Making Sense of Money Matters - business planning and entrepreneurship

Black Enterprise, Feb, 2000 by Tonia Shakespeare, Gerda Gallop-Goodman

TAKE FINANCIAL CONTROL OF YOUR ENTERPRISE

IN 1997, LENWARD TERRY SMITH'S COMPANY, LIFESAVER

Training Institute, took in more than $250,000 in revenue. But by 1998, income had plummeted. The once-lucrative company that designed medical response systems for corporations, schools and hospitals saw its year-end figures drop to less than $100,000.

"I became overly dependent on a $250,000 contract I had with a private hospital," says Smith of his six-year-old, Brooklyn, New York-based business. "On top of that, I reinvested the money in capital expenses, which I used for expansion. If I had put that money into an account, I would have had a buffer. I virtually expanded my company out of business."

When the hospital opted out of a contract renewal, Smith, 49, was forced to reduce his staff by 60% and give up a coveted office location because he failed to adequately plan his company's cash flow. Today, Smith works from home and generates $60,000 in revenues. He also plans to turn over nonprofit aspects of his business, such as EMT training, to a nonprofit volunteer ambulance corporation.

Smith is one of an estimated 500,000 black self-employed business owners who grapple every day with financial issues ranging from cash flow to insurance to payroll to taxes.

In the first installment of our four-part Business Management series, we explored how you make the transition from being an employee to becoming self-employed. In this, the second article of the series, we provide strategies for managing financial matters, avoiding financial pitfalls and dealing with tax issues.

FORMULATE FINANCIAL PROJECTIONS

Topping the list of pitfalls that affect small business owners such as Smith is undercapitalization.

"Oftentimes, small business owners think a year ahead: annual payroll, annual expenses and projected profits," says Allen Lipsky, first senior vice president at Valley National Bank, a leading SBA lender in North Plainfield, New Jersey. "But in actuality their cash outlay has not been planned well enough, and whatever cushion is planned gets used up."

To minimize the drain on working capital, Lipsky recommends identifying all the basic start-up costs associated with operating your business: inventory, equipment, office supplies and furniture, lease payments, transportation, payroll, utilities and phone, business insurance, advertising, business licenses or permits and legal or consulting fees.

If you're just starting out, you'll be better able to identify operating expenses, accurately estimate the cost of start-up necessities and seek outside capital if you research your market and write a business plan first (see "Flying Solo," January 2000).

Working capital (the amount of money needed to operate your business from day to day) should be projected for the first 90 days to protect against any unplanned events, such as slow sales or unexpected expenses, to keep your venture from stopping before it gets started. To assess your operating costs, you should put together a budget based on start-up expenses; project your sales for the first 90 days (factor in competitors' pricing, your marketing strategies and geographic location); and review the financial statements and projections in your business plan.

After working at IBM for 20 years, during which time she advanced from technical support person to sales rep, Cheryl Curry, 45, wanted to be sure that she was giving up her career for greater rewards before launching Kaleidoscope Learning Center, a preschool in South Plainfield, New Jersey, in April 1998. So, Curry prepared a business plan.

"I went to the library. I got Census Bureau data and demographic data from surrounding towns," says Curry. "I talked to people who had early childhood learning centers. I paid for a business profile on day care centers from Dun & Bradstreet."

After having her plan reviewed by several professionals, Curry contacted the Small Business Administration (SBA) and the Service Corps of Retired Executives (SCORE) for additional business advice.

Armed with $100,000 in savings, Curry approached Valley National Bank and was approved for a $250,000 loan. Curry used the funds to renovate her leased space and to purchase equipment for the school.

It seemed Curry had all her bases covered, but like many people starting a business for the first time, Curry was overly optimistic. Her projections for her first month in business called for 33 children to be enrolled in her school. When her doors opened in September 1998, she had just three.

"I had to dig much deeper in my pockets to find more than lint," says Curry. "Because we had only three kids, my husband and I were committed to making a go of it for a year. We had to borrow [about $30,000] from friends and family, even though when we started, we thought our contributions and bank financing would take care of our operating expenses. What kept us going is that we were steadily getting children, but I needed 30 full-time to meet my monthly expenses. It wasn't until September 1999 that I had enough tuition to cover these expenses."