy or step in after other policy limits have been reached in the event of a catastrophic loss.

Workers compensation insurance is required in most states to protect employees in case of an accident on the job. You may need a specialized policy for your particular business. For example, if you deal with hazardous chemicals, you may want a policy in place to pay for the cleanup of unexpected spills. Business interruption insurance protects from catastrophes which interfere with the normal operation of a business. It is meant to replace income while the business is shut down.

Health insurance, disability insurance, and life insurance are nice perks and benefits for your employees, but for the owner they are really not a business expense. However, they may be necessary to protect the business from financial hardship. If you don't have health insurance, an illness could cost all you own, including the business. It doesn't take much of an illness nowadays to financially devastate a family. In the case of disability, you may not be able to continue working in the business, in which case the business may go under, or you may need to hire extra help to keep it going. Life insurance is meant to be income replacement in case the bread winner of the family is unexpectedly deceased.

When shopping for insurance policies, compare rates and coverage to find the best fit for your business. Not all policies are the same. Choose a reputable company that has the financial resources to stand behind you in case of a claim. Make sure the required coverage is in place before you start your business.

Although insurance is a necessary part of doing business, it is possible to be over-insured. You may have coverage, you don't really need. Or you may have an overlap of coverage from two different policies. Make sure you are not paying for more than you need.

One way to reduce the cost of insurance is to self-insure a portion of your risk. By raising deductibles, you are assuming more of the risk, but you are saving money on the premium. If you take the money you save in premiums and put it into a self-insurance fund, in the long run, you will save money. But, **only self-insure what you can afford to lose**. Make sure you have plenty of insurance coverage for the significant loses which could wipe out your business. By self-insuring a portion of the risk, you save money on insurance and you are also more apt to take steps to minimize potential risk by contemplating things that could go wrong and taking steps to prevent losses.

Forward Contracts and Futures Contracts

One way to protect against market risk or price fluctuations is to have a contract in place to sell (or buy) goods at a set price. This is especially important if you sell commodities or products which experience price volatility. A forward contract is simply a commitment between the buyer and seller to exchange a certain quantity of goods for a certain price. Locking in the price protects the seller from a price reduction and it protects the buyer from a price increase.

For example, say a farmer wants to lock in a price for his wheat before he even plants it to ensure that he doesn't end up with a price that is lower than his input costs. He could go to the wheat buyer and contract his wheat at a specified price. He would only do this if the price is high enough to cover his costs. For the wheat buyer, he knows in advance what he will pay for the wheat and he can price his product accordingly. It also ensures that he will have wheat available when he needs it. So it protects both parties. However, it also limits their upside potential in case of a favorable price swing.

A futures contract works somewhat the same as a forward contract, except that the contract is not between the buyer and the seller. There is a third party middle man involved to broker the deal, but the actual commodity doesn't change hands. This is called hedging. The farmer would sell a futures contract at a specific price with the intention of buying the contract back from the broker later on when he is ready to sell his wheat. Meanwhile, if the wheat market goes down, he will buy back the contract at a lower price than what he paid for it. So the amount he has lost in the cash market is nullified by a gain on the futures contract. Therefore, he has locked in a price well ahead of selling the crop. But once again, he has also limited his upside potential. If the wheat market had gone up, any gain in the cash market would be offset by a loss on the futures contract.

The buyer can also lock in a price ahead of time by buying a futures contract and selling it back at a future date. There are also speculators buying and selling futures contracts without really owning the commodity. They are basically betting that the market will go one way or the other. The speculators are a necessary ingredient in the futures market because they give the hedgers someone to buy from or sell to.

Internal Controls

Having a good set of internal controls can guard against defalcation from employees and customers (refer to chapter 3 for a discussion on internal control). Having controls in place can guard against loss of cash, inventory, and supplies.

Diversity

A company that has only a few products or a limited number of large customers has a concentration of business risk. If one of the products becomes obsolete, it could have a huge affect on sales. If a large customer goes out of business or decides to take their business elsewhere, once again, it will adversely affect sales. By diversifying you can reduce that risk. Then if one part of the business is slumping, you can survive with other products and customers. You need to be careful not to get so spread out that you can't manage the business effectively, but you should try to become more diversified as the opportunity presents itself.

Investors will try to diversify by not putting all their money into one stock or one mutual fund. They may even spread it out into bonds, real estate, or loans. The same principle applies in business. You don't want all your eggs in one basket.

In my sod business, during the recession of 2009 and 2010, sod sales were really slow because construction of new homes came to a grinding halt. At the beginning of the recession, all we sold was sod. Now we do hydro-seeding, lawn care, sprinkler maintenance and snow removal. We use most of the same equipment, but we have spread the cost of the equipment over more services. Although we weren't diversified prior to the recession, we were prepared to make adjustments and had the resources available to move in that direction quickly.

Use Entities

As mentioned before, setting up multiple legal entities can protect the assets from liability claims that may arise. By having the business assets in more than one entity, if someone sues one entity, theoretically, they can only go after the assets in that entity. They may try to go after you personally, or the assets in other entities, but if things are structured properly, some of the assets can be sheltered from possible claims. Once again, the best protection against law suits is to have adequate insurance.

Contingency Plans

Have a plan of action in place to deal with possible losses. Be prepared. Try to foresee things that could possibly go wrong and be ready to deal with them. Do things ahead of time to prevent or reduce possible losses. Have fire extinguishers on hand and serviced regularly. Train employees how to deal with emergency situations and how to use safety equipment. Have a strict set of rules for using safety equipment such as hard hats, protective eyewear, and safety clothing.

Install a security system to protect from theft. Have a system in place to back up computer files on a regular basis and keep a backup copy off site, but in a safe place. Protect information systems from hackers or theft. With today's data storage devices, it would be possible for someone walk out of your business with a ton of information in their pocket. Information is a business asset that needs to be protected.

Risk management and asset protection are areas that often get neglected. Your hope is that none of the tools discussed here are ever needed. But if you do experience an unexpected loss, you will be glad you took precautions to keep the business alive and well.

Managing risk is not easy, **but it is worth it.**

Chapter 9 – ADVERSITY

The previous chapter talked about some of the major risks and adversities that can happen in business and how to protect the business against them. This chapter is about the minor everyday challenges that a business owner faces and how to deal with them. As a business owner or manager, you become a problem solver. You solve customer's problems. They are buying your product or service to solve a problem or fulfill a need. Make sure they are satisfied. You solve problems for your employees. They come to you for employment, which fills a need in their life, and they come to you to resolve issues they might have with other employees, with issues in their personal life, and with the task at hand. You solve problems of the business itself by keeping things running smoothly, keeping productivity up and keeping costs down.

Life was not meant to be easy and neither was running a business. Challenges and setbacks are just part of the program. The important thing is how we deal with adversity and what we can learn from it. I'm not trying to discourage anyone from owning or managing a business. But at the same time, I don't want to sugar coat it. I'm just trying to prepare you for things that will inevitably come. If you are prepared for adversity, it will be much easier to deal with. No challenge is insurmountable if you are prepared for it. At the same time you need to realize that not all problems have a simple solution. Not all problems can be solved by throwing money at them. You need to allocate your resources to those problems that can be dealt with effectively. For other challenges the solution may be to adjust and learn to live in an imperfect world.

Problems should be dealt with as soon as possible. As much as we hope problems will just go away, that is usually not the case. More often problems are like an open wound. The longer it continues to fester, the more difficult it is to find a remedy.

### KEEP A POSITIVE ATTITUDE

Part of success in dealing with adversity comes from simply adjusting your own attitude. Look at challenges or obstacles as opportunities to learn and grow. Placing blame for problems is a waste of time. You should welcome challenges that make you stronger. Adversity helps you develop an inner strength and fortitude. You are not defined by your adversities. You are defined by how you react to adversity.

There is opportunity in adversity. It is not always easy to see. Sometimes it takes years to see, but in looking back, you can see how dealing with adversity was a learning experience and how you became better from it. There is always an upside to every challenge. The more struggles you go through, the sweeter the taste of success when you are triumphant over adversity. Finding solutions to problems or potential problems gives you almost like a euphoric high.

Don't use adversity as an excuse for failure. Every successful business person I know has had their share of difficulties. But they found ways to overcome, adjust, and emerge from challenges even stronger than before. They refused to stop believing in themselves. Even if they failed once, they gained first-hand experience to make their next venture successful. **The antidotes to adversity are persistence, resiliency, and tireless commitment.** You haven't failed until you quit trying. Conrad Hilton experienced several business failures and setbacks before founding one of the largest hotel chains in the world.

### GET HELP

Don't be afraid to get professional help to solve complex problems. Look at the problem from a cost-benefit standpoint. A professional can often solve the problem much more quickly, and you can use your time doing what you do best. Business consultants, technology consultants, marketing consultants, attorneys, mechanics, and accountants have often encountered the same problems in other businesses and are more prepared to offer effective solutions. I once heard a very successful farmer say that he has an annual meeting together with his accountant, banker, and marketing consultant to discuss the strategy for the next year. He said, "I just want to be the dumbest guy in the room." I think he is pretty smart.

Dealing with adversity is not easy, **but it is worth it.**

Chapter 10 – DECISION MAKING

A business manager literally makes hundreds of decisions each day. For the small, insignificant decisions, there is no need to spend a lot of time going through the decision making process. All you need to know is this: The worst decision is indecision.

### DECISIONS FOR SUCCESS

Major decisions, such as equipment purchases, product lines, hiring employees, and marketing, require a great deal more planning and analysis. You should develop a systematic approach to weigh the pros and cons of each decision, pinpoint the likelihood of a specific outcome, and assign some value to that outcome. Decisions should be based on logic, not emotion; based on needs rather than wants. Think it through. Try to foresee all the consequences of a decision whether they are intended or not.

Not all decisions will lead to the desired result. But that's okay. It doesn't mean it was a bad decision. **The best decisions don't always have the best outcomes.** For example, let's say you are in a coin flip with someone who is willing to give you $10 if you win, but you only have to pay him $5 if he wins. Is it a good decision to make the bet? Well, the probability of a positive outcome is 50%, but the value of a positive outcome is double that of a negative outcome, so it is a good decision. But if you lose the coin flip, you have a bad outcome from a good decision. You lose 5 dollars. However, if you were to make the same decision, again and again, over time you would come out ahead. Don't let one bad outcome deter you from making good decisions.

No decision will be good if you fail to act on it. A good friend of mine once said, "When all is said and done, there is usually a lot more said than done." How true it is. If you are going to talk the talk, you had better be willing to walk the walk.

Your success will be determined in large part by the choices you make every day. Famous basketball player Karl Malone once said, "The tough part of playing basketball is not running up and down the court in front of thousands of fans. The tough part is in the offseason, when no one is watching; working out every day and keeping in shape." Karl was a great basketball player and one of the strongest players on the court. That had a lot to do with his success. But if he hadn't used his will power and forced himself to work out during the offseason, he wouldn't have been nearly as good. It is the same in business. If you don't have the drive to do what needs to be done, regardless of who is watching, you won't be as successful.

In order for your business to be successful, you need all of the appendages to function properly and work together for the good of the whole. In other words, the marketing arm must be working to get customers. The personnel arm must be working so disgruntled employees don't drive the customers away. The financial arm must be working or there will be no resources to hire employees or engage in marketing. The production arm must be working or there will be nothing to sell. No one segment is more important than the others. The whole is greater than the sum of the parts. Your company can be no better than its most limiting factor.

### EASY MONEY

There are those who would have you believe that business ownership is the path to "easy money." I'm here to tell you that there is no such thing. For everyone who enjoys financial success, someone at sometime has had to make sacrifices, take risks, work long and hard, and live within their means. The truth is: there are no shortcuts to wealth and prosperity. You simply must pay the price of hard work and perseverance. We often see the end result of someone's success, but we don't know what they had to go through to get there.

There are a lot get-rich-quick schemes out there that promise you the world on a platter; schemes that promise wealth without risk, claim you can get rich in real estate or in the cash flow business, or that you can make a fortune from home in just a few hours per week. The only people making money with these gimmicks are the ones selling them. If they really were making that kind of money, why would they be sharing their "secret methods" with the entire world and potentially increasing their competition? The harsh reality is that you are bound by the law of the harvest: you reap what you sow. If it were easy anyone could do it. If anyone could do it, everyone would do it and no one would make any money at it.

Making sound business decisions is not easy, **but it is worth it.**

Chapter 11 – IT IS WORTH IT!

"Picture yourself vividly as winning and that alone will contribute immeasurably to your success."—Harry Fosdick

Up until now, I have told you how difficult it is to run a business. I have told you how hard you must work, how you must be innovative and creative, how you need to manage employees, and how you must satisfy your customers. I've tried to give you some of the tools needed to accomplish these hard tasks, but I haven't sugar coated them or made them look easy. I've told you again and again that it's not easy, but it is worth it. In this chapter, I'd like to tell you why it is worth it. Running a business is one of the most rewarding experiences you can have in life.

### REWARDS

In addition to the monetary rewards, business ownership also lets you enjoy intrinsic rewards. You get a deep satisfaction and sense of accomplishment that you can get in no other way. It's like climbing a mountain peak and being able to look down at what you have accomplished.

Financial Security

One of the most common reasons to go into business is the potential to make more money. If you want to be the master of your own economy, the captain of your own destiny, this is one way to achieve it. The sky is the limit when it comes to earnings. The only limitations are the ones you put on yourself. Your most important asset is your own ability to earn; to pay your own way. If you don't keep improving that asset, you limit your options and become locked into your present situation.

Making a Difference

Making a positive difference in other people's lives is a gratifying experience. For some people, making money is secondary. To them, success is finding solutions to challenges that help other people. You can improve the lives of your employees, your customers, and the people in your community. You give employees opportunities to earn, grow, and learn that they may not get anywhere else. It is life changing. You provide products and services to your customers that make their lives better. And you make a difference in your community by bringing economic stability. If you bring outside money into your local economy, it gets circulated several times, helping to provide jobs at every point along the way.

Leadership Development

Being in charge of an organization can enhance your leadership skills. There is a difference between management and leadership. Peter Drucker said, "Management is doing things right; leadership is doing the right things." Stephen R. Covey added, "Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall."

Empowerment

Empowerment means being in control of your life, your circumstances, and your destiny. When you are in control of your circumstances, they don't control you. You don't need work in a job where you are unappreciated, overworked, and underpaid with no opportunity for growth and advancement. You are free to use your own talents and creativity.

### LEAVE A LEGACY

For me, one of the most motivating factors of owning a business is being able to pass on something of value to my family. Not only do you pass on the business assets, but you pass on business skills and opportunities. You pass on values and principles that will help them throughout their life. You can teach them by example how to work, sacrifice, save, prosper, and enjoy life. These are skills that will help them no matter what they choose for an occupation.

I'd like to share a story about my grandfather; the way he got started in business, and the legacy he left behind. Right after the great depression, my grandfather was a poor dirt farmer in eastern Idaho. Money was obviously scarce at the time and grandfather was barely able to keep food on the table. He was always looking for extra work to help supplement the farm income. In the early 1930s, he harvested 6 acres of potatoes and soon after harvest, a potato buyer came along and offered him $2.00 per hundredweight for his potatoes. This seemed like pretty good money in those days, so he accepted the offer, shook hands, and considered the crop sold. The next day, a neighbor visited grandpa and told him that he had just been offered $2.40 for his potatoes. He tried to convince grandpa to back out of his deal and sell them to the buyer offering more money.

Grandpa explained that he had already made a deal, and that he never went back on his word. The next week at a meeting for potato growers and shippers, someone mentioned how grandpa had stood by his commitment. One of the potato shippers said he needed a good honest man to work in his business, so he went and offered grandpa a job buying and selling potatoes. Over the next several years, grandpa learned a great deal about the potato business. He continued farming with the help of his young family, he saved his money, and in 1948 he and his sons founded their own potato business. The company that grandpa founded in 1948 still carries his name, and continues to thrive today and bless the lives of his posterity.

For those of us who are no longer involved in grandpa's business, we still have the legacy of hard work, honesty, and integrity to guide us in our various ventures.

### TRAITS OF SUCCESSFUL PEOPLE

As I have prepared to write this book, I have read or watched the biographies of many successful business men and women. I have talked to successful people and watched how they conduct the affairs of their businesses and their lives. I have noticed some common character traits among them that I think have helped them in their business. I would like to list some of the more recognizable traits for success. Here are the top 10 traits of successful people.

They are **decisive**. They are not afraid of making tough decisions. They love to take credit when things go right, but they also take full responsibility when things go wrong. Decisions are guided by principles and values rather than popular opinion. They don't worry what others may think. Their security is not based on the opinions of others.

They are **proactive**. They make things happen instead of letting things happen. They are in charge of their circumstances. They are problem solvers and can respond quickly to change.

They are **driven** to success. Failure is not an option. Although they experience setbacks, they learn from their mistakes and are motivated by their adversities. They are all about doing things right. They won't do just the minimum to get by. There is no such thing as doing a half fast job.

They are **conservative** but not cheap. They are willing to spend extra for something if it brings extra economic benefit. They pay attention to value more than price. They don't waste resources. They appreciate what they have and take care of their things.

They are **fortunate**. They are the authors of their own good fortune. Some people say they are just lucky, but luck occurs when preparation meets opportunity. Their happiness comes from within and is derived from their own accomplishments in family, work, and community. Happiness is not dependent on circumstances, opinions, or possessions.

They are **focused**. They don't let distractions interfere with reaching their goals. They generally finish what they start. Occasionally they will abandon a project if things aren't working out as expected. They know when to cut the losses and move on. But those occasions are rare because plans are well thought out ahead of time.

They are **shrewd negotiators**. They are wheeler dealers and bargain hunters. But once they strike a deal, they live by its terms faithfully.

They are **leaders**. They know how to delegate, motivate, and follow up. They have the vision to know what's right and the determination to make it happen. They are good communicators, good listeners, and have a sound understanding of interpersonal relationships. They are confident, but not arrogant; assertive, but not intimidating; demanding, but not overbearing.

They are **risk takers**. But the risks are calculated risks. They know the bounds of their limitations.

They **love what they do!**

These character traits are not all evident in all successful business people, but the majority of them are demonstrated by most successful people in varying degrees. These traits are not part of their genetic makeup, but may be a result of their environment. These traits can be learned and developed over time if a person really wants to obtain them.

### YAGOTTAWANNA

Now that I have presented both sides of business ownership; the risks and the rewards; the hard work and the personal satisfaction; the downside and the upside; now it is time to decide if it is right for you. I will be the first to admit that it's not for everyone. There's no way I would recommend it if it is going to cause more frustration and pain than joy and happiness. Only you can decide if it is right for you. No one else can make that determination. But in order to make an educated choice, you should know all the pluses and minuses.

I have put together a series of "if—then" statements to help you analyze whether or not a small business is right for you.

If you don't mind working extra hours and putting forth extra effort to make things happen, then a small business might be right for you; if you would rather work a set number of hours per day on a regular schedule, maybe not.

If you don't mind taking risks in the hopes of enjoying the potential rewards, then a small business might be right for you; if you like the security of a steady paycheck, maybe not.

If you don't mind solving problems and dealing with issues, then a small business might be right for you; if you would rather avoid conflict, maybe not.

If you have a positive mental attitude and are optimistic about your chances of succeeding, then a small business might be right for you; if you feel like you just can't catch a break, maybe not.

If you are a "people person" and enjoy seeing others succeed, a small business might be right for you; if you see everyone as competition, maybe not.

If you enjoy a challenge, a small business might be right for you; if you like the path of least resistance, maybe not.

After reading through the "if—then" statements, if you found yourself wanting the safety and security of a steady job, that's okay. There's nothing wrong with that. If you don't feel you are up to the physical, mental, and financial challenges of owning your own business, it's okay. It's not for everyone. But if you have what it takes and don't go for it, you will always wonder what might have been.

While researching material for this book, I came across a word that describes what it takes to succeed. The word is: yagottawanna. At first I thought it was a word from a foreign language—perhaps from a Native American tribe. But then, I discovered what it means. It is the condensed phrase, "you've got to want to," and it means that you have to want to do something before you will do it. It means you have got to want it bad enough to make the sacrifices necessary to achieve it. You can't just wish for it.

Champion bull rider Lane Frost once said, "Don't be afraid to go after your dreams. But don't be afraid to pay the price." Lane ended up paying the ultimate price for his dreams, but now his final ride is legendary.

I sincerely hope that the material presented in the book has helped each and every reader in some way. I hope the principles and procedures outlined will help, not only in business, but in everyday life. I haven't gone too deeply into the different topics because I wanted to cover the basics and provide a foundation for what the reader needs to learn before entering the world of business management. It is up to the reader to determine what more needs to be learned, what information is relevant to his or her situation, and how to go about obtaining further knowledge. There is a wealth of information out there. I wish much success and happiness to anyone who has the desire to catch the American Dream. Good luck in your endeavors!
