Calculate Your Net Worth

Do you know how much you’re worth? Most people don’t but as a business owner, your personal net worth may be important. Although your business is probably legally separate from your personal assets, a bank that considers giving you a business loan will likely ask for personal collateral if your business has little real value. Calculating your net worth gives you an accurate picture of how much of your personal worth you’re pledging to your business.

On a more personal level, having a clear picture of how much you’re worth helps with financial planning. Do you have enough saved for retirement; where is your debt and are there assets that could help you pay it down it down faster? What percentage of your net worth is in liquid investments and is it allocated appropriately? Your net worth is more than a single number—it’s an entire report full of important data.

Terms

Before diving into the calculations, you need to know a few terms:

Asset- Any property with real value. Real estate, a car, and jewelry or art are a few examples.

Illiquid Asset- Something that can’t be converted to cash quickly without a substantial loss. Remember the housing crisis that left people underwater on their homes? Homes became an illiquid asset for many.

Liability- Something you owe—a debt.

Liquid Asset- Something easily sold for profit. Stocks might be the best example.

Personal Property- Something you own that is movable—boats, cars, collectibles, and furniture are examples of personal property.

Real Property- Property permanently attached like a home, a barn, or detached garage.

Gather the Information

Probably the toughest part of calculating your net worth is gathering the information. Some of the information might be an estimate. Unless your real property was appraised recently, you won’t know it’s current value without paying an appraiser. In the case of your home, look up recent sales of similar homes in your neighborhood and use those as a guide for estimating your home’s worth. These are called “comps” or comparables in the real estate business.

If you have jewelry, some jewelry stores have appraisers on staff or they can recommend somebody.

For assets like your car or some collectibles, look at online guides that list their value. If you haven’t dug into the value of a 401(k) from a past employer or the cash value of a life insurance policy, set up online accounts with the firms holding these investments or call and request a current statement.

If you’re going to invest time into calculating your net worth, do the legwork to compile the most accurate data. The more you estimate, the more inaccurate your final calculation will be.

The Calculation

Calculating your net worth is simple once you have the information. It’s simply your assets (what you own) minus your liabilities (what you owe). Add everything you own including:

Money in savings or checking accounts
Actual cash
CDs or treasury bills
Annuities, bonds, mutual funds, pensions and other retirement plans, stocks
The cash value of any life insurance policies
The value of real and personal property
Anything else that you own that has sellable value.
Next, add your liabilities

Loans—car, mortgage, home equity, second mortgage, boat
Credit card debt
Medical bills
Student loans
Personal loans
Taxes due
Any other debt or outstanding bills
Subtract your total liabilities from your total assets. Now you know your net worth.

What’s Next?

Once you do the work the first time, the calculation is easier the next time around. If you haven’t already, use a free service like Mint.com to keep many of the numbers up to date in one place. Instead of having to compile the value of each of your investment accounts, credit cards, and everything else, you simply open Mint and copy the numbers into your spreadsheet.

In fact, Mint tracks the estimated value of many of your personal and real assets and gives you your net worth based on the information it has. It won’t be perfect but it will be pretty close.

Tips To Reduce Business Debt

Your business is no different than your home—too much debt can cripple you. Although it might be ideal to run a debt-free business, that’s virtually impossible. The best you can do is to manage and reduce it as much as possible. Here are some ideas.

1. Know Your Numbers. Don’t just be familiar with your numbers—know them. Knowing them means that you know the cost of each of your raw materials, labor, rent or lease costs, and everything else. Do you know what each item costs down to the penny? Do you know the interest rate on each of your debts? If you don’t, you’re probably paying too much for something.

2. Be Smart About Your Ordering. Sometimes you stock a poor-margin item that gets people into your store, but as a general rule, if it’s not getting you to the margins that others in the industry report, it may not be worth your time. Sales that result in ultra-low margins are costing you money. Identify unprofitable sales and eliminate them or look for a lower price from suppliers.

3. Increase your Margins. Speaking of margins, each industry has its own benchmark for what are considered strong margins. Do you know yours? Check with your industry trade group, but once you know it, make adjustments. You can raise your prices, lower your costs, or both. The goal should be to raise margins without raising your overhead expenses. What are others charging for the same item? Can you purchase more at a significantly lower cost without losing the savings to debt service?

4. Watch Your Inventory. Like your refrigerator at home, some items tend to linger. Don’t put off ordering more of your popular inventory but look for the product that isn’t selling and liquidate it.

Inventory is probably where most of your money is tied up. You’re probably paying interest on that stale inventory that everybody forgot about. Don’t let it sit in your store unnoticed. Even if you move it at cost or for a small loss, liquidating is better than keeping the money tied up. Sell it online—eBay or Craigslist, for example.

5. Check Your Interest Rates. Business owners are still enjoying an economic climate of low interest rates. If you have older debt, it’s time to renegotiate the terms.

6. Talk About the Terms. If you’re having trouble making payments, talk to the supplier about extending the terms. You aren’t going to save any money but lower payments may give you the financial room you need until the product sells.

7. Sell and Lease Back. Do you have relatively new fleet vehicles or other larger items? Sometimes it makes sense to sell the items and lease them back. Payments might be lower. To gauge the payoff that comes from this strategy, you will likely need help from a professional crunching the numbers.

8. Ask Your Employees. You were an employee at some point. You know that the people on the front lines will see things that the managers may not. Your employees know where money is being wasted. Ask them. They may be skittish about telling you for fear of retaliation. Explain to them why you’re asking and maybe offer a bonus to anybody who helps the company save money.

9. Be Tougher on Your Customers. Don’t become that business owner that every customer hates but do insist that customers meet their payment terms. You probably won’t go to battle if payment is a few days late but when a couple of weeks go by, it’s time to start calling the customer to ask for payment. If late paying customers are a big problem, you may want to add a late fee clause to agreements you have customers sign before you begin work for them. Check with your local professional advisors to find out if there are any laws that regulate what late fees you can charge. Good business relationships happen when both parties feel respected and valued.

10. Reduce Staff. Nobody likes to reduce staff, but if your business fails, the reduction in staff will be much larger. Sometimes you have to make tough decisions that negatively impact the few to protect the many. Are there employees you could do without? Could you consolidate positions by paying one person more rather than paying benefits for two employees?

11. Speak to a Credit Counselor. Most credit counselors are consumer-based but some work with small businesses. If you’re having trouble negotiating better terms, a credit counselor might be able to help.

12. Hire a Debt Management Company. Debt Management companies come into your business and sniff out where you’re losing money unnecessarily. They may be expensive but worth it in the long-run.

13. Bring on an Investor. If things are really bad, an investor can offer an injection of cash often in exchange for a piece of your company. In general, avoiding this option is best since it involves signing away a portion of your future profits but if times are really tough, it’s worth considering. However, finding investors is difficult. Don’t wait too long to start looking.

Know More About Insurance in the Gig Economy

There are plenty of reasons to become a freelancer. The new “gig economy” is one where people are opting out of being on a company’s payroll. Instead, they’re forming their own company and taking contract jobs. There’s plenty to like about such an arrangement. There’s often more flexibility in your schedule and although you go from a couple of bosses to often many, you get to pick who you work with. Owning your own business can also be financially lucrative as you gain a reputation for dependability and quality work.

But as we’ve been exploring in our gig economy series, there’s a lot to consider before quitting your job and going freelance. We looked at the tax implications—the fact that you no longer have an employer paying a portion of your Medicare and Social Security taxes. That represents a lot of money.

Next, we looked at retirement. You no longer have a 401(k) that your company is paying into on your behalf. Retirement planning is now a solo endeavor so your pricing has to be high enough that you can contribute to a retirement account each month.

There’s one other major piece of freelancing you have to take into account—insurance. When you were an employee for another company, there were insurances in place to protect you and the company you worked for, but as a freelancer, it all falls on you.

First, and most important, is health insurance. Many freelancers get insurance through their spouse who remains on a company’s payroll—something for no other purpose than health insurance. If not, you can get coverage through the health insurance marketplace or through private companies. One word of warning: trying to save money by purchasing only catastrophic coverage isn’t in your best interest, especially if you have a family. Plan on getting a better plan. A 2016 analysis of healthcare costs found that a silver plan for a 40 year old non-smoker making about $30,000 cost $208 per month after the tax credit. But this is only the individual rate. Providing coverage for a family will be significantly higher. Before leaving your job, figure out your insurance costs. Sometimes health insurance alone makes freelancing as your sole source of income impossible until the business grows significantly.

Life Insurance

If you were to pass away, would your family quickly fall into a state of financial emergency? If the answer is yes, you need life insurance. Consider term life rather than universal. There are a lot of opinions out there but many experts agree that cash value life insurance policies aren’t efficient investment vehicles for retirement planning.

Disability Insurance

What happens if you’re temporarily disabled for an extended period or permanently unable to work? Where will your income come from? You might qualify for disability and get a monthly amount from Social Security but that’s not likely to support your family the way you were as a freelancer. It won’t be long until you need to consider disability insurance. Prices vary depending on your age, your health and your habits—whether you smoke, for example, but plan on paying 1% to 3% of your annual salary.

Liability Insurance

There are very few businesses where making a mistake doesn’t expose you to a potential lawsuit. That’s why you need business liability insurance. Contrary to some people’s beliefs, home based businesses often aren’t covered under the owner’s residential home owner’s insurance policy. General liability policies will cover you up to a certain amount for injuries customer might sustain while on your property, copyright violations, or alcohol-related injuries if your business deals with alcohol. Some business might need a commercial policy that ups the maximum payout. Because each business has different needs, it’s hard to put an average price on this type of insurance but a sole proprietor will likely pay between $50 and $100 per month.

Business Auto Insurance

If you’re a sole proprietor who doesn’t run a delivery business or something else that centers around their car, normal auto insurance might be enough but if you have employees or use your vehicle for commercial intent, you will probably need business auto insurance. Business auto insurance works a lot like the auto insurance policy you already know. Talk to an agent. They will tell you if you need business auto insurance and how much.

Industry Specific Insurance

Doctors have malpractice insurance, financial advisers have errors and omissions insurance, and many other businesses have insurances specific to their industry that must be in place. Once you hire employees you will likely need worker’s compensation insurance as well. As you grow and evolve, ask a trusted agent or your industry trade group what’s required.

Start a Business with No Money

You have a dream but no money to put toward the dream. That’s not uncommon among entrepreneurs. Don’t let the lack of money deter you from a business you know other people would find benefit from. Here are a few ideas of how to get your business off the ground with no money.

1. Some are Easier Than Others

If you don’t have any startup capital, service-based businesses are perfect. Product based businesses require you to purchase and then resell. Service-based businesses like consulting, advising, or things like content creation or web design, only need equipment you probably already have.

2. Get Creative with How You Raise Funds

Consider the story of how Outbox Systems started. The founders had a dream of connecting two software applications together but didn’t have the money to build it. Instead, they worked out a deal with another company where they would build a similar product for a discounted rate yet retain the rights to sell the product to others. That’s creative financing. How can you get creative with how you raise money?

3. Sweat Equity is Free

Starting a business is hard. It’s not comfortable. Expect long days, a lot of hard conversations, and plenty of people telling you it won’t work. You don’t have the money to hire people to do tasks like cold calling and door to door sales so you have to take on the task. If you commit to being the person that does just about everything in the beginning, startup costs are much lower.

4. Creative Fundraising – Part 2

Yes, there’s friends and family but today we have crowdfunding, local and national incubators, accelerators, and microfinancing. If you don’t know what these are, do some Googling and learn about them. Look for communities of investors in your area and tell others about your business. There’s plenty of funding that doesn’t involve banks and credit cards.

5. Start Simple

Your dream might include a pretty big business offering a wide variety of products and services but for now, keep it simple. Sell a single product or service. Build your customer base and later branch out into other products and services.

One of the most expensive parts of running a business is acquiring customers. If you gain their trust with one product or service now, selling something else later is much easier.

6. Start as a Hobby

At some point you’ll have to quit your day job but that day isn’t today. Hobby businesses often come from the person’s love of something. Maybe you have a corporate job during the day but you love to bake when you come home. Start with people you know and allow your network to grow from there. Your marketing costs are zero and you still have money coming in from your day job.

7. Work for Somebody Else

Although they may not admit it, most business owners became entrepreneurs thinking they knew more than what they did. In fact, many businesses fail because the person was ill-equipped to build a successful business.

Before you start your own business, work or intern with somebody in the business already. The experience you gain will allow you to start your business knowing what you truly need to spend money on and what you don’t. You’ll also gain insider knowledge of the industry and possibly a healthy customer list from the beginning.

8. Use Free Services

The Internet is full of high quality services you can use for free. Mailchimp is a powerful e-mail marketing platform that’s free for the first 2,000 e-mail addresses. Wufoo allows you to make online forms, and although Facebook and other social media platforms won’t put your ad in front of large amounts of people unless you pay, you can still gain some traction by telling people what you’re doing.

There’s also freelance platforms like Fiverr, Elance, and Upwork that have quality freelancers willing to help with logo and web design, and other service for cheap. You could get a logo made for $5!

9. Barter

Don’t have any money? Offer to barter your services in exchange for somebody else’s. There aren’t many small business owners that aren’t looking for ways to get quality services for little or no cost. What you have, they want, and they’re willing to trade for it.

10. Hustle!

Finally, go into your business endeavor with a hustling mindset. Be ready to do anything legal and ethical to get your business off the ground. Don’t like cold calling? Do it anyway? Not a graphic designer? You can find templates online for just about anything. Don’t want to do any free work? It might be worth it to get your name out there. If you don’t have the money to pay for services, you have to do them or find somebody who can and will do it for free.

Tips To Reduce Attorney Fees for Your Business

Whether you are just starting a business and need to form an entity, have an existing business and are negotiating contracts with third parties or are in the process of selling your business, an attorney will undoubtedly play a critical role. It’s important to keep in mind, however, as vital as an attorney’s advice is in these situations, it doesn’t mean you have to pay an arm and a leg for it. Set forth below are three strategies to minimize attorney fees and stay within your budget:

1. Know What You Need

The first step to ensuring you receive quality legal services for an affordable fee is to know exactly what you need from your lawyer. Prior to seeking out a lawyer, write down any questions you would like to ask and take notes of your situation. Will you need help with specific documentation or just need more general legal advice? The more organized you are before you speak with a lawyer, the better off you’ll be.

2. Negotiate Fixed Fees

Small business owners are particularly sensitive to costs associated with hiring counsel when they have a legal need. For this reason, business owners should negotiate fixed fees for their transactional needs rather than paying an attorney on an hourly basis. This is because with fixed fees both the client and attorney are very clear on what the intended objectives of the engagement are. An experienced attorney will know what needs to be done and how much time they will likely spend on the matter and will be able to (more or less) accurately price it upfront.

Sometimes attorneys are resistant to provide fixed fees on the theory that a matter is too complicated to price it up front, say for instance, when purchasing a business. If you do receive pushback, break down the matter into discrete tasks. You could agree to pay (i) a fixed-fee for initial legal due diligence, (ii) a second fixed-fee for the initial drafting of the purchase and sale agreement, and (iii) another fixed-fee for revisions, negotiations and finalization of the agreement. Structuring attorney fees this way ensures that you have control over your costs and clearly defines the scope and involvement of the attorney throughout the process.

With hourly rates, on the other hand, even the most well intentioned attorneys could be inaccurate with their time-keeping, which may ultimately result in unexpected costs for the client. Take for example an attorney that charges $300 per hour and bills for 10 hours of work, for a total of $3,000 at the end of the engagement. If the attorney billed in increments of 6 minutes (which is customary) and is off by 6 minutes in tracking for each hour spent, that would mean an additional hour’s worth of work (or $300.00 in this example) is charged without any actual value in return. Simply put, inaccurate timekeeping can add up if you are on a budget. That said, if you are unable to negotiate a fixed-fee arrangement, you should request that the fee based on the hourly rate is capped at a set amount so that you at least have a sense of the outside cost.

3. Using Legal Forms

One method small businesses often utilize to save on costs is downloading a legal form and filling in the blanks. This certainly will reduce your legal costs since the business owner is deciding to forgo counsel. While it is true that most forms contain “standard” or “boilerplate” provisions, it is the non-standard provisions that really require an attorney’s attention. Instead of just using a stock document form without any modification, a better approach would be to use the legal form as a starting point and have an attorney tailor the form to your particular needs. This should save you significant fees as the attorney can concentrate on the customization and reworking of deficient provisions in the “standard” form rather than starting from scratch.