5. Money

5. Money

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The love of money may be the root of all evil, but the lack of money is the root of nearly all failure for small businesses in Michigan. SBDC reports that up to 82% of all small businesses that fail do so because of money problems.

Framing The Question Of Teams

Money is a sharp tool that cuts both ways. Money pays to keep the lights on, funds your team, and supplies the tools you use to carry out every day business. However, money also demands you think about taxes, budgets, and investors.

Fair warning: this module might make your head spin. Remember, there are a lot of people who want to see you succeed, and are willing to work with you for free. Take the time to read this carefully; if you need help, you can learn more here.

Video Outline:

00:30 - Why you need an Legal Entity

01:40 - What is a Legal Entity

02:10 - You Options

02:50 - How to Choose

03:40 - Your Next Steps

1. Startup Costs:

Starting a business isn’t free. Most small businesses don’t turn a profit for the first three years. In fact, even running a business can cost you money. Having a clear idea of how much money you need for the first several phases of your business is crucial to achieving success.

These initial costs are called “startup costs”. You should consider making a list of all of the costs necessary to launch your business to ensure you have the appropriate funds to start out strong.

What physical things will you need?

  • Equipment
  • Furniture/Shelving
  • Technology
  • Inventory
  • Materials

Who are the people you will need to pay?

  • Are there services such as legal or accounting consulting you will need to fund?
  • Is there going to be a marketing element?
  • What insurance do you need?
  • Do you need to purchase inventory to sell?
  • Where are you going to work from? Is there a lease to account for, or buildout costs to consider?

Creating a list of all these startup costs can be a little tricky at first, but is key to starting a business. If you want to learn more about startup costs, check out these articles by QuickBooks and Investopedia.

2. Operational Budget

During our business planning module, we talked about creating an operational budget and linked you to several tools.

If you skipped that section, head back and create the operational budget.

3. Thinking About Funding

Many businesses in Michigan receive outside funding to help them get started. Before you go hunting for money, remember these few things.

What for strings.

There is almost never free money without strings attached. Before accepting money, fully understand all the responsibilities and conditions it comes with.

Think down payments.

If you are looking for a loan, you are expected to demonstrate your willingness to risk your own financial resources for the business before someone else will risk their money. In general, you should have a minimum of 20% down before you go for a business loan.

Minimally viable version.

For almost every business there is a minimally viable version that you can run before spending big bucks investing into the business. This might force to think creatively, but it can be done 95% of the time and it is unlikely you are an exception.

Validate

Ensure you have fully validated your business before you start risking money.

Review Validation Module →

4. Startup Funding Sources In Michigan

If you would like a more extensive list, checkout this article by Commercial Capital or this one by The Balance. You can also call your local chamber of commerce, economic development council, SBDC or SCORE to ask for more help.

  • Bootstrap: Fund the business yourself.
  • Friends and Family: This is the most common source of funding, but can also be very damaging to your close relationships if not handled appropriately.
  • Loan: Money you have to pay back with interest.
  • Grant: Money you normally do not have to pay back as long as you follow some rules. There tends to be very few grants available for main street businesses, but there are a few more for women, veterans and minorities. Learn more from Nerd Wallet.
  • Conventional bank loans
  • Micro Loan Fund - Less than 50k
  • SBA Loans
  • Local economic development loans

5. Compliance

Starting a small business can be full of surprises (and what sometimes even look like traps). It's likely that you are going get caught in a few traps along the way, so ensure you have some extra funding squirreled away to deal with these.

Here are some financial considerations to make:

  • Local Taxes - The most common example would be property taxes. Call your county to ask about these.
  • tate Sales Tax - You have to collect 6% on some goods you sell in Michigan and give this money to the state with a connected report, typically on a quarterly basis. If you don't collect the money from your customers, you have to pay the state directly. If you goof up on the numbers or forget to file a report, you are fined. Ask your accountant or business coach if this is something you need to worry about.
  • Federal Taxes - As a small business, you have to pay Income Tax, Self-Employment Tax, Employment Taxes, and sometimes Excise Taxes, to name a few.
  • Federal Taxes - As a small business you have to pay Income Tax, Self-Employment Tax, Employment Taxes, and sometimes Excise Taxes to name a few.

Consider the fact that you may need to obtain a business license depending on the type of business you wish to establish and the effects Local zoning regulations

It is perfectly normal to feel overwhelmed at this point. Unless you have some special training, you are going to need to work with a free business coach or your accountant on these things. It's their job to figure them out for you.

6. Legal Structures

Money and legal items are often deeply intertwined. This means you need to be thinking about both when talking about money. Here are a few legal and money action items to consider:

  • You are probably going to need to set up a legal entity which we will talk you through in the next module.
  • If you set up a legal entity, your next step is to generate an EIN, which is the social security number for your business.
  • Above all else, please setup up a dedicated business bank checking account. Any money that you spend on business related items should flow through this account and any money you receive should come into this account. Do not spend money from your personal account for business things unless you transfer it to the business account first. Similarly, do not use money in this account on personal things. This simple step will save you so much time and suffering.
  • You need to track where your money goes and where it comes from. There are lots of different tools you can use. Regardless of what tool you work with, work with a professional to set up your chart of accounts.
  • If you are going to be running a storefront or have employees, you are going to need a full size accounting system like QuickBooks or Wave.
  • Your professional team will need to have a money person; probably a Certified Public Accountant (CPA) at the minimum. Before you start your business, please run everything by your money person to ensure you have all your bases covered.

Next Steps

Do Somthing:

  1. Work with a money person.
    • Find an accountant. More info in the Team module.
    • Get free business coaching here
  2. Setup a separate business checking account by visiting your bank or you can read more from INC.
  3. Create a startup budget.
  4. Write an Operational Budget
  5. Create a dedicated accounting system with a chart of accounts.
  6. Write out how much money you need to get started and where you are going to get it from on a piece of paper.
  7. Setup a legal entity. Or wait to watch the next module.
  8. Signup for you EIN at the IRS website.
  9. Work with your professional team to review compliance issues.

Learn More:

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