In Part 1 of this blog post, we examined how to evaluate the potential profitability and hence success of a prospective business. In Part 2, we’ll be examining key aspects of setting up a business.
Seeing the Future — Cash Flow Projection
You want to know if you’ll be making a profit before going any further. If you skip this step, your chances of failing increase significantly.
Investigate your costs to start up and run your business. The most common are:
•Rent — how much will it cost to rent at the location where you want to set up?
•Wages and payroll tax — will you need employees or can your run the business yourself? How much do you need to pay yourself to meet your personal living costs?
•Advertising costs — what types of advertising will you use — TV, radio, internet — and what is their cost versus their potential return on investment?
•Cost of inventory or raw materials — will these be imported? If yes, you’ll need to factor in the impact of exchange rates on your profitability.
•Purchase of equipment — general office equipment like a phone system, computers and IT network, and furniture, as well as specialized equipment for your specific line of business like restaurant equipment (if you’re opening up a restaurant).
•Business liability insurance — to protect yourself from liability if someone is inadvertently harmed by your product or service, or if someone is injured on your premises.
•Pricing — how much will you be able to sell your product or service so that’s it’s competitive with others in your line of business
Once you’ve figured out your monthly costs (i.e., your overhead) and pricing, you’re now in the position to determine how many unit sales you need to make to breakeven — remember the Contribution Margin Ratio that we looked at in Part 1. Use a spreadsheet to build a cash-flow projection model.
Protecting Yourself — Creditor Proofing
If things don’t work out for your business you could be financially ruined. Therefore, consider the following techniques to protect your personal assets from your business creditors.
1.Incorporate the business. This will provide you with a level of creditor protection — most of a corporation’s obligations are limited to its assets so this structure can provide protection for personal assets. This structure also has income tax benefits, which will not be discussed here.
2.Always pay statutory debt on time, specifically:
• Payroll source deductions;
• Sales tax collected; and
• Employee wages and vacation payable.
Corporate directors can be personally responsible for these debts, notwithstanding that the business is incorporated. In many incorporated small businesses, the shareholder (i.e., the business owner) and director are the same person.
3.If you can, avoid giving personal guarantees of your corporation’s business obligations (e.g., landlord, suppliers) unless it is absolutely necessary.
Your Next Step
You will need a financial expert on your team to deal with the issues raised in this blog post. Therefore, I would strongly advise that you contact a CPA who can help you further.