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First lesson

Beginning a new business

Establishing the resources support

Step one is to recognize that less than 1% of successful businesses started without a basic cash investment in its beginning. It is called start up funds. The more your business has to hold it over hard times and plans that do not pan out, the better. This said, hopefully you have that start funds and are ready to deploy them. That does not mean that your business plan does not involve using funds developed in the course of the plan to help the business grow. Far from it. However, some funds must be set aside to take care of the basic issues, some for contingencies, base expenses, and then planning categories. Let us review these categories.

• Cost of goods
• Cost of goods - solid.
• First and foremost, realize that you and your living expenses are a cost of goods for your business plans. If you need $24,000 per year to pay your house payment, utilities, groceries, and otherwise just live, you should schedule a $2,000 per month payment to yourself to cover these. Since this is your Maslow model basic essential need (we will discuss this more later), if you do not have this available from existing resources (savings, etc.) you will drive your business into the ground as it is almost impossible to make good decisions about business growth when your family's survival is at risk. How you make this payment, 1099 for consultant services or salary in C corporation, or owner draw in C schedule, is irrelevant to the planning process. The key is that this payment must be made each month to keep "your home fires going" and avoid clouding your judgment. The standard recommendation is that you have three years of this type of money on reserve to the company. In your tax forms, in most cases, this can be declared as a cost of goods for the company, and income on your individual. If you are not running a corporation, it is simply income to you.
• Cost of goods - operational.
  • Labor.
    Most businesses need added effort for every contract you obtain or contract effort you work on. Plus, if your business requires other people, materials, or features, per contract or contract effort, you have an operational cost of goods.
    
    A clear example of this is an effort you bring for a client that involves a person that is not yourself. In this case, you should have a negotiated a price per hour, incident, or other measurement parameter for that consultant. We recommend 1099 agreements for startup businesses, but this may not be the correct direction, which will be discussed in future lesson plans.
    
    If you hire someone to provide services, irrespective of if you actually sell them, then you are an employer and the cost of goods include their salary, benefits, operational (taxes, UI, WC, etc) and other fixed cost items.
    
    A far less clear example to many is the cost of yourself, a spouse, or child in the effort. Often, business owners assess this cost at a different value (based upon the overall existing benefits due to the benefits that close business member enjoys). For example, I may have selected that my child receives $8 per hour because of their age and closeness to the family unit, which is taxable to them and that they are a 1099 consultant (no UI or other benefits- which require special considerations beyond the scope of this discussion). Your spouse may have received a $500 per incident payment based upon their need to be involved, and need to compensate expenses based upon their inability to meet those expenses due to their business acts per incident. You may have decided that you want to be paid a "comfort fee" of $2,000 per incident so that you can generate enjoyment for you family and life beyond the survival rate discussed in the costs of goods - solid, discussed above.
    
  • Other.
    Few businesses have strictly labor in cost of goods. For example, if you are running a training program, the course books, student supplies, and other items are a cost of goods. However, the cost is often related to the number of students, contracts, etc. involved. For example, if you have a cost per student of $60 in materials to provided the training, this is a cost of goods to provide the training. It is operational as that you do not generate a cost unless you provide the service material. It does not mater if you actually provide the service as if you expect to provide the materials and generate the materials, you have encumbered the cost.
    
• Cost of goods - optional
  

  This is exactly the same as operational but is related to the planning effort. For example, if you are planning to provide 5 optional services (expected to be offered but not actually accepted), you generate an optional cost of goods, based upon your choice to accept the contracts involved. Acceptance can be based upon past history, planned offering, etc. However, should they occur, the cost of goods will be acquired. Thus if it cost you $5,000 per contract incident to provide the service, and you expect 10 per year to occur, your optional cost of goods is $50,000, which will not occur unless you get those contracts. Optional cost of goods usually become operational as a year progresses and business is acquired. If it does not happen, problem indicators are generated as business plans are not being acquired.

• Expenses
  • Expenses - solid.
    • Some expenses of doing business are required irrespective of whether you generate income or not. Examples are a lease for a commercial location, copier maintence contract, loan payment, advertising, etc.
  • Expenses - operational
    • Each contract you accept will incur an expense. Once you accept it, an operational expense is incured.
  • Expenses - optional
    • Each contract you expect to accept will generate an expense to support it that cannot be associated as a cost of goods sold. In planning, this is an optional expense. At the end of a year, it becomes an operational expense.
• Investments
  • Investment - solid,
    • This does not exist, as once you make the investment, it becomes a solid expense, cost of goods, or other feature.
  • Investment - operational
    • Again this does not exist as as once you make the investment, it becomes a solid expense, cost of goods, or other feature.
  • Investment - optional
    • From a planning stand point, this is one of the key issues. In any business, you obtain income that you have the choice of investing, or taking it as a profit item. If you take it as a profit item (next category), it is taxable and you have converted it to personal use. If you invest it in the business, you selected to ivest it in the business and it is a business expense. This indicator is a key growth category, from which money are moved into business growth, or owner profits.

Real examples