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Kevin Mercadante

Getting Your Small Business Out of the Starting Gate

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Watch Out For Common Pitfalls
Watch Out For Common Pitfalls
The hardest part of starting any business is getting it up and running and out of the starting gate. Just the thought of that obstacle is enough to keep a lot of people from even trying in the first place. But there are ways that you can make your business startup easier, especially financially.

There are two areas that you have to pay close attention to – expenses and income. That’s more than obvious, but it’s the tactics that you use for each that will largely determine whether your business is a success or failure.

Keep a Tight Lid on Your Expenses

A common mistake that many new business owners make is spending a lot of money upfront, often before they even launch the business. With bricks and mortar type businesses that’s par for the course. But since most businesses today are Internet-based, you should be able run your business on an absolute shoestring.

Here are some tactics to help you do just that:

Work out of your home for as long as you can. You should avoid buying or renting any business-related space until you’ve first established a healthy cash flow. Work out of your home for as long as you can, and if you do need extra space rent or sub-let it on a short-term basis at the very lowest price possible. In the meantime, working out of your home will allow you to have all the trappings of an office – electricity, phone lines, and Internet connection – without the added expense that you have if you need to hook them all up in a remote space.

Unless it’s mission-critical buy secondhand. Equipment is another area where you need to be cost conscious. Unless equipment is absolutely essential to the basic operation of your business, you should avoid heavy investment until you have a demonstrated cash flow coming in. Buy secondhand equipment and use it for as long as you can, until your income allows you to trade up.

Don’t hire – subcontract out instead. One of the toughest parts of starting a new business is having to do every job connected with your business. If there’s no income, you can’t possibly hire anyone to do certain jobs for you. Instead, sub-contract work out on an as-needed basis. For example, you can bring in someone with accounting experience to help you close out your monthly books. You can also hire someone for a couple of days to help you with your accounts receivable.

Partner where possible. Sometimes there’s a major function in your business that you simply cannot handle on your own. If that’s the case, look into partnering with somebody who is strong in that area. Since the partner will get a share of the profits – rather than a fixed salary – the arrangement should be much easier on your budget.

When you are starting a new business, you should be very conscious to avoid creating fixed expenses that you will need to pay even if you don’t have any income. That can put you out of business before you even get started.

Building Your Income

There’s no delicate way to put this, but until you have a cash flow, you don’t have a business. This should make creating a cash flow Job 1. There are ways to do this when you’re first starting out and operating on a shoestring.

Get a cash flow going before going full-time. In most businesses, it’s completely unnecessary to quit your job and start running the business on a full-time basis. It will be better if you hold onto your job – that way you have a cash flow for your living expenses – and build up your business as a side venture. If you can create a cash flow of just a few hundred dollars a month in this way, you will not only have an income when you go full-time, but you’ll also have the confidence of knowing that your business concept will be successful. Yes, it will slow the start of your business, but at the same time it will improve your chances of success. Those are the kinds of trade-offs you will want to make.

Concentrate your time on the activities that generate the most income. This needs to be a core principle of anyone who is going into business for themselves. Starting a business, you might have 20 tasks that you have to perform each week. If four of those tasks are the ones that will generate income, or the lion’s share of it, then those are the tasks that you need to be concentrating on most heavily. You’ll need to do this at least until your business reaches a point where it’s generating sufficient income for you to begin paying others to do the tasks that are not bringing cash in the door. Your business will succeed to the degree that you are successful in concentrating on activities that will generate the most income.

Implement low cost/free marketing. Marketing is generally the most important activity in any business, but especially at upstart. Marketing is what draws people’s attention to your business, so that you can convert them into paying customers. You will need to come up with low-cost and therefore very sustainable marketing activities that will make this happen.

Some of the methods that you can try that will be easy on your budget include:

  • Networking with people who represent natural clients for your business.
  • Using the social media to draw people to your website and business – they’re free to participate in.
  • Email blasts to everyone in your email address book – even if they’re not prospective customers, they may forward your email on to others you are.
  • Ask everyone you meet who do you know who is looking for (my product or service)? Many business arrangements are started by informal conversations.
  • Have a supply of custom-made business cards or business flyers that you can pass out to anyone you meet. You need to have something tangible to help people remember you after you meet with them.
  • You should create a website – even a simple one – as soon as you start your business. Everyone is on the web these days, and you need to be as well. A simple (and free) WordPress format can get you started until you have enough income to build a top-quality site.

The whole purpose of marketing is to get people’s attention so that they are looking for you even when you’re not out prospecting. Some of the best customers and clients you will land will be third-party referrals, or people who saw your flyer or website. These are all inexpensive marketing methods that will help you to create a customer base until you can afford to invest serious money in marketing.

Concentrate your efforts on building your cash flow, as well keeping your expenses at the absolute bare-bones minimum level. That combination will help to give you the time that you need to get your business established.

Which Debts Should You Pay Off First?

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Managing Debt, Debt ManagementThere is all kinds of advice floating around as to which debts you should pay off first. Most advisors seem to have a preference for paying off credit cards or mortgages ahead of other types of debt.

There may be no right and wrong when it comes to paying off debt – after all, paying off just about any debt is a step in the right direction. But some debts are more threatening than others, so we’re going to look at paying off debts in the order of most risky to least risky. When you look at it that way, the whole order changes.

1. Car loans

I am a strong advocate of paying off car loans ahead of any other type of debt. There are two primary reasons for this:

High monthly payment to balance. If you owe $10,000 on a credit card, your monthly payment is probably around $200. On a student loan debt, it’s probably a little bit over $100. With a car loan, the monthly payment could easily be $400. That is a big, fat monthly payment, and getting rid of it as soon as possible will do wonders to improve your cash flow, and make it easier for you to concentrate on paying off other debts. Typically, paying off a car loan gives you the greatest bang for the buck when it comes to improving your budget. This is why it needs to be the first loan that you pay off.

The outcome if you are unable to pay this debt. This is an issue most people don’t think much about, but you need to. Typically, a car is an asset that you use in the production of income. Whether you use your car for business purposes or to commute to your job, you need your car in order to earn a living. If you lost your job and could no longer afford to make the payments on your car, the car would be repossessed and you would be unable to get a new job for lack of a way to get there. For this reason alone, paying off your car loan should get top priority.

2. Business loans

There are a large number of people who are self-employed in small businesses and have certain assets that are required in order for them to generate income. Paying off debts associated with these assets is a close second to paying off car loans.

The case here is similar to giving a priority to paying off your car loan. An asset used in the production of income should be owned free and clear, that way if you hit on hard times and couldn’t afford to make your debt payments, you will still be able to earn a living.

3. Other secured loans

If you have a secured loan that is collateralized by an important asset, you should pay it off as soon as possible. This may not be a true priority if the loan is secured by furniture or a recreational vehicle, since they are not necessities. But if the loan is attached to something you can’t live without, it should be given a priority. This is because normal functioning in your household will not be possible in the event that a major asset is repossessed.

4. Credit cards – smallest to largest

Most financial advisors make paying off credit cards the number one priority. But in the grand scheme of things, credit cards are more of an annoyance than anything else. If you fall behind, the creditors can harass you and threaten you with of all kinds cataclysms, but they won’t be able to remove important major assets from your life. You’ll still be able to get to work every day, to heat your house and to do your laundry, you’ll just have to get used to living under a constant cloud of threats.

The two most compelling reasons to payoff credit cards are:

  1. High interest rates, and
  2. The rates are variable

These are legitimate concerns, but in the current low interest rate environment, you have time to payoff the more dangerous loans listed above before taking on any of your credit cards. And if you do, you’ll have more cash to payoff your credit cards.

5. Student loans

These days it seems that nearly anyone who has a student loan wants to pay it off. That makes sense, given the long-term nature of the debt. But at the end of the day, student loan debts are simply not that threatening. Monthly payments are low compared to the outstanding balance, and interest rates are far more well behaved than your credit cards. In short, student loans aren’t going anywhere so you have plenty of time to take care of other debts first.

Given the fact that student loan debts are typically large balances, you’ll probably need to payoff other debts before taking on these. In order to make substantial progress in paying off a large balance, you’ll have to clear the decks of other obligations to free up your cash flow to make the larger payments. Which is another compelling reason to pay off other debts ahead of your student loans.

6. Your Mortgage

Next to credit cards, paying off the mortgage is probably the most recommended course of action. But there are a whole lot of reasons to hold this debt until last:

  • The loan is secured by your home, which probably has enough equity that you can sell it to payoff the loan, if push came to shove.
  • If you have negative equity in the house, the lender would be in no hurry to foreclose on you anyway, giving you time to work out some sort of settlement.
  • Mortgages typically carry lower rates of interest than other types of debt.
  • You’re probably getting some kind of income tax break on mortgage interest.
  • If it’s a fixed rate mortgage, your payment cannot increase.
  • A mortgage is long-term debt, which means you have close to forever to pay it off; in the meantime, you have the benefit of living in the house.

Perhaps the biggest reason of all to put mortgages at the back of the payoff line is their sheer size. Let’s say that you are three years into a 30 year mortgage, and still owe $250,000 on it. Even if you concentrate all of your efforts on paying off the mortgage, it will probably still taking years to do it.

And if it will take years, you’ll need to have all of your other debts paid off first, that way you’ll have the money that you need to make a serious effort to make your mortgage go away.

Finding the Right Business Idea For You

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The 600,000 plus franchised small businesses in the U.S. account for 40% of all retail sales and provide jobs for some 8 million people. SBA.gov
The 600,000 plus franchised small businesses in the U.S. account for 40% of all retail sales and provide jobs for some 8 million people.
A lot of people want to start their own business. There are a number of obstacles to doing so, but the first, biggest one is usually finding the right business idea. There is good reason for this concern – finding the right business idea is often the most basic difference between the success and failure of any upstart business venture. Go into the right business and you can be on an elevator ride to the top. But the wrong business can be a one-way ticket into bankruptcy court.

How do you go about finding the right business idea for you? The best ideas are always the simplest, so we should keep the searches as close to home as possible. It’s generally a mistake to think that a business venture has to be into something exotic. Quite the contrary – the more familiar you are with the idea, the easier it will be to make it a success.

Use the following as starting points to help you find the right business idea.

Converting what you do on your job into a business

Very often the best business ideas can be found in the job you’re in right now. If you can take what it is you’re doing for your employer, and convert it into an activity that you can sell to clients and outside customers, you may have landed on the best business idea possible.

There are a number of advantages to doing exactly this:

  • Since you are already doing on your job the kind of work you will do in your business, you probably won’t need to get any additional training.
  • Since you have experience and even a routine, you’ll have the kind of confidence in your work that all business owners need.
  • Converting your job to a business will be a lot less risky than plunging into something completely new.
  • If the new business venture fails, you can always go back to your old job or to a new one, with no break in your work experience.

An example of converting your job skills to a business will be someone who is working as a bookkeeper on their job, offering their services out to multiple clients and customers on a retail basis. Another example is a person who handles IT on the job, that offers his or her services out the general public.

See what skills you use on your job that you could sell to the public.

Doing what you know – but don’t do on your job

For some people the best skills they have are ones that they never use on the job. For example, you might be an accountant who is also a whiz with computers. You may not get much of an opportunity to use those computer skills on your job, but you may be able to take them and use them as the basis for starting side business. As the business grows, you can begin thinking about quitting your accounting job and making your computer business your full-time occupation.

Make a list of all of the skills that you have, but don’t forget to include those that you don’t use on your job. It may turn out to your best and most marketable skills – from a self-employment standpoint – are not at all related to the work that you are currently doing.

Doing what you love

This is more risky than converting your job skills to a business, but it can also be a major reason why your business will be more successful than you ever dreamed.

In most cases, our highest income earning capability will be found in doing work that we like best. While that may seem self-evident, most people take a job in order to meet financial obligations, then settle into it and make it a career. Whether or not they actually like the work never enters into the equation.
work-together
The typical outcome of that arrangement is either job burnout, or planning your career around retirement (usually early retirement). On the retirement side, the idea is often that you’ll begin doing work that you actually like once you retire, and can afford a pay cut.

But what if you didn’t wait until retirement to start doing what you really like to do? If you like the work enough, you may actually find that you no longer have interest in ever retiring at all! And once again, if you really like the work that you are doing in your own business, there’s a better than even chance that you will make more money than you ever have.

Doing work that you actually like to do is a greatly underestimated “secret” to business success. So along with inventorying your skills, spend an equal amount of time determining what it is you actually like to do.

Trying something entirely new

This is where the truly high risk business ideas come from. Since you are stepping out of your comfort zone – often well outside of it – the risks are increasing commensurately. For that reason, this is not the recommended course in determining the right business for you – even though it may be the main method people use to find business ideas.

But if you are going to go this route, there are some steps you can take to minimize the risks:

  • Thoroughly research any new business idea before taking a plunge into the business itself.
  • Find a mentor who could help you learn the business.
  • Apprentice into the business before entering it – a good example would be taking a part-time job in the kind of business you want to go into.
  • Start the business as a side venture, that way you have your full-time job in case the business fails.
  • Avoid putting serious money into the venture until you can prove that you can first generate a cash flow.
  • Make sure you have a well thought out back-up plan – failure is a definite possibility here.

If none of these suggestions look scientific, that’s because finding the right business idea has a definite hit-or-miss quality to it. Consider using each of these methods to come up with the right business idea, or better yet, blend two or three methods. If you find a business idea doing work that you love, where you already have tangible skills, your chances of succeeding in the business will multiply dramatically.

Don’t Let Lifestyle Inflation Overwhelm Your Finances

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Protecting Your Money So It Can Grow In Value
Protecting Your Money So It Can Grow In Value

So often, people watch their careers flourish and their incomes grow – but no matter how fast they do, somehow their overall financial situation seems to go nowhere. Sometimes, it even gets worse. How can that be? It’s called lifestyle inflation, a kind of financial cancer that can render your finances a complete wreck, even as your career takes off.

It’s important to realize that income and net worth are not the same thing. Income is how much you make, but net worth is what you’re left with after all your living expenses are paid. If those expenses are too high, you will never see your net worth rise – and your finances improve – no matter how high your income is. That’s what lifestyle inflation does to your finances. And it’s something we all need to be on the lookout for.

What is Lifestyle Inflation?

Lifestyle inflation has become so pervasive that it even rates a dedicated definition from Investopedia.com:

“Increasing your spending when your income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.”

That’s the general idea. On a mechanical level, lifestyle inflation looks like higher living expenses, more debt, and very little in savings and investments. You’re in the trap if that combination remotely describes your financial situation.

How Lifestyle Inflation Overwhelms Your Finances

Lifestyle inflation is virtually a default setting. Unless you’re intentional about managing your finances, your living expenses will continue to grow, eating up every extra dollar you earn and sometimes even more.

Have you ever played that game what would you do if you had $1 million? There are different versions of that question, but it comes down to what would you do if you suddenly came into a very large windfall of money? It’s fun to imagine, but if you listen to the answers that most people give you begin to get a solid idea as to how dangerous lifestyle inflation can be.

When confronted with the prospect of coming into a large amount of money, people almost instinctively read off a laundry list of how they would spend the money. Very few ever contemplate how they might save and invest it. In reality, this is what often happens to people who win the lottery or inherit a large amount of money. In short order, they end up broke.

That’s the essence of lifestyle inflation. We all have an almost limitless number of wants in life, and when the money becomes available those wants are magically converted into needs. The difference between wants and needs is more than just semantics. Wants are something that we would like to have – needs carry a certain urgency. The transition from wants to needs often happens as a result of a pay raise, a promotion, or the receipt of a windfall.

The Worst Part – You Don’t Even Know It’s Happening

Most times, you won’t even recognize that lifestyle inflation is taking place. That’s because the whole concept is rooted in emotion, rather than logic.

Let’s say that you get a $10,000 increase in pay. $3,000 will go for income tax and payroll deductions, so you’ll really have only $7,000. You reason that this is the perfect time to replace your old clunker with a brand-new car. You then go from no car payment, to $400 per month. But what the heck, with a big fat raise swinging the monthly payment should be no problem, right?

There’s a good feeling that comes with having extra money. So in addition to buying yourself a new car, you also increase your eating-out from once per week to twice, at an extra $50 per week. You also decided you need to new clothing, and about $1,000 should do it.

Let’s add that up. $400 per month a new car payment comes to $4,800 per year. The extra restaurant meal per week at $50 each comes to $2,600 per year. And then there’s the $1,000 for clothing. $4,800 plus $2,600 plus $1,000 comes to $8,400! Not only does that combination eat up your entire $7,000 net increase in pay, but you’ve also overspent.

Making more money feels good, and that’s the problem. When you feel good, your defenses are down and you enjoy the extra financial freedom. Since it quietly, gradually goes into consumption, none of the extra income ever makes it into the bank.

That’s how lifestyle inflation creeps into your life, and keeps you from ever getting ahead financially.

Preventing Lifestyle Inflation From Happening

It’s easy to see lifestyle inflation happening in the lives of other people. But it’s more complicated when we’re engaging in it ourselves. If that’s been your pattern in the past – and the evidence will be inflated credit card balances and an undersized bank account – you’ll have to take concrete steps to get it under control.

Try these steps to get out of the lifestyle inflation trap, and put you on the path to financial independence:

  • Track your spending – make sure you know exactly where your money goes
  • Reduce or eliminate any expenses that are not absolutely necessary
  • Set up payroll savings plans; you can direct money into a savings account, mutual funds, and of course retirement plans (yes, even IRAs if you don’t have an employer plan)
  • When ever you get a raise, increase your payroll savings by the amount of the net pay hike
  • When ever you get a cash windfall, use it either to payoff debt, or to put into savings and investments – don’t give yourself the opportunity to spend it on something you don’t really need

Unfortunately, lifestyle inflation can easily become a way of life – it is for millions of people. Breaking out of that habit will be like going on a diet, except that this one will be a financial one. That means that it will be painful at first, but once you get control of your finances, your life will get progressively easier. It’ll will be like creating a new automatic pilot for your life, one that will stack the long-term deck in your favor.