I absolutely love the material put out by the Kauffman Foundation, which exists to help instill entrepreneurialism in America and around the world.  Now they are bringing entrepreneurs together to commit ourselves to the countries future because, in the words of the Kauffman Foundation’s executive, Carl Schramm, “entrepreneurs continue to be the key to our country’s economic recovery because they are the primary source of new job creation. Introducing the Pledge only enhances the Entrepreneurs’ Movement, which is aimed at giving entrepreneurs a platform to share their stories and amplify their voice.”  So check out the pledge below, and then go over to the Kauffman Foundation to sign the pledge.

The Entrepreneur’s Pledge:

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Purpose of a Balance Sheet

The balance sheet boldly declares where a business stands at a given moment in time.  From the balance sheet, a financially sophisticated reader can learn an immense amount of valuable information about a business and its viability.  That is why potential investors and lenders will almost always ask you for a copy of your financial statements, including the balance sheet, income statement, statement of retained earnings, and statement of cash flows.  This is also why you, as a savvy entrepreneur, need to understand the information presented on them.

Why It Is Important

The principal reason your business’s balance sheet is so important to you and to any potential investors or lenders is that it is like a photograph of your business.  It tells how the business is put together, what its principal resources are and where any potential dangers lie.  Like any portrait it is incomplete, in that it only shows one fleeting moment in time, and therefore is most useful in conjunction with the income statement and by comparing several balance sheets over a period of time.  Ahh, this is where the real story begins to unfold!  The clever entrepreneur becomes the Sherlock Holmes of the balance sheet and astutely looks for trends over time and checks ratios and balances to see which direction the company is headed in and to look for any potential to cut costs or perform more efficiently.

Why Small Businesses Are Different

If you are a small business owner or entrepreneur then you need to be able to read and understand your balance sheet because, first, it is through your financial statements and other numerical data that you collect that you really get to know your business.  Michael Gerber, the best selling author of the E-Myth Revisited, says it much better than I ever could as “because without the numbers you can’t possibly know where you are, let alone where you’re going. With the numbers, your business will take on a totally new meaning. It will come alive with possibility.”  The very first step you will ever take down that road to really knowing your business is through examining and understanding your own balance sheet.

Second, your balance sheet is how anyone that you will ever want to do business with will understand your business.  Think about getting a loan, the first thing your banker wants to see are your financial statements and the first page of your financial statements is your balance sheet.  Why is it first?  Perhaps because it is the most important.  Now think about your situation; you’re applying for a loan or a grant or you want to do business with the federal government or an investor is thinking about either coming on board or buying you out and you present your financial statements to them.  They open them up, turn to page one, and there is your company laid bare, open to them.  And they ask you questions; “why is this line a negative number, how did you arrive at the valuation of that line, what are the terms of this liability.”  Don’t you want to be able to confidently look them in the eye and answer those questions?

What Makes Up a Balance Sheet

Hopefully, you have been exposed to some basic accounting and understand the concepts that some numbers in accounting are recorded as debits and some numbers as credits.  These numbers are often represented as positive and negative numbers and the balance sheet, as its name suggests, must balance, i.e. the negative and the positive numbers must total zero.  In addition, the basic formula for accounting is Assets = Liabilities + Equity, and any US balance sheet will be organized into exactly three sections with at least two subtotals, for assets and for liabilities and equity.  Using the basic algebra that we learned in Ms. Arithmatic’s 6th grade class, we can shrewdly deduce that the two subtotals must be exactly equal.  So far no problem, because if your balance sheet doesn’t balance then you have much bigger problems then simply worrying about understanding your financial records.

How Assets Are Valued

Great! you’re thinking, let’s start with the assets!  Well, I love an enthusiastic learner and so I will oblige.  To put it very briefly, assets are the total of everything your business has that has some sort of value to the business.  This could be cash or real estate or stocks and bonds or machinery and equipment or accounts receivable or other moneys due to you.  It could also include inventory, which is product that you have produced but not yet sold.  So to summarize assets are usually either cash, something that you have bought, something that you have made and that you expect to sell, or something that is owed to you.

Clearly then, if you want to make your balance sheet you must have a list of your assets and how much each is worth.  The rub lies in the worth, or valuation of the assets.  “Hmm, you think, I bought this asset ten years ago at 10 grand, I added 5 grand in improvements to it, it would cost me 20 grand to replace it and I could get about 18 grand on the open market for it, so what value should I put down for it?”  Clever question, my dear reader!  Well, as you may have assumed, we accountants have put a great deal of thought into these issues and we continue to think about and tweak the ways we value things to this very day.  If you want the exact answer to just about every accounting question then it is there for you, for free but in techno-accountant babble, at http://asc.fasb.org/.  However, most of you don’t want to do all that work, you want a quick and easy rule of thumb that works 90% of the time without you having to leave this article, and that is exactly what you will get.  The key here is conservatism, we are much more worried about overvaluing an asset then we are at undervaluing.  Therefore, the rule of thumb is that assets are valued at the lessor of cost (what you paid for it) or fair market value (what you could get if you sold it right now).  Now, there are additional considerations, like depreciation for buildings, machinery, and equipment, and the value of receivables and other moneys owed to you, but that is the general rule.

How Liabilities Are Valued

The next step is to make a list of items that your business owes or obligations that it has.  This could be money that you owe to your suppliers for products and services or money that you owe to your employees for services performed or money that you owe to the government for taxes or or money that you owe to the bank or another lender.  It could even be money that the business owes to you, as an owner.
Remember what I said before about conservatism?  Well, this counts for liabilities as well, only in this case the concern is that liabilities are undervalued or, even worse, unrecognized and unrecorded.  The general rule of liabilities is that they are included at amortized cost which should be equal to the amount owed on them at that moment in time.  This usually presents less of a challenge than the valuation of assets because most long term assets, like loans, have explicit terms that spell out exactly how much you owe on them at any given moment in time.

How Equity Is Valued

Depending upon the type on entity (Corporation, S-Corp, LLC. etc.) that you use the equity portion of the balance sheet can use different terms, but really there are two kinds of equity: capital that you put into the company (stock, contributed capital, etc.) and the earnings of the company (retained earnings).  The capital that you contribute is usually pretty straightforward.  If you contributed something other than cash, such as real estate, machinery, or your interest in another business then use the rules for the valuation of assets, the lessor of cost or fair market value.

Retained earnings is a whole different ball game.  Remember what I said back in the beginning about the formula for the balance sheet?  That Assets = Liabilites + Equity?  Well, if you’ve filled everything else out you only have retained earnings left, and, using a little bit of algebra and adding some detail to the preceding formula, retained earnings absolutely must equal Assets – Liabilities – Contributed Capital.

Now, it’s fine to do the math and plug the number to get started, but as you go forward your retained earnings will develop a new relationship, with the income statement (also commonly called the profit and loss statement).  Basically, the relationship is net income + any contributions to capital – any distributions of capital (dividends) = the change in retained earnings for the period.  So retained earnings becomes the bridge between the balance sheet over two consecutive time periods (usually a year).  For more information on calculating retained earnings see the link to my blog post on retained earnings.

What the CPA or Auditor Does

You’ve done a fantastic job getting your balance sheet set up and keeping it going, but at some point you’re going to show it to someone, a banker, a supplier, a potential business partner, and they are going to take one look at the work that you have so proudly and lovingly put your heart into and they will say, “what the Hell is this crap?”  Don’t take it personally (you need their money, after all) just understand that there are standard ways to present present financial statements and set rules to follow.  In order to make your statements comply with these rules and to give them an air of authority you will have to hire a Certified Public Accountant, or C.P.A., and have them compile, review, or audit your financial statements.  What this means is that the C.P.A. takes your statements and then makes some cosmetic changes in order to present them in the form proscribed by US Generally Accepted Accounting Principles or, if appropriate, one of a number of alternate forms, and then issues an opinion on them.  The opinion will vary depending upon the type of engagement you hired them to do.  The standard opinion for a compilation is “we took this pile of crap and made it pretty, but we’re not saying that it makes any sense” while the standard opinion for an audit is “sure, we took a look and everything seems OK, but please don’t sue us if we’re wrong!” while a review falls between the two.

Shenanigans

If you’ve watched the news at all over the past five years then you are aware that not all balance sheets are what they are painted to be.  Enron and WorldCom are the biggest examples of out-and-out fraud, but more recently the big Wall Street firms, like Lehman Brothers, have come under fire for inadequate or questionable accounting practices.  How does this all happen?  Well, let’s go back and revisit the assets and liabilities sections of this article and rethink what I said about conservatism.  If assets are valued at higher than they should be, or liabilities lower, the difference must come through retained earnings in the form of income.  So, most accounting frauds are a resulting of overstating assets, usually inventory for industrial firms or investments for banking and Wall Street firms, or by not including certain liabilities on the balance sheet.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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Foreign Investments and Bank Accounts

The amnesty period for holders of foreign bank accounts to come forward and pay back taxes due to avoid prosecution and penalties has expired and now the IRS seems serious about rooting out potential tax evaders.  First UBS was coerced into coughing up an estimated 4,000 names and now HSBC seems under the gun.  In addition to the rules over foreign bank accounts, don’t forget your requirements to disclose certain investments in foreign corporations.  Expect this to be a hot area of compliance for some time.  Unfortunately, the statutory penalty for failure to file IRS Forms 5471, 8858, or 8865 with the IRS is $10,000 per return, per year, per taxpayer for each year in which the required returns are not filed.  Keep in mind that the penalty is for failing to disclose and has nothing to do with rather or not any additional tax would have been due.

Contract Workers and 1099s

Another bee up the IRS’s bonnet is the improper classification of employees as contract workers, thus depriving the Treasury of the employer’s portion of FICA and of federal unemployment.  A reclassification by the IRS can be hideously expensive, so cover your ass by making sure that you get it right.  One way to do so is by making sure you treat all workers consistently, making sure that your classification is reasonable, and giving everyone a 1099.  If you clear those three hurdles the IRS cannot retroactively declare them employees and demand the FICA and employment insurance payments from you.  However, if you fail to give the workers a 1099 and the IRS audits and reclassifies them as employees, you’re left holding a potentially very expensive bag.

Deduct Your Health Insurance on Your Schedule C to Lower SECA

In what will be a sweet deal for many of my clients self-employed persons will be able to deduct their medical insurance right on Schedule C for 2010.  A sweet deal, if very brief because right now that will only be a one-off for 2010.  This could be great for you because it should lower your Schedule C income and therefore lower your self-employment taxes.

Save Your Kids Taxes By Dying in 2010

If you have assets in excess of $3.5 million then this might still be a great year to die, just ask George Steinbrenner.  Ridiculously, Congress has still yet to act to close the loop in the inheritance tax law that could, in the absence of a new law, allow George Steinbrenner’s kids to inherit the Yankees without owing any estate tax.  Back in January everyone was sure that a new law would be passed before the year’s end that would include 2010 but so far there has been no action.  If things keep going like this the Mrs. and I might consider a vacation to the West Bank come December.  Of course, we would need to come up with another $3.4 million to make it worth Junior’s while.

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I don’t know about you but every once in a while I need a real kick in the ass; something that shocks me out of complacency and moves me to reach for something more and to leave my comfort zone in order to venture out into the unknown. Well, this week the William Kamkwamba story provided just that shock to the system.

William grew up in rural Malawi, Africa, and had to leave school to help provide for his family of 20. In William’s village there was no electricity but lots of wind, and so, sick of sitting in the dark, William decided to make a windmill. His only book as a guide just had photos and the basics of what a windmill was and was definitely not a guide on how to make them. Not the quitting type, William says “Yeah, I figured it out on my own.”

But don’t just listen to me wax on about it, invest 6 minutes of your time to take a look at William’s story.

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Ty's Offshore Telecommute

No Graphics or Photos

Look, with amazing and breathtaking photos available for free on flicker.com (don’t forget to give credit to the photographer) and inexpensive photos and graphics at iStockphoto.com there is absolutely no reason not to include some images that can bring some life into your book.  I may turn an exquisite phrase, but the perfect photo can frame and enhance my prose to make it truly a masterpiece.  Or at least readable.

No Table of Contents

Nothing screams amateur like the lack of a detailed table of contents with hyperlinked indexes.  The first page I read, or at least review, in any book is the index.  It helps me organize my reading and serves as a reference when I’m done.  God knows I could use a little more organization in my life.

No Section About the Author

It's OK, He Takes After His Mother

No Personality in Writing

I once had an accounting professor who literally wrote the book on corporate income tax.  As you can imagine, the book was your typical, dry college textbook; except he still managed to put some personality in it.  In the examples, instead of saying Mr. Jones, Chief Financial Officer of ABC Corp he would use something like Guido McGoodfella, CFO of Concrete Shoes , Inc.  Also, the guy had kids that played soccer and was a bit of a soccer nut, this was during the 2002 World Cup, and managed to bring in soccer references in his material.  Now when I write I think of that guy and think that if he can put personality into an accounting textbook then really none of us has an excuse not to season our material with our own personalities.

No Updates if Material is Technical or Timely in Nature

The world changes and, unless your eBook is on using the ancient Greek method of fermentation to make wine in your basement, your eBook needs to change too.  Open any book cover at Borders and you’ll see multiple published dates, especially if the book is informative or at least somewhat technical in nature.  The subsequent dates are often revisions in which the book was revised to keep up with changes in the material.  Your eBook, if you continue to sell it, must be kept up to date as well and the reader should be informed of any revisions.

No Follow Through or Use of Social Media

Once you’ve drawn the reader in and dazzled them with your wit and personality then don’t just let them walk quietly away into the darkness but rather give your new friend (the reader) the chance to maintain and even enforce the connection that you have established.  Provide links to your blog or Facebook fan page, let them follow you on Twitter, and lead them to other products you have been involved in.  This isn’t just good business, this is a service to your client.  After all, they’ve just been educated and entertained and are starving for more.  So don’t leave them hanging, throw them a bone.

How to do it Write Right

Besides not doing any of the above, you should look to the experts.  Pat at the Smart Passive Income blog has a brilliant eBook available that is a guide to writing and promoting better  eBooks!  Better still, all it costs you is your name and email address.  I have used it for my own eBook and I absolutely love it.  Note, I get absolutely nothing from Pat, not even a thanks, for recommending this to you.  Besides Pat’s book there are a number of books and blogs out there that can help.  In addition, if you are going to market through another website then see if anyone will edit your book.  Having a pair of experienced eyes read and edit your book adds tremendous value.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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Put the World at Your Fingertips

The World At Your Fingertips

I don’t know if it was calling home from a McDonald’s in Guatemala for free on my laptop or visiting a Spanish School that had teachers in Guatemala giving lessons to students in Japan that provided the epiphany, but I realized that I had been oblivious to the most incredible revolution of the 21rst century to date, the end of the geographical tyranny of opportunity. If a potential business partner, vendor, or customer in Manila or Tel Aviv is just as easy to do business with as someone two blocks over, why wouldn’t you at least consider their services? Voice Over IP (VoIP), and specifically the largest provider of VoIP, Skype, are going to impact services in more profoundly than containerization shook up manufacturing.

What Skype Can Do For You

If you haven’t used Skype yet then it’s time to dip the toe in the water. Used as a conventional telephone to make a phone call to another phone, Skype can undercut the prices of your regular carrier and save money on long distance calls. However, when Skype is used to contact other Skype users is where it really shines. Skype to Skype calls are free and, since you can download Skype for free, you can really talk to anyone, anywhere for free. Not only that, but Skype allows you to make video calls, record video messages to forward, and even make conference calls. Now you can even use Skype from your cell phone in the U.S. with most major providers.

Any business that deals with communication and information needs to think about the impact of Skype and of how it opens up the entire world to them. Think about our friends the Spanish teachers for a minute. The use of Skype both opens up new clients to them and can help them retain old clients. So you go to school in Antigua, Guatemala and really feel that you’ve made humongous strides in improving your Spanish and you would like to continue your lessons, but you’ve got to go home tomorrow. No problem, on your last day your instructor asks you to fill out an evaluation and suggests that you continue your lessons on a weekly basis through a Skype video call! What a fabulous way to add value to both student and instructor. Alternatively, there will always be a segment of the population that just can’t get away for a month, or can’t stand the thought of being an hour’s drive away from a sushi bar, or maybe wants to test out the teacher before actually committing to studying in a foreign country, but would still like to learn. Either way, the school has the chance to better serve its customers and to make more money.

Learn Spanish in Antigua, but without the view

Skype and the Virtual Office

As part of the aftermath of Tim Ferriss’s book, The 4-Hour Workweek, the concept of a cubicle-less virtual office, with team members collaborating from all over the world, is sweeping through the business world like a rampaging tsunami. Of course the internet and email have been the sparks that have ignited this revolution, but Skype is like a supertanker of high grade fuel that has just drifted into the blaze, threatening to take it to the stratosphere.

What It Is Used For

If you are a knowledge worker you spend 90% of your working life on your computer and, in those rare situations in which you are away from it, you carry your Blackberry or iPhone with you everywhere, maybe even your laptop. Using your computer, and by extension your cell phone, as your own mini-call center just makes sense. Everyone from your office and your most important customers are already on Skype and familiar with it anyway, it really becomes a matter of convenience. A fantastic article in Small Business Computing summed it up this way: “RNC is probably typical of businesses using Skype in that its partners and employees are all heavily computer-centric. If you ask Lane what it is he likes about Skype, besides the cost savings, he says, ‘It’s just the convenience of having it on my computer. It’s nice especially when you’re in an airport—you can plug the headset in and start taking calls.’”

Skype can also become part of your virtual phone system. Steve at MyWifeQuitHerJob.com has an excellent article on how a virtual phone system can make your small business look and function like one of the big boys. Multiple phone lines for different departments, check, call forwarding to your cell phone, check, voice transcription, check. Why should only the guys with the big and fancy offices get to have all the fun?

Using Skype as a cheap and easy way to keep your team of workers in touch is one thing, but some businesses take it to another level. Shahab Kaviani of HyperOffice, winner of an award in 2009 for innovation in using Skype, says “we use Skype to follow up on international leads. International customers made up less than 5 percent of revenue in 2007. Looking at 2009, I expect that number to be closer to 20 percent, using Skype for inexpensive international calls.”
He continues, “and, in our email marketing, we embed a SkypeMe icon. Our prospects receive an email campaign and within minutes we have people who we never spoke to before clicking to Skype chat or call with the Internet sales department.”

In another Skype innovation winner, RareJob, uses Skype in a way similar to our old friends the Spanish teachers. One of RareJob’s services is teaching English in Japan using teachers based in the Philippines. Besides saving money by not having to rent expensive classroom space like their competitors, RareJob also has the advantage of being able to hire labor in a lower cost environment, the Philippines, and being able to push some of the savings on to their customers. But that is really not the best part; the best is that it is simply more convenient for both parties. The customer doesn’t have to schlep down to some distant learning center and the employee can work from anyplace with an Internet connection; saving both parties time and bus fare and helping the environment to boot.

How Can Skype Revolutionize Your Business?

This is the most fascinating part, brainstorming up all the different business models that suddenly become viable when you take the cost out of voice telecommunications. I have founded this business because I believe that the old way of doing accounting, of partnerships, of networking through local business and service organizations, and of rounds of golf followed by the nineteenth hole, will soon become a thing of the past as a new generation of technologically sophisticated entrepreneurs takes the place of the old guard. Now your online footprint and the integrity of your reputation are becoming more important than your golf game or social contacts. Even more importantly, geographical specializations with give way to knowledge-based specializations.  So, instead of being, for example, the small business accountant for Littletown, USA, you must niche your knowledge specialization further and become, say, the online startup accountant for the world!  The most shocking thing to me is, most accountants are as unaware of this as the Dodo was aware of the impact that new human settlers would have on its population!

Think about it this way, while accountants faithfully trot to classes every year that debate the minutiae of this or that new regulation or tax law, no one ever talks about how the way that we meet, serve, and do business with our customers is undergoing a dramatic revolution! Even now, I can speak with a client anywhere in the world using Skype, as I review their financial records online using Quick Books or just about any major accounting software, and share documents with them using Basecamp. I reach out and promote to them via my blog and through writing articles for business-oriented and participating in online forums. If they want to learn more about me then they can track me via LinkedIn or visit my Facebook page. The point is, the world is changing, don’t forget to change with it.

Do you know of anyone using Skype for their business? Do you have any brainstorms yourself? We would love to hear them!
Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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E-Myth Revisited is one of those classic icons of the small business/entrepreneurialism genre, up there with the Richest Man in Babylon, the Four-Hour Work Week, and Rich Dad, Poor Dad. I had come across references to the book and it’s author, Michael Gerber, while  taking the Entrepreneurial Learning Initiative many times and I really respected what the man had to say and what he accomplished, but I never got around to reading the book. Finally, while doing research for a blog entry I came across the E-Myth web site and it is class. No more excuses! I picked up a copy of the book and began to read.

EMyth.com

What It is All About

The central point of the E-Myth Revisited is that most small businesses don’t work because most small business owners have really created themselves a job, not a business. A real business should have structure and planning and a system in place that is so flawless that it does not require the owner to work in the business as an employee, but rather on the business as an entrepreneur; doing the heavy work of thinking, planning, and refining the system.

In Gerber’s eyes, most business owners get the entrepreneurial bug and leave the business that they are in, in the profession that they have trained for (people Gerber calls “Technicians”), to start a competing business in the exact same field, because that is what they know how to do. The problem is what the Technicians don’t know how to do, which is actually run a business. But because they are uncomfortable or unfamiliar with that role, they put it off by burying themselves in other tasks. Gerber puts it much more eloquently as “most businesses are driven by Technicians who lose themselves in the minutiae and the work because that is what they know how to do.”

How Do I Make My Business Work?

Alright, now that we know what’s wrong what are we going to do about it? In Gerber’s eyes we all, and especially those of us whom already have a small business, have an Entrepreneur lurking within us. This Entrepreneur needs to be nurtured, developed, and brought into the running of our small businesses. Gerber says, “to the Entrepreneur, however, the customer is always an opportunity. Because the Entrepreneur knows that within the customer is a continuing parade of changing wants begging to be satisfied. All the Entrepreneur has to do is find out what those wants are and what they will be in the future. As a result, the world is a continuing surprise, a treasure hunt for the Entrepreneur.” This is about as beautiful of prose as you will find in a small business book.

Once this inner Entrepreneur is given his rightful place in the business, he immediately gets to work reorganizing the business so that it becomes a system and not a job. The system is modeled after the most successful business model for developing entrepreneurial success of all time, the turn-key business franchise and specifically that of McDonald’s. Gerber really drums in the necessity of consistency for success and lays down the following rules.

1. The model will provide consistent value to your customers, employees, suppliers, and lenders, beyond what they expect.
2. the model will be operated by people with the lowest possible level of skill.
3. The model will stand out as a place of impeccable order.
4. All work in the model will be documented in Operations Manuals.
5. The model will provide a uniformly predictable service to the customer.
6. The model will utilize a uniform color, dress, and facilities code.

According to Gerber people crave consistency, which is why the fast food restaurants do so well, they create a uniform experience wheresoever in the world you may be. It is not enough for service to be excellent, it must be excellent in the exact same way every time.

The Importance of Accounting and Other Key Points

In one of my favorite sections Gerber gives up a little love for the nerdiness that is my profession, accounting. Gerber stresses the need for the quantification of your efforts. In this he is not just talking about products sold or dollars made, he is talking about the quantification of the consistency of your business model. Gerber says, “because without the numbers you can’t possibly know where you are, let alone where you’re going. With the numbers, your business will take on a totally new meaning. It will come alive with possibility.” An appeal right to my heart.

“Find a perceived need and fill it,” is another great line from the book. The emphasis here is on perceived. If someone needs something (like great accounting and help in the quantification of their success) but doesn’t perceive that they need it then it is really of little use to the entrepreneur.

Some other great lines include:
“In fact, there isn’t a function or position withing the company that is free of asking marketing questions, if by marketing we mean, “What must our business be in the minds of our customers in order for them to choose us over everyone else?”

“The customer that you’ve got is one hell of a lot less expensive to sell to the the customer you don’t have yet.”

What This Book Can Do for You

Man, if you have a new business or are planning on starting a new business pick this up and read it now. I’ve laid out the bullet points here but Gerber really drives it home with some top-shelf, beautifully written prose. The book is actually an incredible relief for most of us, as you don’t have to have an MBA to run a small business and you don’t have to re-invent the wheel. You don’t even need tons of money or a revolutionary product. Just follow the trail blazed by Ray Kroc and make a quality system that allows your business to thrive an removes you as far a possible from being an employee of the business and allows you to focus on direction, organization, and innovation.

If you read as many business books as I do then some of this might seem to be very familiar. That’s because the book was written in 1995 and so many later writers have borrowed from it’s teachings. I read some passages and was reminded of Robert Kiyosaki or Tim Ferriss only, of course, it is they who were influenced by Gerber.

Bottom line, if you’re in the trenches starting up a new business and putting in the hard hours and incredible effort that it takes to get there then Gerber provides you with a road map and shows you the light at the end of the tunnel.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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An insufficient return on investment is your canary in the coal mine, it tells you when your business is failing and, with proper examination, why.  Better still, it does this before all the money is spent and Tony Soprano is knocking at your door, calling in his loan.

Time to Count Some Beans

What is Return on Investment for a Small Business?

If you have experience as an investor then your are familiar with return on investment as being the amount you earn on your investment over the amount that you paid for it.  So when you shop around online to get a half a percentage higher interest rate on your savings account you are looking for a higher return on investment.

How Do I Calculate It?

For your small business, the concept is the same, return on investment is a measure of what you get out of your business divided by what you have invested in it .

The key word here is measure, the return on investment formula is a tool to help you measure how efficient your business is at generating profits.

Why Is It So Important?

Your assets are the resources that you have put into your business, your investment.  When you calculate return on investment you are concerned with two things: first, the opportunity cost of your resources, and second, the trend of your business’s return on investment over time.

Opportunity Cost

The opportunity cost of your resources basically answers the question; “would I be better off putting these assets to a different use.”  Think back to the example of a savings account, if the return on investment from your business isn’t beating the interest you would get if you sold your assets and deposited the money in a savings account, then you’re pretty much screwed.  Either you have to take drastic action to improve the ROI or you should find a more effective use for your assets.

Change Over Time

The trend of your ROI over time is the canary in the coal mine; a steady and increasing ROI means a strong and healthy business while a negative or decreasing ROI is usually a precursor to a long, slow, and painful death for your business.

“Hidden” Assets

When you start your business you are often a one-man band, you are not only the Chief Executive, Sales, and Financial Officer but also the delivery boy, the maintenance man, and the head of productions.   As such, you get a huge amount of time wrapped up into your business and this creates what Steve Wilkinghoff, in his amazing book for business owners Found Money, calls “hidden inventory.”  It is hidden because it is not captured by traditional accounting but it is crucial to achieving success in a small business.  If you are a lawyer and a client hires you to handle a certain legal issue and you go to work at it but then, after putting say 20 hours into the project, get called aside to do a second project and leave the first on hold then you have hidden inventory.  The time that you invested in that project should be billable to the client but you can’t bill them until you’re done.  So there you have hidden inventory, it is the work in process that can’t be collected upon until the job is done.  The danger for the small business owner, who often is a one-man (or woman) show, is that they build up this hidden inventory, and work like crazy to do so, but are too slow at bringing it to the point of billing and thereby run into the trap of too much work and not enough money.  Estimate how much hidden inventory you have and add this hidden inventory to your assets when you calculate return on investment.

What is an adequate return

As we already discussed, if you have another investment immediately available to you (like a certificate of deposit or a savings account) and it offers a higher return on investment than your small business then you should feel really, really, uncomfortable.  I will tell you that so many times I have seen businesses borrow money with a higher interest rate than their return on investment and I just to take them gently and tell them to go spend that cash at the casino, because it is about that bad of an investment.  Your small business should generate for you several times the ROI of just about any investment you can readily find.  Why, because it is very risky investment.  1 million and one things could go wrong and you will find yourself back to square one, only this time you will owe tons of money.   So, the higher the risk the higher the required return you should require.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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You’ve worked incredibly hard to build up your business and, when the time comes to move on, you want to get the absolute best price for it. However, the market for a small business is extremely illiquid, that is, it is very difficult to unite potential buyers with the business. You must be proactive and reach out to the potential buyers and have the information they will want in order to make their decision. Be prepared to work as hard to sell your business as you did to build it and go into the process with the same sense of adventure and enterprise.

Big Dollars For My Biz

Take the Initiative

The fact that you have a valuable business for sale, something millions dream about but never get around to doing, means that you are the type of person that takes charge and gets things done. So don’t stop now, merely hanging a “For Sale” sign on your door, or even hiring a broker, and then sitting back and waiting for things to happen isn’t going to cut it when it comes to selling your precious asset, you will have to go out there and make this happen. Start by thinking of who you’re potential buyer will be. A-list blogger and online entrepreneur Yaro Starak sold his first web business to some of his best customers, who loved his business so much that they didn’t want to risk it falling into less friendly hands. Think about your competitors, about business owners in the same industry who may wish to expand into your industry, and businesses in parallel industries that could find useful synergies with your own. For example, if you have a camping supply store then a synergy might be someone selling adventure travel and vacations; the two have a significant overlap in customers and could try to cross-sell their customers. Don’t forget to market to trade and professional organizations, if they’re appropriate to your business. I know that the AICPA (Bean Counters of America Association) has a special area on the web site for CPA practices for sale. In case you’re wondering, I’m going to build my own up to the eight figure neighborhood before I put it up for sale.

Importance of Financial Records and Other Information

When you sell a pound of alpaca wool or a barrel of North Sea Brent Crude the exchange is pretty easy; the buyer knows what she is getting and what the current price for it is. Your business, however, is not something that you can drop on your foot, but rather a process or a system that (hopefully) generates cash and profits for its owner. To show prospective buyers what the value of the business is you will need a narrative, which is a one page summary of what your business does to make money, and some supporting numbers, usually in the form of financial statements and tax returns. If you have traditional financial statements then that’s great but you also want to put together a summary of several years statements (if indeed you’ve been in business that long) in a tabular format so that any prospective buyer can easily see what the trend for your business is. Also, in many industries, such as with a website or online store, you will have important non-financial numbers to compile and include in your summary. For example, if your web site is an important element of your business then a number of metrics, such as unique visitors, become important to the businesses potential value to a buyer. Remember that many potential buyers will already be in your business and will by looking for synergies with their own businesses that may increase the value of what you have to offer, so don’t make them have to hunt for this information, tailor your approach to your potential buyer. SCORE has an excellent check list on what you’ll have to prepare before you sell.

Brokers, Accountants, and Lawyers

Your accountant absolutely must be informed of your intent to sell, the earlier in the process the better, and be kept up-to-date at all times. The timing and structuring of the sale can have enormous tax consequences. Remember, due to taxes a $50,000 sale isn’t really worth 50 grand to you; sometimes it’s worth much, much less. Your lawyer needs to be brought in once you have an interested buyer and before you begin to discuss terms. Your lawyer’s job is to structure the sale so as to protect you as much as possible from fraud, default, and negligence from your buyer and to limit your liability during any interim period.  The use of a broker will vary depending on the industry and the expected price of the sale.  Whether you use a broker or not, don’t expect to be able to just hand the job off to them and then forget about it.  From my experience and from what I have been told the majority of businesses get sold through good luck, good timing, or the owner’s hard work.

Online Marketplaces

In the new global age you can buy or sell almost anything online, including your small business and a number of sites have come up to help you connect to a buyer. The online option isn’t just for online businesses, according to the general manager of one of the largest online marketplaces, bizbuysell.com, restaurants were actually the single largest category of business that they sell. Other larger players are imergeadvisors.com and bizquest.com. The market is still relatively young and fragmented, so you might peruse all three to get an idea of their individual strengths and specializations. Also, it is great fun and enormously beneficial to see what the owners of similar businesses are asking and what information they are providing.

Ebay also has a section for selling businesses and websites and, as of today, it had 17 thousand businesses listed, although 12 thousand of those were web sites. My suspicion is that Ebay’s format would be inadequate to sell a more complex business, in which communication between the owners, the sellers, and their supporting professionals is essential, but it does make for some interesting comparisons. Plus it is really fun to look at some of the remarkable stuff that people are trying to sell.

Be Prepared to Negotiate

The old saw in business negotiations is “I’ll let you name your price if you let me name my terms.” What this means is that the structure of the sale is as important as the price of the sale. If you are only interested in cash up front then be very clear and firm on this to potential buyers. When one of my first and best clients, my Dad, passed away he had a number of valuable assets that my mother was not able to or interested in running. I was living in a foreign country at the time but managed to come back for a month and half to help settle things and helped my mother sell off some of these assets, mostly real estate related at a time when real estate was still very hot. It was fascinating and eye opening to listen to the pitches of some of the potential buyers and creativity of some of the terms that they offered. One of the most popular propositions was that one of the assets be put into a partnership owned by my mother and the buyer and then the “buyer” (Mom’s new partner) would contribute their labor and expertise to convert the asset into a more lucrative form (i.e. subdivide or build a building for lease, what Dad had already planned to do with it) and then would share the profits with Mom. The chances are that you are going to get offers that are a combination of cash and credit and in some cases may require your continued involvement. Don’t hesitate to bump up the price if the terms aren’t to your convenience and do not hesitate to walk (run) away from any deal that might put you into business with someone of questionable moral character.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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Online forums are amazing sources of knowledge about almost anything you can think of.  I myself used forums recently to find real estate in Costa Rica, to set up some new software, and to research some gnarly tax issues.  But I never really thought of forums as a way to promote myself as a professional and businessman until hearing some of the big names in internet business talk about how they tapped into the power of online forums to lay the foundations for some breathtaking business success.

Where the Influencers Are

Why the Forum?

If you’re not familiar with Yaro Starak’s blog, Entrepreneur’s Journey, then it is definitely worth checking out.  For me, the best part of about the blog are the interviews with successful online entrepreneurs, usually in the form of podcasts.  They have titles like “How So-and-So made $X Doing Y” and are both inspirational and are really meaty in terms of delivering information relevant to most of us and our businesses right now.

How Pat Flynn Lost His Job Then Made $203,219.04 In His First Year Online is the story of, well, I guess the title says it all.  Pat’s  first business was a study guide for a professional certification and the story of how he almost stumbled into it and then was smart and aggressive enough to turn it into a source of income is powerful enough, but what really gripped me was how he earned the credibility and promoted his product in the early days through participating in online forums.  Pat says “I have a brand that people know about because I because I go to forums and I go to different blogs and I help people out and people know me as that guy that gave that great information…  One tactic is to go into forums and just help people… you don’t even need to mention your product just by having your signature at the bottom with the link “for more information go here.”  Pat has since branched out into many different businesses, which you can read all about in maybe the best online business blog on the web, SmartPassiveIncome.com.

James Schramko started out as an affiliate marker for a social networking software product.  After getting his infrastructure set up: web sites, blogs with links back to the sales page to drive traffic, a demo project and a bonus product, James “rolled up the sleeves, sweated it out and went into the forums and started posting lots of valuable posts with signature links back to myself… and I started building up brand equity.”  In other words, James utilized the forums to meet with influential people who were already very interested in the product.  By genuinely helping people out James developed a reputation for being an expert and, even more importantly, a helpful and good person.  People followed his signature link back to the blog and the blog back to his product.  He has since branched out into many online businesses and, per Yaro, is making seven figures per year and absolutely crushing it.  In addition, James blogs at InternetMarketingSpeed.

How Does It Work?

The effectiveness of forums lies in their ability to target the active, decision-making people within a community (Malcolm Gladwell’s “three agents of change”) and to promote through the establishment of an honest, mutually beneficial relationship.  The entrepreneur provides useful, honest information and in return gets access to and the chance to earn credibility with influential decision-makers.  In addition, the entrepreneur gets free publicity and some search engine optimization, as forums are freely searched by Google and other search engines.  Your forum comments remain in the public domain, as well as your online signature and, usually, a link to your own site.  Post Release has an excellent white paper , an excerpt of which is below, on who users of forums are and why the average forum user is a much more important viewer than your average eyeball on the internet.

Forum Users Are Influencers

Most forums will offer the benefits above, but in addition some offer you the chance to submit articles or write reviews or other informative materials.  Many will also offer a “coffee shop” or an area where members can go to discuss off-topic items, tell jokes and socialize.  This brings us to an additional benefit of forums, networking and becoming part of a community.  Many entrepreneurs have met future partners, investors, collaborators and friends through the power of online forums, so don’t forget to take advantage of this aspect of the forum as well.

How to Harness the Power of Online Forums

Any decent online forum will have strict rules against spamming and will move quickly to stamp out any overt advertising, especially if it adds nothing to the conversation of the forum.  This is absolutely to your advantage, because if you are trying to make a one-off, heavy-handed, used car salesman type sale then you are in the wrong place.  The average forum user is pretty sophisticated online and very wary of spams.  Instead, think of this as your opportunity to network, make alliances, and build up credibility in your personal brand.  As Pat says in his interview, “I got to be known as that guy who helps people” on the forum that he targeted.

Many forums will rate community members, usually by their activity and the quality of the information that they give, and will post this information prominently.  This is the forum’s method of rewarding its top participants and, should you become one of them, your way of getting some additional notoriety and credibility.  Again, the absolute key is providing quality, sincere feedback.  Avoid overt advertising at any cost.  It normally is acceptable, however, to answer a question or provide feedback and then provide a link back to your own site for more information.  Another online legend and genius, Robin Good, provides an exceptional guide to using online forums and the strategy, technique, and etiquette that you will need to follow to capture the magic of the forum for yourself.

But Will I Have to Do Any Work?

Yes!  The biggest knock on participation in forums is that they will consume your time and effort.  You will want to find a forum that you can participate in daily, almost the more the merrier, to establish your expertise and your reliability.  Really, forums are almost entry-level online marketing because of their huge time commitment.  However, you’ve got to start somewhere and don’t overlook the usefulness of the forum for your own information.  It’s a great way to keep track of what resources people are using, what concerns or problems they run into and what information they are looking for.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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