11 Financial Mistakes – Part 2

By Trishan Arul    October 28, 2009

This is Part 2 of my post on Top 11 Mistakes that Ruin Entrepreneurs. Part 1 covered the first five items. “Ruin” may be overly dramatic but even businesses with solid underlying fundamentals can be ruined if you make enough of these mistakes.

6. Creating the wrong business structure – One of the first things you should do is to determine what business structure you need. Common choices are: sole proprietorship, partnership, LLC, and Corporation (both S-corp and C-corp). Take into consideration compliance work, cost, legal liability, employee issues, and taxation. There is no right form of business for every startup. In most cases you can switch forms down the road but the hassle and costs can be significant. I’ve spoken with many entrepreneurs who have spent thousands of scarce dollars to form a corporation which they didn’t need. This is a huge topic which I will address in the future but some resources can be found at my colleague Richard Greenberg’s Seedport website – he does that stuff for a living so if you want help, I recommend him!

7. Having employees without realizing it – Despite what some people say, there is no black & white line between being an employee and a contractor. The IRS provides some general information and even has Publication 1779 devoted to the topic. In general, the more control the business exerts over the work and finances of the person, the more likely they are to be classified as an employee. Penalties for incorrectly classifying an employee as a contractor are severe: the employer has to pay all of the payroll taxes (employer & employee portions), all of the income taxes that should have been withheld, and penalties. That can add up to 50% or more of what you paid the person. While classifying someone as a contractor may seem easy, it could cost you dearly down the road. Payroll is a huge headache which most people try to avoid but there are many inexpensive payroll solutions which can make it painless. So, no more excuses not to do it right.

8. Not opening business accounts – This ties in with #5 in Part 1 about Mixing Personal & Business Funds. At a minimum, you should have a separate bank account and credit card for your business. Most likely, you will have to personally guarantee the credit card but that shouldn’t prevent you from opening the account. Not only does it help you to separate business from personal transactions, it also allows your business to build a credit history. That will be important as you try to open accounts with various vendors for office supplies, cell phone service, computers, etc. Whenever you have the option, open an account under the name of the business so that when you need credit it will be available.

9. Funding the business with credit cards – Even after Congress acted to ban the most blatant abuses of the credit card industry, they are still a double edged sword. Credit cards are useful and often necessary to make many regular purchases, especially online but they also offer very expensive credit which is all too easy to abuse. If someone offer to lend you money at 20% interest, you’d probably consider that loan shark rates and immediately turn them down. Yet many small business owners pay more than that to their credit card companies without even thinking about it. Usually it starts out with small balances carried over so that you can meet payroll or conserve cash. But very quickly people end up reaching their limit, unable to pay off the balance, rolling it over month after month, and transferring balances to other cards. And when you depend on the credit card, it can really hurt if it gets cut off as many entrepreneurs have recently discovered.

10. Accounting without a shoebox – Handling your business finances with a shoebox isn’t recommended either! But many entrepreneurs don’t even bother to collect receipts, bills, statements, etc. in one place. They just ignore the accounting and money side of the business because its a hassle and there are so many other things to get done. Plus most people don’t like accounting so they avoid it as much as possible. Aside from never really knowing where your business stands financially, you will eventually have to figure it out. And when you finally try, it will be the nightmare you were dreading – we routinely spend months with new clients just trying to sort out their historical finances. If you’re separating your finances (Item #5) and keeping separate accounts (Item #8), then accounting doesn’t have to be difficult. Sign up for some of the free online services to make your life easier. Some websites that I recommend are Outright (which is designed with businesses in mind and can even sort expenditures by tax line) and Mint (which is geared to individuals but the importing and classifying features are great).  And if your business is large enough, then consider hiring a professional to handle the accounting – a good accountant will not only keep your books in order but they will become a financial partner and trusted advisor helping with many other business matters.

Image via Wikipedia

11. Not paying your taxes - I had a tax professor in university who used to say that you always have to pay your business partner… the government! Unfortunately, its true. This may seem simple but there are many layers of taxes that need to be paid: local property taxes, local payroll taxes, withholding taxes, FICA, income tax, etc. Its not uncommon to find businesses operating on a shoestring who decide not to pay some or all of them. This can lead to significant penalties down the road. One popular misconception is that you only have to pay income tax when you file your tax return. In reality, everyone has to pay income taxes throughout the year – employees get taxes withheld from paychecks but businesses need to make quarterly estimated tax payments. If you fail to pay the lesser of 90% of the taxes due or 100% of the prior year taxes by December 31, then you can be assessed penalties. And if you handle your own payroll, not remitting payroll taxes (employee withholding) is a serious crime with penalties to the INDIVIDUALS responsible (yes, even if it was a corporation) of up to 100%. Like credit cards, many businesses fall behind and think they will make it up later. If your business can’t afford to pay its taxes when due, you need to take drastic action now.

I’ve seen these mistakes made countless times by generally smart individuals. Avoiding these mistakes won’t necessarily make you successful but it will create a solid financial foundation for your business. Now, if you do end up making any of these mistakes, just don’t tell people you read our blog!

11 Financial Mistakes that Ruin Entrepreneurs!

By Trishan Arul    October 21, 2009

Image by Observe The Banana via Flickr

This post started out as a Top 5 list, but quickly grew from there as I thought about my experiences over the years. It wasn’t very hard to find 10 mistakes but since everyone does Top 10 lists, I decided to up the ante with 11! That’s 10% more useful, right? This is part of 1 of 2, the remainder will be in my next post. The list is intended to help first time entrepreneurs ensure that their business is on sound financial footing – its in the order that a typical entrepreneur would encounter each problem. If you’ve already made a mistake or two, I’d recommend fixing the problem before it becomes a real issue for your business.

1. 

   Image by Jon Newman via Flickr

   Computing financial viability – Most people don’t even know what this means but its not as complex as it sounds. You need to figure out if your nascent idea can be turned into a viable business. How much will customers pay (Revenue/Customer)? How many will you have (Qty) based on the market size? What do you need to run your business – product manufacturing cost or purchase price, servers, bandwidth, people, advertising, shipping, etc (Cost)? Is (Revenue/Customer * Quantity) – Cost > 0 ? If not, the idea is not financially viable and needs to be reworked. This is a simple “back of the envelope” calculation that everyone should do at the very beginning.

2. Not making a business plan – You may have heard the saying “those who fail to plan, plan to fail”… its true. I’m not saying you need to spend three months creating a 102 page business plan document with footnotes, appendices, and pie charts – though I am a fan of colored graphics . What you should do is think through all the basics – Customer Problem, Target Market, Product/Service Solution, Delivery Method, Employees, etc. On the financial side, that means creating a projection and budget for a few years (typically 3-5) with at least the first year in detail by month. This budget will be valuable to determine if you have enough money to survive, what big costs need to be paid, where you may be able to save money, how much investment you need, and so forth. Without a budget and plan, you’re just hoping that things work out.
3. Being overly optimistic with your budget – For financial matters, its usually better to take the conservative “glass half empty” approach. No one minds being surprised with extra money, but suddenly finding out you don’t have enough money is a bad thing. Assume it will take longer to make each sale, assume customers won’t pay right away, assume vendors will demand payment up front, if you’re doing development assume it will take 50% longer and cost twice as much… you get the idea.  Unexpected things always crop up, planning on everything going perfectly is the same as expecting to receive boxes filled with money – it won’t happen. And when reality is worse than your plan, you may find yourself out of money and time to complete the product, meet payroll, or other critical business needs.
4. Ignoring personal expenses – Most entrepreneurs have to save money and can do so very creatively. But you can’t live rent free holed up in your parents’ basement dining on Kraft Macaroni & Cheese and PBR while working 18 hours a day. Plan to spend a reasonable amount on your living expenses, including going out once in a while. Starting a business is stressful enough without turning yourself into a hermit. After making a business budget, make a personal budget to ensure that you have adequate money for both.
5. 

   Image by marsi via Flickr

   Mixing your personal & business funds – Keep your business money separate from your personal money and keep good records! The pain of sorting it out after the fact will make you wonder why you didn’t take the extra few seconds each time to do it right. You WILL need to sort it out for tax purposes, financial reporting, bringing on other investors, and budgeting purposes.  Its also easy to do, open a separate bank account, use one credit card just for business expenses (even if its in your name), minimize cash transactions, and always ask for a receipt. Its not easier to mix everything up and sort it out later since you’re creating a bigger headache down the road.

Next week I’ll finish the list but you can start fixing, or avoiding, these mistakes right now.

Addressing SaaS Concerns

By Guest    July 9, 2009

This is the second part of a two part post on using SaaS (Software-as-a-Service) applications within your business. In the first part, Guest Author Vikram Prashar looked at the benefits of using SaaS and why it has become so popular. In this post, he will provide information on the potential risks of using this software and ways to mitigate those risks.

How do you make sure YOU are comfortable?

Ultimately, the most important point is for the accounting department- generally the CFO & Controllers to be comfortable that their valuable data is held somewhere secure and that privacy is maintained.  Any organization regardless of size should have an in-house security policy in place that addresses access levels, access control, password policy, etc.  Without an enforceable agreed upon policy the business is vulnerable to internal employees.  This would hold true for manufacturing or engineering applications as well, but financial data tends to draw greater security concerns.  To take this to a level where the CFO will be more comfortable a comprehensive list of items must be addressed regarding SAAS:

• What access controls are in place? Who can make changes to various user groups within the application and are those changes logged?
• What change control processes are in place? When can the systems be brought down for scheduled maintenance or patches? Does it require client approval or is it determined by the service provider?
• Does the service provider conduct regular external 3rd party security audits on their systems? The service provider should have a penetration test conducted by an external firm such as eEYE or Qualys.  These reports should be made accessible to the clients for their systems upon request.
• What kinds of backup and recovery methods exist? Can the service provider ensure that backups are done in manner consistent with company policy? Furthermore, can they restore data deleted either accidently or maliciously?  This MUST be tested before going live.
• If the application connects to your internal user directory (Active Directory), how is the connection? Is it a point to point VPN? How does that affect your access away from the office? Many applications offer single sign on, but that requires access to your network.  It is not unreasonable to ask for security certifications from the provider’s network engineers- CCIE, CCISP, or similar.
• Does the service provider have a Statement on Accounting Standards (SAS-70) certifications? This helps validate that they have adequate operational controls in place.
• Does the service provider give agreeable Service Level Agreements on all their services? It is imperative that clients get a detailed SLA in writing from any service provider but particularly for a financial application.  What are the consequences for clients not being able to access their systems- refunds, credits, ability to exit the contract?
• Just because the application is provided by an external service, it doesn’t mean the organization can ignore all the application specific security issues. They must make sure they have controls and methods to ensure password policy, account lock-outs, detailed log files that record unauthorized access, etc. One item to ask them is whether passwords are sent over the internet encrypted or clear-text.  This will provide a strong indication as to the security focus of the Application Service Provider.  If you get a blank look from them when asking them this question, that would be a major red flag.
• If the application can be accessed via a web browser, who is responsible for updating the security certificate?  Lastly, ask them about the tools used in their application and whether they routinely plug holes for their Java or similar tools.
• The ASP should be willing to provide you with a tour of their data center upon request. It need not be the exact data center where your applications are stored but it will give you a general idea of their operations.

Summary

In conclusion, SAAS can be as secure as any in-house application.  It requires a similar level of due diligence as the security of your office network, in fact more.  If the aforementioned items are covered and the service provider will give references for any of their clients (you select which ones you want from the service provider’s website) you should be able to enjoy the many benefits of SAAS.  Understand that you will be required to maintain a relationship with your service provider to make sure they continue to meet your needs in a secure and auditable manner.  Enlist the services of an experienced IT consultant or ensure that someone from within the organization does a comprehensive check on these and other organizational specific security concerns.  All application providers will swear that they have a secure and reliable infrastructure, but it is ultimately your responsibility to ensure that a sound policy and service level agreement exist and that these can be enforced.

For further information, Vikram Prashar can be contacted at vprashar@prasharconsulting.com.

Is SaaS right for your business?

By Guest    July 2, 2009

SaaS stands for Software-as-a-Service. It is sometimes referred to by the terms “on demand” or “cloud computing” and is gaining in popularity with smaller business. Traditionally, desktop software was installed on a single computer for one person to use while enterprise software was installed on large servers with many users connecting to it via a client application (or increasingly through a browser).  SaaS vendors run their enterprise scale software in large data centers and allow individual companies and users to use the software remotely over the internet. This has become big business – Salesforce.com became the first company of this type to reach over $1B in annual revenue.

In this two part post, Guest Author Vikram Prashar will look into why you might use SaaS applications and how to mitigate the risks. Vik is an IT Consultant who has held VP roles at large organizations managing IT departments.

Why SAAS?

SAAS has steadily been emerging as a very popular method of operation for companies of all sizes.  For larger firms, they like the ease of implementation, ability to easily charge back costs to departments, and low overhead required for these applications.  Smaller firms have benefited from it in many ways too.  The biggest advantage is they get pricing normally offered to large corporations.  Additional benefits include:

• Increasing costs of running a data center
• Server consolidation
• Reduced capital investment
• Reduced energy usage
• Ability to use the latest technology and tools
• Business continuity advantages
• Reduced IT staffing needs
• Ability to run applications from any location

These are all good reasons why more and more companies are relying on SAAS for their ERP needs.  Applications are becoming more of a commodity that can be purchased on demand on a per user per month basis.  As the company grows licenses can be purchased or returned generally with little impact on software contracts.  From an end user point of view, there are really not a lot of differences between a SAAS vendor and an internal IT department.  Generally an application on a server located on the same local network will perform better than on the cloud, but for many applications the differences are not significant enough to outweigh the numerous benefits of hosted applications.

Basic Concerns:

Of course just because the software is essentially outsourced, it doesn’t mean we can ignore all the other components of application service.  Many of the same concerns that apply to in-house applications also apply to SAAS.  These include:

• Security
• Backups & Restores
• Application availability
• SLA’s for uptime and performance
• Application support- patches, software updates, etc.

In Part 2 Vik will give you suggestions on how to mitigate these risks. For further information, you can reach Vikram Prashar at vprashar@prasharconsulting.com.

Seminar for New Entrepreneurs

By Trishan Arul    May 11, 2009

Richard Greenberg of Seedport, Inc. and myself will be hosting a free seminar tomorrow evening for people considering starting their own business. We’ll cover the basics that you need to deal with and will have plenty of time for Q&A. This is an offshoot of our successful sessions at various LaidOffCamp events. If it goes well, we plan on doing these quarterly at various locations around the Bay Area. If you would like to attend or know someone else who would, please RSVP at the Event Webpage at:

http://event.pingg.com/StartupBasics

This first one will be in a conference room so there is a limited amount of space. If you’re interested in attending but can’t make it to this one, feel free to send us an email and we’ll invite you to a future event.