ThomasGoodwin.com

This is the introduction to a new article that I’ve written. You can read the full article by clicking on the link below to the Cinventure website.

Donald Trump is known for saying “there’s no such thing as too much exposure.” And certainly no one would disagree with this when you think about the good exposure. But I would venture to guess that no one likes bad press. And the only thing second to bad press is ineffective good press, or better stated… advertising that just doesn’t work.

Read the full article on the Cinventure website. Cinventure.com is a website for entrepreneuers. As a contributing author and blogger on the website, you will find this full article and many others written by myself as well as other entrepreneurs and bloggers like Aaron Forgue and Ryan Walker. You can read all of them free of charge and even subscribe via RSS or email.

As always, I welcome your comments and feedback…

The US Census Bureau is a great resource that most entrepreneurs over look. Aside from all of the excellent demographic information that you can find, the Census also handles industry classification codes, known as NAICS (pronounced nix), which stands for North American Industry Classification System. While it is certainly important to understand the demographics of an area to better target your advertising and marketing, it is equally important to understand who your competitors are, and the Census Bureau can help us there, too.

The NAICS code for a given business will be six digits long. For instance, I am engaged in the sale of real estate. But if you type in Real Estate into the search box on the NAICS website, you get numerous results. There is Lessor of Nonresidential Buildings, code 531120. Since I am a Realtor, I am better classified under Offices of Real Estate Agents and Brokers, code 531210. This is a good time to point out that any one business could fall into multiple class codes. If I was a Realtor that also handled the leasing of non-residential buildings, both codes might apply. You certainly wouldn’t be able to put General Electric into one classification code; rather, you would have to determine a number of codes that apply to its divisions.

One more important thing to note: the classifications can be very broad or very narrow. The more zeros there are at the end of a classification code, the broader the label. For instance, code 445000 is Food & Beverage Stores. Code 445100 is Grocery Stores. Code 445120 is Convenience Stores. This helps identify the industry and any particular niches within the industry.

So where am I going with all of this? If you know the classification that applies to your own business, your products and services, and your industry in general, then you can identify a number of things. You can identify who your greatest threats are with respect to competition. Then there are potential new customers if you’re a Business-to-Business (B2B) entity. You can even see whom your suppliers’ competitors are in your supply chain to help you find the best prices for the things you need to run your business.

So you’re saying to yourself: so I have a few numbers scribbled on a sheet of paper. What do I do with these things?! Well, aside from scouring the Internet and researching individual companies, my best advice is to walk into any public library and head to the reference section. Ask any librarian where you can look up companies by NAICS codes and they should have a directory to assist you. You may have to specify the full name of the NAICS when asking for its directory.

Also, as a brief side note, the NAICS replaced the US Standard Industrial Classification system (known as the SIC). Since the NAICS is relatively newer, you will see references to both codes. Just know they are essentially serving the same purpose, to identify industries and classes of businesses.

This same data can be used by investors when deciding whether to invest in a company or not! Using this data can help compare a company to its peers and the industry as a whole. Is the company considered a leader or a laggard?! Even if they are a leader, is this an industry that you want to be investing in right now?! This data helps find answers to these questions.

As always, I welcome your comments and feedback…

You will notice that I posted this same entry on the Cinventure.com website, where I am a regular guest blogger. CinVenture is a website geared toward entrepreneurs in the Cincinnati, Ohio metropolitan area (but is not restricted or limited to people in the area). Please check out the other interesting articles and links on the CinVenture website… and tell them Thomas Goodwin sent ya!!! Well, better yet… subscribe to the feed or check back often to get the latest news and columns on business start ups in the Cincinnati area! Leave comments and feedback, network, and feel free to email and submit ideas for new articles. We’d love to hear from you on CinVenture AND on ThomasGoodwin.com…. Thanks!

Although I do have a category in my blog for Entrpreneurship here on this website, I am also a columnist for Cinventure.com. If you haven’t seen the Cinventure website and are interested in entrepreneurship, I would encourage you to visit the website and even subscribe to the feed. You can even subscribe by email.

Today I posted a new article to the Cinventure website regarding negotiating skills. Now, most of the articles you read about negotiating focus on how to actually think and act in the negotiation itself. My article takes a step back and examines the things you should do to prepare for the negotiation ahead of time.

In the future I may post my articles on both this website and the Cinventure website (as I have even done in the past for some articles), but it seems like a lot of extra work for the same article. Please take a minute to visit Cinventure.com and read the newest article about preparing for a negotiation.

As always, I welcome your comments and feedback…

Please note: I have posted this same article at Cinventure.com, a website devoted to entrepreneurship in the Greater Cincinnati, Ohio area.

Let’s face it - we entrepreneurs are all pretty optimistic people. I mean, we come up with these business ideas and we’re willing to tweak them until we can get them to work. Fortunately for the optimist there is a reality check that can be used to maintain a comfortable level between it’s a sure thing and that will never fly. It’s called an acid test, and most banks and seasoned investors will want to see one.

The Acid Test, also known as the Quick Ratio, is derived from the Current Ratio. Thus, we need to briefly discuss the Current Ratio first. Anyone that is currently running a business or is in the planning or startup phase will want to be concerned with managing the cash flows of the business.

The Current Ratio does just that. It is simply the ratio of the firm’s current assets divided by the current liabilities. The current assets are those that are the most liquid - namely cash, accounts receivable, and any inventory. Current liabilities are those bills that are due within this year (the current term). If your firm’s current liabilities begin to exceed the current assets, you run the risk of a cash shortage and could soon be facing liquidation just to meet your current obligations. You don’t want to be forced to go deeper into debt just to pay your monthly bills as this only makes it harder for your business to continue to survive.

If you take the inventory out of the Current Ratio you are now left with the Acid Test. This is basically a method used to determine the liquidity of the business, namely how much cash is on hand to pay the monthly bills. The acid test is also an excellent gauge when used along side the Burn Rate, which is simply the amount of money being spent in a given period during the startup phase of the business (or a period of less income than expenses - this could be an off season, such as a homebuilder in Minnesota during the winter).

If you know you’re burning through $3,000 per month and expect break even to be reached during the 7th month of operations, you know you need $18,000 to carry you over till you start to break even and turn an operating profit (6 months times $3,000).

If your Acid Test ratio is less than 1.00 you know your cash is less than your current debt and you are going to face a cash crisis soon unless you can turn things around. The Acid Test could be less than 1.00 because sales were not as high as expected (thus not as much cash in hand and you are holding more inventory - which as you know we do not include inventory in the Acid Test) or it could be that your business is taking on too much debt given the amount of money it’s bringing in (e.g. you owe $10,000 each month and only bring in $1,000 in sales). We don’t include the inventory in the Acid Test because, well to be quite frank, you’ve obviously not sold it yet and if your company is struggling it could be that no one wants the product! When a company has to be liquidated, it seems inventory is always sold pennies on the dollar. This is the reality check part of the Acid Test.

An Acid Test of 1.00 means your cash and debt levels are equal. Please don’t think that equal means optimal!!! The higher the ratio the better. What if sales dropped off and you start burning through more cash?! The ratio would quickly slip below 1.00.

One final note about Acid Tests, Current Ratios, and Burn Rates: these numbers are only representative of what is going on in the business today. I would be much less concerned about a startup with an Acid Test ratio of 0.80 that just landed a huge contract with a Fortune 500 company than another entity that has an Acid Test ratio of 1.20 and is in the business of making typewriters, payphones, or door-to-door sales of encyclopedias. I’m sure you all understand why that is. If your business and its industry has a bright future, it’s understandable that you are taking on additional debt now to get your operations up and running.

To sum it up: if you have an Acid Test ratio less than 1.00 your Burn Rate will be accelerating and you will see a more rapid depletion of cash in your business in the near future. An Acid Test ratio greater than 1.00 will generally indicate more cash coming into your business (this could be from increasing sales and/or a reduction of current liabilities) and is a rough indication of growth or growth potential.

As always, I welcome your comments and feedback…

Sure it’s not easy getting an idea from the drawing board to the shipping dock. And this is where successful entrepreneurs set themselves apart from those who are just dreamers. So when you come up with a great idea but lack the resources to launch the product or service, what do you do? Well, without tacking on that second or third mortgage onto the house or before you tell your children to kiss the thought of college goodbye, consider some thoughts on what I like to call economic resource rationing.

Here are five ways to help conserve cash during the start up phase. Each method is discussed in more detail below the list.

1. Scale it down.
2. Add non-cash equity.
3. Ask suppliers for more favorable terms.
4. Consider generic instead of name brand and shop around.
5. Invite enthusiastic and early suppliers and customers to become investors/partners.

1. Scale it down. Instead of manufacturing 10,000 wigits in the first year could you get the business up and running by making 5,000 of them. During this initial launch you could also be seeking out additional investors and demonstrating your new product to a select few customers.

2. Add non-cash equity. This option is great when you’re planning to go to the bank to ask for a loan, especially when you’re going to be offering an intangible product… namely some type of service. In a service company (like a law firm, doctor’s office, etc.) you won’t have a tangible product for the bank to repossess if you default on your loan payments.

Consider this: most people own a personal computer, some furniture, office supplies, a car, cell phones, printers, art work, digital camera, general purpose tools or tools of a certain trade, and so forth. While banks won’t want to see a list of every item you own (the shirt off your back so to speak), if you are funding the business with all of the necessary office equipment and tools you’ll need the bank understands you won’t be rushing out to spend the bank’s money on furniture and computers at Office Depot. Use what you already have at home, list it as a business asset when you go to apply for a loan and save your new start up the precious little cash the bank will require you to contribute to the loan in order for it to be approved.

3. Ask suppliers for more favorable terms. There’s a couple of old mottos: “it never hurts to ask” and “the worst they can say is no“. This could not be more true than in dealing with those suppliers for your business. Remember, YOU are their customer. If you’re starting out and don’t have much cash, ask for more time to pay.

A lot of companies want payment 2/10 net 30, meaning you get a 2% discount for paying in the first 10 days and if you don’t pay in the first 10 days the full amount is due within 30 days. Other companies, especially larger suppliers, may try to push their own credit program on you - for instance if you go to any of the big box stores or office supply stores they will want you to sign up for a business account or store credit card.

Let them know right up front when you order that you are a new business and you need to stretch your dollar as far as possible. Ask if it’s possible to pay over 60 days instead of 30. If they balk at that suggest 45 days. Always start with the higher number. Let them know that within the year you hope to be taking advantage of any discounts for paying early (once your venture starts bringing in revenues as opposed to burning through cash at the start).

4. Consider generic instead of name brand and shop around. By this we don’t simply mean buying the store brand, single-ply TP for the office or the refurbished ink cartridges. When building your wigit, is there a part or component that could be made cheaper by someone else and added to the final product, or can a piece be substituted for another (making them interchangable and therefore reusable). The easier it is to swap parts, replace parts, and interchange them, the easier it will be to make your product cheaper and at a lower cost to you.

If you are offering a service rather than a product, this means buying the store brand pens that dry up faster… no, just kidding, you can still shop around for lower prices on things you use to bring your service to market or that add value to your service. These value added features will of course depend upon your service or possibly a particular customer’s needs.

5. Invite enthusiastic and early suppliers and customers to become investors or partners. You will find out early on that there is no one who wants you to succeed more than your suppliers. They like for their customers to grow as that helps them grow in return. If a particular supplier is eager to help you get up and running, and to sell you more supplies, perhaps this supplier would be willing to take an equity stake to help get your venture up and running.

It could be as easy as providing a set amount of supplies for free, giving you a discount, an extended amount of time to pay, or could be actually taking an equity stake in return for some capital. Likewise some customers early on may like your product so much that they want to ensure it will be there to meet their needs down the road. These customers have a vested interest in seeing your business becoming successful and sustained. At the very least these early suppliers and customers represent a good resource that can help your business grow. These groups also represent excellent sources for advisory panels, board of directors positions, and by making them more involved in your business will help forge more loyalty and drive growth. If you go to a bank looking for a loan it will also look better in the bank’s eyes that you take such an interest in your customers and suppliers and value their feedback and input.

There are many more ways to help get your business up and running without having a truck load of money to get started. This article is meant to stimulate your thoughts on what you can do in your own unique situation to think outside the box with regard to funding your venture. Please feel free to share any alternatives to cash investment that you think might work or even those that you have tried that don’t work and why they didn’t work.

As always, I appreciate your comments and feedback…

If you are like many entrepreneurs you have a great idea but are struggling to get your new venture started. Of the many decisions that you need to make - from marketing your product or service, handling logistics, to managing your cash flow, etc. one of the most important decisions will be deciding what form of business entity you will operate.

There are several to choose from:
Sole Proprietor
Partnership
Joint Venture (for combining two or more existing businesses in a given project)
C-Corporation
Limited Liability Corporation
S-Corporation

Since most people are familiar with the more basic sole proprietorship and partnership models, we will skip those and examine the pros and cons of the various types of corporations. We are also snubbing joint ventures since those are mostly done in a specific project setting between multiple companies.

The C-Corporation will be your basic company that maintains its own financial statements and can choose to reinvest earnings or distribute them as it sees fit. The income or losses will be reported on the company’s own income tax filing and any dividends will be taxed to the individual shareholder.

Since many start-ups are smaller in nature it makes sense that an entrepreneur would not want to pay income tax as a C-corp and then again as an individual. This brings us to our next two forms of incorporation:

The Limited Liability Corporation, or LLC, passes earnings on to the shareholders’ income tax return (so it is not taxed at both the individual level and the corporation level). However, if you are the SOLE owner of an LLC you will be taxed as if it’s a sole proprietorship. You may still have some of the limited liability protection that an LLC provides; for instance your personal assets may be shielded in the event the business venture goes bust.

However, most lenders and creditors are wise to the fact that a one-person LLC is really just a sole proprietorship that’s incorporated for liability purposes. Therefore, the creditors will want you to personally guarantee the repayment of any loan, usually by making you personally responsible for the debt if the business goes bust. This makes sense when you’re the only person owning/running the organization as you ultimately affect the degree of success that your business achieves.

Another form of business that you may consider, especially if you’re flying solo and were thinking about filing the LLC method, is to form an S-corporation. The “S-Corp” is purely a tax maneuver with the IRS. You file the C-corp articles of incorporation the state of your choosing. You then submit the Form 2553 with the IRS and select S-Corporation. This form of business venture allows the income to pass through to your personal income tax so once again, like the LLC, it is not taxed twice (once as a corporation and once as an individual taxpayer). It’s important to note that you need to file this form within 75 days of filing your articles of incorporation, otherwise you have to wait until the next year (by March 15th if your new company operates on a calendar year) to change your tax status. You would operate as a C-corp in the meantime.

The S-corp is more limited in use than the LLC or C-Corp. An S-corp may not have more than a handful of owners… I read in one place 75 owners and in another place 35 owners. I need to seek clarification on this part. Regardless which number it is, or even if it’s neither of those numbers, that is still a limited number of shareholders allowed. Also, you cannot have more than 25% of your company’s gross receipts as passive earnings, i.e. rental property/real estate that you are not actively managing the business. If you’re a landlord but spend more of your time doing other things, it’s probably better to file as an LLC. An LLCs stock can also be held by other entities such as other companies (or even parent companies) whereas an S-corp can only be held by individuals who are U.S. citizens or permanent residents.

Wow, it really sounds like I am touting the LLC over the S-corp. Well, that’s not necessarily true. It depends on your individual situation: how many owners you have, how many of the owners are actively involved in the business, how the ownership and profits are to be split up, and so forth. A drawback to the LLC in this respect is that members (owners of LLCs are referred to as members) would have to show a gain made by the LLC regardless whether or not that gain was distributed to them by the LLC or the LLC reinvested those earnings into the company (gains not distributed are referred to as “phantom income” because it was never received). If the company reinvested earnings over multiple periods, this could have a compounding tax effect (added taxes without realized gains) by the various members. One way around the phantom income problem in an LLC is what’s known as “gross-up” clauses to be added to the LLC’s operating agreement. These clauses simply state that the LLC will reimburse the shareholders for tax incurred on income that they did not receive.

As you can tell, the water is getting kind of muddy, but I hope when you analyze your own situation you can pick out the pros and cons of the various forms of incorporation and choose one that fits you best! This article is not meant to be considered legal advice, tax advice, or in anyway represent a recommendation to set up your business venture in one particular fashion over another. Since the laws vary by state and the tax code changes yearly, it is highly recommended that you seek legal counsel and the advice of a CPA, accountant, or tax attorney prior to starting a new business venture.

As always, I welcome your comments and feedback

A sure sign that we might be heading back toward another dotcom bust… my dog has his own website now. He just started it so let’s try to be encouraging and supportive. Please take a moment to hop on over to GarbanzoTheDog.com. I know it doesn’t look like much when you click around but keep in mind that he doesn’t have thumbs so it’s kind of hard for him to do a lot of this stuff.

Or if you’re more interested in making the Internet work for your small business take a moment to look at the recently updated Solo Signal website. It features a good explanation of how to structure your links instead of simply typing “Click Here“. It’s worth a read.

Ok, ok, so this blog entry was mostly shameless self-promotion. But I will be taking a short break from blogging due to the July 4th holiday. I hope you all have a great holiday and I look forward to reading your emails and comments when I get back.

As always, I appreciate the feedback!

A blog on entrepreneurship AND insurance all at the same time?! You probably never thought it would (or should) happen… but I am posting this in hopes that it helps those of you out there that are currently in the early phases of starting your own business.

Much like you would insure your home and your car, you need insurance if you are going to operate a business, too! If your business uses a car you will most likely need a commercial auto policy. If you are responsible for insuring the building that your business occupies you will need property coverage. Regardless whether you operate your business out of your garage or in the penthouse of a tall office tower you will need some form of general liability insurance.

There are many types of exposures that you will want to consider insuring your business against. Many of these are things that you might not have thought of prior to owning your own business; like various types of crime coverage for instance. Unlike auto or property insurance that you are already familiar with on your personal insurance policies, crime policies are unique to businesses. Same with workers compensation insurance. Some of these insurance coverages you will be required by statute to carry, such as workers compensation coverage if you have employees that are not in one of the five monopolistic states. Many of these various business insurance coverages are combined into packages.

Below is a link to a document that I wrote in 2006 for a group of entrepreneurs that I had the opportunity to give a presentation to in Cincinnati, Ohio. This document hits briefly on several types of insurance. If you have questions or need clarification about anything you read in the document, please don’t hesitate to contact me.

More importantly, discuss your business venture with a licensed insurance agent that you trust, and then get a second opinion from another agent just to make sure you’re not overlooking anything or that you’re not being taken advantage of in any way. I have yet to have someone come up to me and say, “man, I wish I never had that second opinion” but I have certainly heard people say just the opposite, “if only I had gotten a second opinion!”

Protecting Your Business: Commercial Insurance - A Brief Introduction

As always, I welcome your comments and feedback…

So you’re going into business (or you’ve gone into business) and like most small businesses you have a great deal of your personal wealth tied up in the success of your endeavor. Many entrepreneurs go into business with a great idea and a way to get the business up and running, but they often overlook details that are not related to their product or service or that don’t need to be taken care of in order to get the business started.

A good business plan will help serve as a road map for entrepreneurs when they face growing pains or when they decide it’s time to close up shop (i.e. an exit strategy). But what happens when two or more owners of a small business don’t agree on something? Or what happens when one person has more control than the other owner and acts in a manner that is good for his or her own personal benefit but to the detriment of the other owner or even the organization as a whole?!

When one owner that has more control acts in manner of self-interest to the detriment of the other owner or the entire organization, the concept of minority oppression comes into play. Minority oppression in a closely-held corporation is a topic that I have done some research on during my time at Xavier University while working on my MBA. I have found some interesting articles from law reviews and professional journals on the topic and have compiled them into a short (8 page + cover page) report on the topic. The body of law is primarily built around the Model Business Corporation Act (MBCA) passed by Congress, with various states passing their own laws that take the MBCA even farther. Depending on what state the closely-held corporation is domiciled in will determine the exact remedies to minority shareholder oppression and consequences for director/manager malfeasance.

One area where the statute is not exactly clear, especially from state to state, is in defining exactly what constitutes “oppressive behavior” or “oppression” in general. The various state legislatures have left it up to the courts to decide this on a case-by-case basis. Thus, it is still in the best interest of each organization to settle these matters between the owners without becoming litigious. Being litigious serves no one well except the attorneys that get to represent each side.

The following link is to my entire report that was compiled in November 2006. The file is in Microsoft Word, please right-click on the link and select save as to download this to your desktop for better viewing. In the future I will try to upload more of these documents in Adobe format for easier downloading and viewing. I apologize for any inconvenience. If you have trouble downloading or viewing this document, please email me at allthingsfinancial@yahoo.com

Here is the full report with explanation of the law, recourse or remedy, and citations and references for further reading or research that you might want to do:

Minority Shareholder’s Rights in a Closely Held Corporation

In the event you ever face such a situation, whether you are being accused of director malfeasance or oppression against another owner or feel that you have been oppressed yourself, it is HIGHLY recommended that you seek legal counsel. This blog entry in no way is to be considered an offering of legal advice. Your own unique situation should be carefully reviewed and considered by a licensed, practicing attorney in your respective state. This is merely a review of the topic from an academic, historical research viewpoint.

As always, your feedback is welcome…