FINANCIAL PLANNING FOR
YOUR MICROENTERPRISE
© 2003 National Endowment for Financial Education. All rights reserved.
Note: The content of this material is believed to be current as of this printing, but, over time,
legislative and regulatory changes, as well as new developments, may date this material.
This booklet is meant to provide general ?nancial information; it is not meant to substitute for,
or to supersede, professional or legal advice.
FINANCIAL PLANNING FOR
YOUR MICROENTERPRISE
TABLE OF CONTENTS
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association
Introduction..........................................................................................i
Common Types of Microenterprises ...........................................................................................iii
Are You Ready to Start a Business? ...........................................................................................iii
Are You Ready to Expand a Business? .......................................................................................iii
Where Do You Go for Help? ......................................................................................................iii
CHAPTER 1
Setting Your Goals...............................................................................1
Making a Dream a Reality ...........................................................................................................3
Dreams Do Come True ................................................................................................................4
CHAPTER 2
Where Has My Money Gone?...............................................................7
Step 1: Listing Your Income .........................................................................................................8
Step 2: Listing Your Personal Expenses .......................................................................................8
Step 3: Comparing Income and Expenses .................................................................................11
Step 4: Reviewing How You Did and Making Changes ........................................................11
Final Thoughts ............................................................................................................................12
CHAPTER 3
Building Your Financial Reserves and Assets .....................................17
Saving for Success ........................................................................................................................17
Tips for Finding ‘Hidden’ Cash for Savings .............................................................................18
Where Do I Put My Money? .....................................................................................................18
CHAPTER 4
The Debt Trap...................................................................................23
Credit Cards: Use with Caution .................................................................................................23
Tips for Using Credit Cards Wisely ...........................................................................................24
Are You Deep in Debt? ...............................................................................................................24
How to Get Out of Debt ............................................................................................................24
Is Bankruptcy a Good Choice? ..................................................................................................25
Getting a Credit Report ..............................................................................................................26
Repairing a Credit History .........................................................................................................28
for enterprise opportunity
CHAPTER 5
Writing a Business Plan.....................................................................31
Take Your First Step ..................................................................................................................31
Describe Your Business ..............................................................................................................32
Analyze the Market .....................................................................................................................32
Reach Out to Customers .............................................................................................................33
Research Marks the Spot .............................................................................................................34
Projecting Sales: An Example ....................................................................................................35
Organize the Day-to-Day Operations ........................................................................................36
Set a Course with a Business Plan .............................................................................................36
CHAPTER 6
Key Financial Skills for Microentrepreneurs.......................................39
Managing Your Cash Flow ........................................................................................................39
Figuring a Break-Even Point ....................................................................................................40
An Example of Break-Even Analysis .........................................................................................41
Calculating an Owner’s Draw ...................................................................................................43
Keeping Records ..........................................................................................................................43
Keeping a Balance Sheet ............................................................................................................44
Exit Strategies ..............................................................................................................................44
Do You Need a Computer? ........................................................................................................45
CHAPTER 7
Do I Need Financing? ........................................................................47
Do I Truly Need Financing? ....................................................................................................47
Are There Other Resources I Can Use? ...................................................................................47
Can I Use a Credit Card..............................................................................................................47
Can I Do it Myself? ...................................................................................................................48
Where to Get Financing .............................................................................................................48
The Language of Lending ..........................................................................................................49
The Money Struggle ....................................................................................................................50
CHAPTER 8
Insurance and Taxes .........................................................................53
Insuring Your Business ................................................................................................................53
Cutting Through Red Tape ........................................................................................................54
CHAPTER 9
Networking and Getting Help.............................................................57
Basting a Bright Future ..............................................................................................................57
Smoothing a Path to Success ......................................................................................................59
Conclusion .......................................................................................61
Recommended Resources ................................................................61
Acknowledgments ............................................................................61
You’ve probably all heard stories of corporate
giants’ humble beginnings, such as computer
giant Hewlett-Packard’s start
in a Silicon Valley garage,
or Starbucks’ birth with
a single coffee shop
in Seattle.
INTRODUCTION
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i
Owning a business is one of the most cherished
American dreams. All businesses, whether
they’re ranked in the Fortune 500 or making
only $500 a month, start just as your business has
or will: with ideas and energy.
You’ve probably all heard stories of
corporate giants’ humble beginnings, such
as computer giant Hewlett-Packard’s start in a
Silicon Valley garage, or Starbucks’ birth with a
single coffee shop in Seattle. Maybe you dream
of your own small business growing into an
economic powerhouse. Or perhaps you’d be
happy to run a small but successful business.
Either way, you
will need an under-
standing of ?nancial
matters to help you
as you work.
This booklet
will help you begin
to organize both
your personal and
business ?nances
through goal setting,
budgeting, and
acquiring basic
?nancial skills.
While good business
owners always
separate their personal ?nances from their
business ?nances, it’s important to apply good
skills to both sides of your ?nancial life.
Your personal
?nances can have a
big impact on your
business ?nances,
and vice versa. If
you’re just starting
out or expanding a
hobby or sideline business, the only ?nancial
track record you can show to prospective lenders
or investors is your personal one. If your
personal ?nances are in poor shape, you’ll stand
less of a chance of getting business ?nancing.
Your personal ?nancial problems also may
drain money from your business. Even if your
personal ?nances are in good shape, you need
a ?rm grasp of how much you spend, and for
what, if you want to know how much your
business must make to support you.
This booklet will help you identify key
?nancial skills you should develop in order
to succeed personally and professionally,
and how you can ?nd help from your
local Microenterprise Development (MED)
organization and other support groups as
you learn these skills and build your business.
One thing you should know as you pursue
your business dream: You’re not alone. A
study conducted in 1999 and published by
the ACCION Network in 2002 reported
approximately 13 million microentrepreneurs
in the United States. Typically, a microenterprise
is a sole proprietorship, partnership or family
Your personal
?nances can
have a big
impact on your
business
?nances, and
vice versa.
er i can dr eam
business that has fewer than ?ve employees and
capital needs of less than $35,000. According to
the U.S. Small Business Administration (SBA),
businesses are still considered small if they have
up to 500 employees, so microenterprises are
super-small businesses. Often, a microenterprise
is a one-person operation or the owner and a
couple of family members.
Microentrepreneurs come from all walks
of life. They start their businesses for many
different reasons. Some of them want to
supplement their income from low-paying jobs
or to replace income from jobs they have lost.
Others ?nd the ?exibility of owning a business
helps them balance family responsibilities with
work. Still others don’t have the training or
talent to ?nd professional jobs. For some,
microentrepreneurship is the avenue to
realizing dreams, expanding talents and
avoiding dead-end, minimum-wage employ-
ment. Do any of these motivations or situations
sound familiar to you? They may strike a
chord with you—or you may have your own
reasons for starting your microenterprise.
Microbusinesses have healthy survival rates.
The Aspen Institute’s Self-Employment
Learning Project tracked more than 400 clients
of Microenterprise Development programs from
1991 to 1997, and found that 49 percent were
still in business at the end of ?ve years. This
compares favorably to the SBA’s ?ndings that
76 percent of small businesses survive two
years and 47 percent
survive four years. You’ll
improve your chances of
success if you improve
your ?nancial skills.
Many resources are
available to help you start
or build your business.
Look ?rst to your local
MED organizations.
MED agencies provide a
variety of services—
although each offers slightly different assistance.
They may help you develop your idea and test
it to see if it’s workable. They may assist as you
write a full-?edged business plan, which will lay
out your strategy for success. They may guide
you as you research your market and develop a
marketing plan. They may even be able to help
you access new markets.
MED organizations also have access to
loans and other ?nancing that entrepreneurs
can’t ?nd elsewhere, and they may offer
matched savings programs. You’ll ?nd most
MED organizations have a wealth of classes,
training, and one-on-one mentoring that will
help you develop your skills and grow your
business. This could include ?nancial literacy
training, and legal or personal counseling.
Even after you launch your business, MED
organizations are there to give technical
assistance to keep you on the path to success.
Many resources
are available to
help you start
or build your
business.
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Common Types of Microenterprises
Some common types of microenterprises are:
• Repair services
• Cleaning services
• Specialty foods
• Child care
• Arts and crafts
• Clothing and textiles
• Computer technology
Are You Ready to Start a Business?
Answer the following questions:
• Do you have a clear idea for a business?
• Do you have experience in your chosen business?
• Are you motivated and determined to develop
this idea?
• Are you realistic about the potential your
idea has for growth and income?
• Are you familiar with basic ?nancial tools
such as bank accounts?
• Are you a good communicator?
• Do you have the self-con?dence to sell yourself
and your idea?
Are You Ready to Expand a Business?
Answer the following questions:
• Are your competitors growing their businesses?
• Do you plan to expand your current line of
business or branch into an associated ?eld?
• Have you examined the ?nancial bene?ts and
risks of expanding?
• Can you show you will gain economies of scale if
you expand? That means expansion allows you to
sell more of your goods or services, resulting in
lower costs per unit and more pro?t.
• Can you get the money, either internally or through
loan sources, to fund expansion?
• Can you keep your customers happy while you go
through “growing pains”?
• Do you have or can you hire the human resources
necessary for expansion?
• Do you have the people skills to direct more
employees and are you willing to turn over partial
control of your bigger business to others?
Where Do You Go for Help?
Microenterprise Development (MED)
organizations should be your ?rst stop as you
look for help in establishing or expanding your
business. Each MED organization is structured
a little differently. Some of them may specialize
in helping certain groups, such as female or
minority entrepreneurs, or in targeting certain
goals, such as the creation of jobs or ?ghting
poverty. Some may help new businesses get on
their feet, others may focus on helping existing
businesses grow, and still others may help both
new and old businesses. Each organization
typically receives funding from foundations,
corporations, and/or tax dollars.
You can ?nd out what kinds of MED
organizations exist in your community by
contacting the Association for Enterprise
Opportunity at www.microenterpriseworks.org.
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1
SETTING YOUR GOALS
Not every “someday” wish
requires money, but many
of them require
some ?nancial
resources.
mon ey r es ou r ce
How many times have you said to yourself,
“Someday…”?
You might have ?nished that sentence with:
• I’ll have a better house.
• I’ll drive a nicer car.
• I’ll get out of debt.
• I’ll be my own boss.
• I’ll have more time to spend with my family.
Not every “someday” wish requires money, but
many of them require some ?nancial resources.
How can you build the ?nancial foundation to
achieve your dreams? You have to work for
your dreams and believe you can achieve them.
It helps, too, if your family
and friends support and
help you.
Goal setting will help
you focus your energies
and move toward dreams
of a brighter, better future
with purpose, vision and
direction. Goal setting
comprises more than
making a simple wish
list. It involves developing
a list of clear goals and
setting a timetable for
reaching them. Some people call this the
SMART system, because you are choosing goals
that are Speci?c, Measurable, Achievable,
Relevant, and Trackable.
In other words, you’re pinpointing
a de?nite goal. A goal that you can measure,
is within your reach, ?ts into your life and
abilities, and can be followed step by step.
You wouldn’t, for instance, choose “climb
Mount Everest” as a goal if your current
exercise consists of walking to the bus stop!
It’s a goal that would be dif?cult to accomplish
without proper training. You wouldn’t pick
“make a lot of money” if you have no ideas to
make money. It’s a goal that’s not speci?c. You
wouldn’t decide to “teach at a university” if
you only have a high school degree. This is a
goal that’s not achievable without
accomplishing some intermediate goals ?rst.
With these guidelines in mind, think about
what you want for yourself and your family. List
speci?c goals, large and small. Then, choose the
appropriate goals for your business or your
personal life.
Choose
goals that
are Speci?c,
Measurable,
Achievable,
Relevant, and
Trackable.
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First, think about short-term goals—those
you can reach in about three months. These
might include saving enough money for the
children’s holiday presents, taking yourself
to the beach for a day, or buying a new cash
register for your business.
Then, consider medium-term goals that can be
reached in three months to about a year. These
might include trading in your car for the pickup
truck you’ve always wanted, learning to sew
your own clothes, or hiring another employee
for your business.
Finally, think about long-term goals that are
more than a year away. Perhaps you’ve always
wanted to go back to school for degrees or
certi?cations, start or expand your business,
or buy a home.
Reaching your goals requires planning.
Estimate the cost of each goal. Calculate how
much money you must set aside each week to
accumulate that amount in the chosen period
(short, medium, or long term).
For example, if you’d like to take your
family out for a special holiday dinner in three
months, and your favorite restaurant will cost
$100 for a family of ?ve, you’d need to save
about $7.75 a week for the next 13 weeks.
Obviously, bigger goals will take more
money and time, but by breaking down your
list step by step, each goal will be much easier
to attain.
These goal-setting skills can be applied to
your business dreams and personal hopes as
well. Paying off loans, increasing pro?ts,
expanding your product line, or adding locations
can be targeted just as
easily as buying a new
car, sending your
children to college,
buying a retirement
home, or remodeling
the kitchen.
In the remaining
chapters, you’ll learn
how to track your
spending, build your
?nancial reserves,
reduce your debt, and
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2
By breaking
down your list
step by step,
each goal will
be much easier
to attain.
master the business skills you need to achieve
your personal and professional goals.
Making a Dream a Reality
For four years in the early 1990s, Fanja
Rakotonirin lived and worked in tiny villages on
the edge of Madagascar’s rain forest, home to the
world’s only lemurs.
In a project funded by the U.S. Agency for
International Development, the Madagascar
native worked with villagers to lessen their
impact on the fragile ecosystem of the nearby
Ranomafana National Park. She helped
villagers start new
businesses including raising ?sh, pigs,
chickens, and honeybees. Rakotonirin grew to
love the people, although they were from
different tribes. “After four years, they
became like my family,” she recalled.
Then Rakotonirin left Madagascar to study
at the Montessori Education Center of the
Rockies in Boulder, Colorado. She tried to stay
in touch with the villagers, and thought all
was well. Upon returning for a visit in 2001,
however, she found the projects she had helped
start had failed. The villagers were desperately
poor and ill, and were turning again to the rain
forest for their livelihoods.
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3
“I cried and told my mom, ‘I just can’t
watch these people die. They are a part of my
life,’” Rakotonirin said. She decided to help the
villagers form a cooperative to make and sell
place mats, baskets, hats, bags, and other items
from raf?a, sisal, jute, and cotton. Rakotonirin
invested in materials and looms for weaving
and created designs for the weavers to use. Her
parents, still living in
Madagascar, helped,
too. She received her
?rst shipment of woven
items in August 2002
and Tropical Items
Madagascar was
in business.
Going from
teaching to business
was a big jump for
Rakotonirin. She got
help through the
MicroBusiness
Development
Corporation (MBD) in
Denver and the Service
Corps of Retired
Executives. She joined a
networking group and a
Boulder women’s business group. She read
everything she could ?nd and did extensive
research on the Internet. The help she received
from the MBD was particularly welcome.
“Without them, I don’t think my business
would exist,” Rakotonirin said.
She sells her items wholesale and
at festivals and craft shows. She keeps her
expenses low by doing her own bookkeeping
and using her husband, Georges Raelisaona, as
her webmaster. Brightly colored and
reasonably priced, the handwoven items have
sold well. Rakotonirin donates 5 percent of her
pro?t to the villages’ health-care programs and
5 percent to education programs.
Rakotonirin found that her village
weavers worked slowly. As interest in her
products has grown, she has had to ?nd
another, more-predictable production source.
She enlisted her family and her husband’s
family, and also is setting up a cooperative
factory, named Naturary (for natural
weaving), in Madagascar’s capital.
Rakotonirin continues to teach. Her
weekends are spent growing the business
and selling at fairs. An article about Tropical
Items in the Boulder newspaper in June 2003
generated a ?ood of calls. She’s optimistic she
will be able to make a difference in the lives
of many of her countrymen.
“Sales are very good,” Rakotonirin said.
“My business is blooming.”
Dreams Do Come True
Synia Gant-Jordan, a cosmetologist in Grand
Rapids, Michigan, wanted to open her own
4
Rakotonirin
donates 5 percent
of her pro?t to
the villages’
health-care
programs and
5 percent
to education
programs.
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hair salon. But with six
children—two of her
own and four she was
foster-parenting—it was
a struggle just to put
food on the table.
Synia worked in a
series of salons for several
years, but never forgot
her dream. In 1997, she
saw a ?yer for Grand
Rapids Opportunities for
Women (GROW), a
microenterprise agency.
She enrolled in a 15-week
class entitled, “Mind Your
Own Business.”
She was very
focused on her idea, and the training helped
her ?gure out step by step how to accomplish
it. She wrote a business plan that outlined
what she wanted to achieve. Several months
after Synia completed the training, her ?ancé,
Johnnie Jordan, found an abandoned building
he was certain would make a perfect home for
her salon. They scraped together the $5,000 in
back taxes to buy it, and did the remodeling
themselves. The Hairnet opened in 1997.
Today, Gant-Jordan’s clientele continues to
grow by word of mouth. She and Jordan, now
married, saved enough money to buy the lot
next to The Hairnet. Gant-Jordan planned to
break ground in the summer of 2003 on an
expansion that will more than double the size
of the salon. The addition will include a third
hairdresser booth, a nail technician booth, an
employee break room, an of?ce, and a play
area for customers’ and the owners’ children.
The success of her business makes Gant-
Jordan feel blessed. To re?ect that, she recently
changed the salon’s name to The Hairnet
with Blessings That Flow.
“We just kind of take it easy. We want
our blessings to ?ow—whatever is God’s will
with our business, home, and lives,” Gant-
Jordan said.
She was very
focused on her
idea, and the
training helped
her ?gure
out step by
step how to
accomplish it.
5
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2
WHERE HAS MY MONEY GONE?
s pen
If you’re like many people, you may not have a
good idea where your money comes from and
where it goes each month. There are times when
you feel pretty well off ?nancially and easily able
to meet your household expenses. Other times,
your empty pockets may baf?e you. Where has
all your money gone? A good money manager
has to be able to track the cash ?ow in and out,
keeping track of both personal and business
accounts. Your personal cash ?ow equals cash
?ow in minus cash ?ow out.
A spending plan can help you get control
and keep control of your money and your cash
?ow. A spending plan is essential to good money
management. It’s
more than a budget,
which focuses only
on monthly bills. It’s
a planning tool you
can use to get a
handle on your
?nances—at home or
in your business.
Examining your
?nances is an
important task. The
average family loses
30 cents out of every
dollar due to poor
spending habits,
according to experts.
In other words, you can give yourself a
30 percent “raise” if you ?nd and stop poor
spending choices. Think of what that amount
of money could do for your personal ?nancial
stability, not to mention your business!
Let’s start by creating a spending plan for
your personal ?nances. Follow these four steps:
1. Identify your income
2. List your expenses
3. Compare income and expenses
4. Review how you did and make changes
A few tips before you start: If you have a
spouse and children, involve them in creating
the spending plan. Strive for accuracy as you
list income and expenses. Collect and use all
the ?nancial information you can ?nd in your
records and ?les.
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7
The average
family loses
30 cents out
of every dollar
due to poor
spending habits,
according to
experts.
di n g
Step 1: Listing Your Income
Review your pay stubs, your bank account
deposits, and other records to ?ll out the above
table. Remember that income doesn’t always
come in monthly allotments. You may have to
multiply or divide in order to ?gure
out what the monthly contribution is from a
particular source. For instance, if you’re paid on
the 15th and 30th each month, you’ll have to
multiply your net pay from a single check by
two. If you receive child support every quarter
(every three months), you’ll have to divide the
amount by three.
Step 2: Listing Your Personal Expenses
It’s usually harder to list where you spend your
money than it is to see where you get it. Some
people ?nd it helpful to keep a spending diary
before taking on this part of a spending plan.
To create a diary, take a piece of paper and
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8
Source of Income Amount Each Month
Your wages/salary (after taxes)
Wages/salary earned by others in the house
Income from self-employment
Interest, dividends
Child support
Pension
Social/Supplemental Security
Gifts
Tax refund
Advance Earned Income Tax Credit
Public assistance (food stamps, housing)
Other income
TOTAL
My Income Worksheet
write the days of the week across the top. Each
day, write down how much you spend, and for
what. Carry a little notebook with you or save
receipts to make this task easier. At the end of
the week, add your expenses. Continue doing
this for about a month.
Also, look at several months of your credit
card statements, your checkbook register, and
your bank statement (particularly if some of
your payments, such as your mortgage or your
cable bill, are automatically withdrawn from
the bank).
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Expenditures Amount
House payment or rent
Heating bill (gas or fuel oil)
Electric bill
Water bill
Telephone bills (local, long distance, cell)
Cable bill
Groceries
Snacks/meals eaten out
Transportation (bus fare, gas for car,
tolls, car repair, car insurance)
Alimony or child support payments
Child care
Elder care
Doctor/dentist bills
Pet expenses
My Expense Worksheet
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Expenditures Amount
Union/professional dues
Clothing/uniforms
Education/training costs
Children’s school expenses
Dry cleaning
Laundry
Personal expenses
(children’s allowances, toiletries, etc.)
Home improvement and repairs
Gifts
Holiday spending
Life insurance premiums
Health insurance premiums
Property or renters’ insurance premiums
Disability insurance premiums
Church or other charitable donations
Loan payments
Credit card payments
Entertainment
Savings
TOTAL
My Expense Worksheet (continued from previous page)
Remember: Just as income doesn’t always
arrive in monthly amounts, expenses sometimes
occur only once or twice a year. Don’t forget
annual insurance payments or other occasional
expenses as you ?ll out the previous worksheet.
If you have a car insurance payment of $360
due once a year, for instance, you will have to
allow $30 a month ($360 divided by 12) in your
spending plan.
Step 3: Comparing Income and Expenses
To compare income and expenses:
Write down your total monthly income from
Step 1: _______________________________
Write down your total monthly expenses from
Step 2: _______________________________
Compare the two numbers.
Step 4: Reviewing How You Did and
Making Changes
If you have more income than expenses, that’s
terri?c. You can put that extra money toward
reaching your goals. If expenses are greater than
income, you need to get back on track. That
will require either reducing your expenses or
increasing your income.
You can consider taking on another job,
?nding a better-paying job, or having other family
members take on paid work to increase your
household income. You also can reduce expenses
by setting target amounts in each expense category.
This will guide you on how much you can spend
without exceeding your income.
Look at your expenses. Some of them can’t be
reduced without making major changes in your
life. These are called “?xed” expenses. Rent or
mortgage payments are examples of ?xed
expenses. You can’t really cut your housing costs
unless you’re willing to pack up and move to a
cheaper residence. Other costs are more under
your control. These “variable” expenses would
include food, gifts, entertainment, and clothing.
Examine your list of expenses and mark
each one, either with a “V” for variable or with
an “F” for ?xed. Look at each “V” and decide if
you can reduce your spending on each item. Can
you ?nd enough to cut so your total expenses are
less than your total income?
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Keep tracking what you spend in your
spending diary. Then, once a month, using
the worksheet starting on page 13, list all your
expenses and income, and compare what you
planned to make and spend with what you
actually made and spent.
Adjust future variable
expenses to balance the two.
For example, if you
planned to spend $300 for
groceries but actually spent
$350, you’ll have to look for
ways to cut $50 from next
month’s expenses. Or,
maybe you can ?nd a way
for your business to bring in
another $50 in pro?t.
Don’t give up, or
become too hard on
yourself, if you continue to ?nd your
income and expenses out of balance. It
happens to everyone. You can change your
plan if you have made adjustments and still
?nd you’re out of balance. Perhaps you’re
beginning to realize that the monthly
amount you set for groceries is just too
small; you know that now because you’re
always exceeding the amount you
budgeted. You might be able to trim costs
from other categories—cut back on gifts
or forego movies, for example.
The important part is to keep
planning. The personal ?nancial skills you
develop will help you—at home and in
business—whether you’re making $10,000 or
$100,000 a year.
Final Thoughts
Perhaps you’re thinking, “I’m a business owner.
Why do I need to master these personal ?nancial
skills?” Knowing how to make and use a personal
spending plan will aid you with your business.
First, you’ll have control of your personal ?nances
so they won’t have a negative
impact on your
business. Second, the skills you use in your
personal spending plan are similar to those you’ll
use in your business ?nances. You’ll learn more
about these skills, such as cash ?ow projections
and break-even analysis, in Chapters 5 and 6.
Don’t give up…
if you continue
to ?nd your
income and
expenses out
of balance.
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Source of Income Planned Actual Difference
Net wages/salary (after taxes)
Other family members’ wages
Income from self-employment
Interest, dividends
Child support
Pension
Social/Supplemental Security
Gifts
Tax refund
Advance Earned Income Tax Credit
Public assistance
Other income
TOTAL
My Spending Plan Worksheet
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My Spending Plan for Expenses Planned Actual Difference
House payment or rent
Heating bill
Electric bill
Water bill
Telephone bills
Cable bill
Groceries
Snacks/meals eaten out
Transportation
Alimony or child support payments
Child care
Elder care
Doctor/dentist bills
Pet expenses
Union/professional dues
Clothing/uniforms
Education/training costs
Children’s school expenses
My Spending Plan Worksheet
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My Spending Plan for Expenses Planned Actual Difference
Dry cleaning
Laundry
Personal expenses
Home improvements and repairs
Gifts
Holiday spending
Life insurance premiums
Health insurance premiums
Property or renters’
insurance premiums
Disability insurance premiums
Church or other charitable donations
Loan payments
Credit card payments
Entertainment
Savings
TOTAL
My Spending Plan Worksheet (continued from previous page)
3
BUILDING YOUR FINANCIAL RESERVES AND ASSETS
You’ve examined your income and
expenses and started to bring them
into balance.
f i n an ci al
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Saving for Success
You’ve considered your goals, both short term
and long term. You’ve examined your income
and expenses and started to bring them into
balance. Now it’s time to look for ways to
save money.
Saving money will help you reach your
goals, both personal and professional, and will
protect you in “rainy day” emergencies.
Savings will help you build your assets—
things of lasting value such as a home, a
building for your
business, or a retirement
fund.
Even a little bit of
money set aside can make
a big difference over time.
For example, if you
would save just $30 a
month—a dollar a day—
in a tax-free retirement
fund that pays 5 percent
interest, you would have
$12,331 in 20 years, and
$45,781 in 40 years.
You say the money
you earn each month
disappears before you can
set anything aside? The
secret to successful saving
is to pay yourself ?rst.
Each time you get a
paycheck from an employer or a payment
comes into your business, put some money
into savings.
If you are working for an employer,
you may be able to have part of each paycheck
deposited automatically into a savings account.
If you have a bank checking account, ask if
you can set up a savings account and
automatically direct a set amount from
checking to savings each month. However you
do it, make savings your priority. After all, you
can’t spend money you never actually have in
your pocket!
You also can examine your spending to
identify “leaks.” For instance, do you stop on
the way to work for coffee or a donut each
weekday morning? Even if you only spend
$1.50 a day, the amount adds up: $7.50 a week
equals $30 a month, which equals $360 a year!
You “need” that coffee each morning, you
say? Learn the difference between wants and
needs. Needs are necessities that you must
have to live. Groceries, safety equipment for
work, and children’s school supplies are
examples of needs. Dinner out, a vacation
home, and renting movies every weekend are
examples of wants.
You don’t have to give up every pleasure,
but you do have to recognize the importance
of paying for needs ?rst if you’re going to be
able to save.
You don’t have
to give up every
pleasure, but
you do have to
recognize the
importance of
paying for needs
?rst if you’re
going to be able
to save.
r es er v e
Tips for Finding ‘Hidden’ Cash for Savings
Consider the following:
• Put $1 a day plus your spare change in your purse
or pocket into a jar each night. By adding your
change to a $1 each day, you’ll probably end up
with about $50 at the end of the month.
• Don’t spend bonuses, tax rebates, or other
unexpected income.
• Send in product rebates. Use grocery coupons to
reduce your food bills. Put the money you get from
both sources into the bank.
• If you’ve just paid off a loan, keep “paying” the
loan amount to savings.
• Be a thrifty shopper. Buy generic or store brands
instead of big-name, heavily advertised brands of
food and clothing. Shop at discount stores. Buy
staples and nonperishable foods in bulk. Check out
thrift stores and yard sales.
• Give up expensive habits such as smoking
tobacco, playing the lottery, or going out and
spending money frequently with your friends.
Instead, ?nd things to do with your family
and friends that are inexpensive.
• Follow the “Rule of Three.” Compare at least three
companies’ prices before making a big purchase
or hiring a service.
Where Do I Put My Money?
As you begin to accumulate savings, you’ll want
to keep the money somewhere safe—not in a jar
or cardboard box or under the mattress! Many
types of ?nancial institutions offer safe places to
keep your savings.
Banks, credit unions, and savings and loans
are the most common places people put their
savings. In return for putting your money in
these institutions, you are paid “interest,” which
is ?gured as a percentage of the amount you
have in your savings account. Banks and savings
and loans usually are set up to make pro?ts—
that is, they use your money to make money for
themselves while still paying you interest. Credit
unions are set up as cooperatives. The people
who put their money in each credit union
become the owners. Credit unions must make
enough money to cover expenses, but aren’t
trying to make pro?ts
for outside owners.
Sometimes credit
unions offer better rates
for savings accounts or
loans because of this.
Most banks,
savings and loans, and
credit unions are
insured and supervised
by the federal govern-
ment. If one of them
goes out of business
because of ?nancial
troubles, the govern-
ment makes sure
customers get their
money back, up to
$100,000 per person.
Banks and savings and
loans are insured
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As you begin
to accumulate
savings, you’ll
want to keep
the money
somewhere
safe—not in a
jar or cardboard
box or under
the mattress!
through the Federal Deposit Insurance
Corporation (FDIC) while credit unions are
insured by the National Credit Union
Administration (NCUA). Look for FDIC and
NCUA logos in institutions, on booklets and
brochures, and on Web sites.
It’s a good business practice to set up
separate business and personal accounts. That
means you actually could end up with four
accounts—two savings, one personal and one for
your business, and two checking, one personal
and one for your business. It’s all right to set up
all these accounts in one institution. However, if
you’re saving for long-range business expenses,
such as replacement of equipment every few
years, you might consider putting your business
savings in a ?nancial institution or account that
pays higher interest for longer-term investments.
See the the list of different investment tools,
starting on page 20, to see if one works for you.
But regardless of your savings needs,
you’ll probably need to create basic savings and
checking accounts. To decide which institution
is right for you, ask:
• If the institution is conveniently located to your
home or your business?
• If it is open on the days and during the hours you
will need to use it?
• If you pay a fee to open a checking or savings
account?
• If you have to deposit a minimum amount
to open an account?
• If there are any fees to keep accounts open?
• If you bounce a check, what do you have to pay? Is
overdraft protection available?
• What interest rate does the savings account pay?
(Sometimes you’ll ?nd checking accounts pay
interest, too. Compare institutions’ rates on this, too.)
• If you have to keep a minimum amount of money
in either checking or savings accounts to avoid
fees? (“Free” checking accounts sometimes
require a minimum balance, which limits your
access to your money.)
• Are you comfortable with the staff? Do they speak
your language? Do they answer questions willingly
and clearly?
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Savings accounts in
banks, savings and
loans, and credit
unions are safe but
usually pay very low
interest rates, so your
savings don’t grow
very fast. You might
consider putting some
of your savings for
longer-term goals in
these types of accounts:
Employer retirement
plans: If you are employed at a salaried or wage-
paying job outside your microenterprise, your
employer may offer some kind of savings plan
such as a 401(k) or a Savings
Incentive Match Plan for
Employees (SIMPLE). You
choose an amount of money
that is then subtracted from
your paycheck and invested in
the plan, often with the
employer matching some or all
of your contribution. These
plans have varying degrees of
risk, depending on where you
invest your money. You also
must leave your money in the
account, or pay penalties to
remove it, until you are 59
1
?2
years old.
Retirement plans for the self-employed: If you
are a sole proprietor, you may create an
individual 401(k). This form of retirement
account has several advantages: You usually can
make larger contributions to this type of plan
than you can through a pension plan or regular
pro?t-sharing plan, and you don’t have to
contribute a ?xed amount each year. This is a
plus if you have a cash-?ow problem one year,
or want to take a larger owner’s draw. Small
businesses also can create Simpli?ed Employee
Pension (SEP) plans that don’t require ?xed
contributions each year. SEPs allow you to
make contributions after the tax year is ended
and you know what your pro?ts are. As a
general rule, plan contributions must be made
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You might
consider putting
some of your
savings for
longer-term
goals in…
on behalf of all employees who meet certain
eligibility requirements.
Individual Development Accounts (IDAs):
Your local Microenterprise Development (MED)
organization may offer these. IDAs are
partnerships among ?nancial institutions,
faith-based organizations, community-based
nonpro?t groups, schools, and others. They are
designed for small business owners and others
who don’t have access to employer-based
retirement savings plans. When you make a
deposit in an IDA, your contribution is matched
by partner organizations, sometimes dollar for
dollar, sometimes by $2 or $3 for each dollar
you save. IDAs have become very popular
among organizations that foster microenterprise
development. More than 350 communities have
programs that support IDAs.
Mutual funds: Mutual funds allow you to
participate in the stock market with less risk
than if you bought individual stocks directly.
Many ?nancial institutions offer mutual funds.
The manager of a mutual fund pools money
from many people to invest in many companies’
stocks, bonds, or other assets. With multiple
stocks in the fund, a drop in the value of one
stock has less impact on the fund’s total value.
Still, if the whole stock market goes down,
mutual funds do, too. You can research different
types of mutual funds online or at the library.
See the “Recommended Resources” section on
page 61 for some suggested Web sites.
Certi?cates of Deposit (CDs): Many ?nancial
institutions offer CDs as well. CDs require you
to make a minimum investment, then leave
the money deposited for a speci?c period. (For
example, you might buy a $1,000, three-year
CD.) The longer the
time, the higher the
interest rate you are paid
on your money. CDs
have higher interest
rates than ordinary
savings accounts, but
you don’t have easy
access to your money.
Treasury securities:
These include bonds,
bills, and notes issued by
the federal government.
Their interest rates are
guaranteed as long as you
hold the securities to maturity (the time at
which the government returns your money plus
interest).
Money market funds: Money market funds pay
higher interest rates than savings accounts, but
require high minimum balances ($2,500 in some
cases; each institution is different). You also may
be limited in how many times you can make
withdrawals, and the minimum amount you
may withdraw at once may be high. These
funds usually are not insured.
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IDAs have
become very
popular among
organizations
that foster
microenterprise
development.
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THE DEBT TRAP
When you buy on credit, you
use someone else’s money to
buy what you want.
cr edi t adv i ce
It’s easy—maybe too easy—to buy things on
credit. When you buy on credit, you use some-
one else’s money to buy what you want. In
return, you agree to pay back the credit card
company, bank, or
other credit source in a
speci?c amount of
time—and with
interest. Interest is
expressed as a
percentage of the
amount you borrowed,
which is called the
principal. If you
borrowed $100 at 5
percent interest, you’d
owe $105 at the end of one year, or $100
principal and $5 interest.
If you make payments according to
the agreement, without bouncing checks or
making late payments, it’s said you have
“good” credit. Good credit is vital to maintain
if you’re going to borrow money for your
business or for a large personal purchase. Few
people have the cash to buy a major item such
as a car or a business computer system.
Credit Cards: Use with Caution
Credit cards have many advantages. They’re
convenient. You don’t have to carry large
amounts of cash for purchases. If
your card is lost or stolen,
you’re liable only for the ?rst $50 of
unauthorized charges if you report the card’s
loss right away. You may also ?nd a credit card
is a requirement at times—such as when
you’re making a hotel reservation, renting a
car, or buying something on the Internet. You
can even use credit cards to establish good
credit by showing you can promptly pay back
the credit
card
company.
Cards also
can help
business
owners buy
supplies or
equipment.
But
credit cards’
very ease of use and availability can cause
problems if you get carried away with
purchases. Credit cards carry very high interest
rates—sometimes 20 percent or more—and if
you can’t pay off the total you charge on the
card each month, interest builds up quickly.
Card issuers typically require you to pay off
just 2 percent of the total amount you owe
monthly. If you charged $1,000 on a card
carrying 20 percent interest, and paid only the
minimum each month, it would take you more
than nine years to pay the debt. You’d end up
paying $2,073 in interest and principal.
Good credit is
vital to maintain
if you’re going
to borrow
money…
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Tips for Using Credit Cards Wisely
Consider the following tips for using credit
cards wisely:
• Look for cards that carry no annual fees and low
interest rates.
• Use them only to make important purchases; not
for clothing, food, or entertainment.
• Keep track of your credit card purchases on your
spending plan—as soon as you make them—so a
big bill doesn’t surprise you when it comes.
• Limit the number of cards you use to one or two.
• Consider using a secured credit card. These require
you to deposit money in a special account to cover
your purchases.
Are You Deep in Debt?
Credit cards aren’t the only form of debt. Bank
loans, car loans, home mortgages, business
loans, and other borrowing can add to your
debt load. How do you know when you have
too much debt?
Lenders use
something called a
debt-to-income ratio
to gauge how much
debt you can afford.
To calculate your
ratio, divide your total monthly debt payments
by your gross (before tax) income. For example,
suppose you pay $800 for a mortgage, $200 on
a credit card, and $150 for a student loan for
a total each month of $1,150. If you and your
spouse together make $4,000 a month, your
debt-to-income ratio would be $1,150 divided
by $4,000 or approximately .29 (29 percent).
Lenders want your ratio to be below 36
percent (25 percent if you pay rent and
have no housing debt).
You probably don’t need to calculate
your debt-to-income ratio to know if you have
a problem. If you’re struggling to meet your
expenses each month, missing loan payments,
bouncing checks, working an extra job to make
ends meet, have been refused credit, or are
getting telephone calls or visits from bill
collectors, you know you need help.
How to Get Out of Debt
If you’re going to build a thriving business,
you must keep your personal debts to a
manageable level. If you’re buried in debt,
you’ll ?nd it dif?cult or impossible to borrow
money for your business. Also, making big
Credit cards
aren’t the only
form of debt.
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debt payments may drain money from your
business. Here are ?ve steps to help you trim
your debt:
Step 1: Figure out where you are in debt.
Do you owe money to a couple of companies
or many? Are you paying late fees or high
interest rates on minimum payments?
Step 2: If you owe only a handful of
companies, see if you can negotiate smaller
payments, at least for a while.
Step 3: If you owe many businesses, consider
seeking help from a nonpro?t consumer debt
counselor, such as Consumer Credit Counseling.
Such counselors will help you set up a payment
plan. (Avoid “credit repair” companies, which
require you to pay a fee to “?x” bad credit.
Check a counseling company’s history with the
Better Business Bureau or the state attorney
general’s of?ce.)
Step 4: Take a hard look at your spending
plan and see if you can ?nd ways to cut
expenses or increase income. Pay your debts
with any additional money you can manage to
save or earn.
Step 5: Don’t ignore bills and past-due
notices. A poor credit history will haunt you
for years.
If you get caught in the debt trap, you’ll
?nd that creditors or their representatives will
call you repeatedly at home and even at work.
You can curtail calls at work by sending a
letter to the collection agency, requesting that
calls to your workplace stop. You must write,
not call. Keep copies of the letters and mail the
originals—with Return Receipts Requested—
to the credit agencies. If calls do not stop,
contact your state attorney general’s of?ce.
Beware: If you do not pay your debts, your
creditors can go to court and seek permission
to take one-fourth of your take-home pay (if
you are working for an employer). This is
called “garnishing” your wages, or “wage
garnishment.” If more than one creditor
garnishes your wages, your employment
can be affected.
Is Bankruptcy a Good Choice?
Bankruptcy is a legal way of helping individuals
and businesses deal with debts when they owe
much more than they can pay. While
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bankruptcy can erase many
debts, it doesn’t excuse you
from everything you owe.
Generally,
there are two types of
bankruptcy: liquidation
and reorganization. In
liquidation, known as
Chapter 7, your business
assets or personal assets are
liquidated (sold) and the proceeds are used to
pay your debts. You may be able to keep some
personal assets. The other type of bankruptcy,
reorganization, allows you to work out a
court-supervised plan to pay your creditors.
Consumers generally ?le for reorganiza-
tion under Chapter 13 while businesses or
individuals with debts exceeding Chapter
13 limits ?le under Chapter 11.
Bankruptcy should be considered
only as a last resort. Because bankruptcies stay
on credit records for seven to 10 years,
depending on the chapter under
which they’re ?led, they will
make it dif?cult for you to
obtain ?nancing to start or
grow a business, buy a
home, or obtain other
personal or
professional
loans.
Getting a Credit Report
Several agencies track your borrowing and
payment history. These agencies are contacted
for reports on your credit history whenever you
seek future loans or apply for credit cards.
If you’ve had dif?culties with debts in the
past—you’ve been unable to pay a loan or been
late with a lot of bill payments, for example—
the thought of asking for your credit reports
could be a little worrisome. You’re not alone.
Many people who have had
credit problems feel
uncomfortable
Bankruptcy
should be
considered
only as a
last resort.
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about looking at their reports. Facing your fears
is a good idea, however. You may ?nd mistakes
that you can ask to have corrected. Even if
everything in the reports is correct, you can see
where you can make changes. Beginning to
build good credit shows prospective lenders
you’ve turned over a new leaf.
Your state may require reporting companies
to provide consumers with one or two free credit
reports each year. You also are entitled to a free
report if you’ve been turned down for a loan or
credit, provided you request a copy of the report
within 60 days of being rejected. Otherwise, you
will pay a small fee for a report.
The companies that provide credit reports
and credit assistance include:
• Equifax, 1-800-685-1111, www.equifax.com
• Experian, 1-888-397-3742, www.experian.com
• TransUnion, 1-800-888-4213, www.transunion.com
• Consumer Credit Counseling Service,
1-888-577-2227, www.cccs.org
• National Foundation for Credit Counseling
1-800-388-2227, www.nfcc.org
Have your Social Security number, your
date of birth, addresses for the past ?ve years,
and maiden name (if applicable) available when
you contact the companies.
In your report, you will ?nd something
called a FICO® score (FICO stands for
Fair Isaacs & Company, the company
that created the formula). It is a
number that lenders use to help them decide
how likely it is you will pay them back on time.
Your FICO score is like a snapshot in time.
Your score this month may be different from
last month’s. Your FICO score takes into
account your payment history, how much you
still owe to creditors, how long you have been
using credit, the types of credit you use, and
how much of your credit use is new and old. By
comparing your information to the patterns in
thousands of other people’s credit reports, the
score assigns you a level of future credit risk.
FICO scores range from 300 to 850—and the
higher your number, the better your score.
Your score will not drop if you order your
credit report. Also, you can gradually improve
your score by following good credit practices
such as paying bills on time, developing payment
plans and not using too
much credit. This will help
you when you go to a
lender to borrow for
personal or business
purposes.
If you ?nd mistakes on
your credit report, you can
make corrections at no cost,
but the process can be slow
and hard. First, check to see
if the report tells you how
to correct mistakes, and
follow those instructions.
FICO scores
range from
300 to 850—
and the higher
your number,
the better
your score.
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You may be required to submit documents to
support your corrections, such as canceled checks
to show you paid the bills. Send a brief letter
explaining the situation. The credit-reporting
agency has 30 days to respond to your complaint.
If it ?nds you are correct, the agency must
notify the other credit-reporting agencies. If it
?nds you are not correct, you may want to take
your case to the lender directly. If an issue isn’t
resolved, you have the right to include your side
of the story with your credit history. For instance,
if you refused to pay a contractor for a home
repair because it was done badly, that debt may
still show up on your credit report, but so will
your explanation.
Repairing a Credit History
You can repair a poor credit history. It takes
sacri?ce and time, but pays off when you’re
ready to start or expand your business.
Consider the case of Karen Smith.
(Although this is a ?ctional account, it
demonstrates how individuals can work to
repair their credit.) For years, she hoped to start
her own sewing business and leave behind her
minimum-wage retail job. Although she was a
talented designer and skilled seamstress, she
knew she wouldn’t be considered a good credit
risk if she went to seek ?nancing for her
business idea.
About ?ve years previously, Smith learned
she had cancer. The tumor was relatively small
and was easily
removed by a surgeon,
who assured her that
her physical future
looked bright. She
had no health
insurance, however, to
cover sizeable hospital
charges. She paid a
little, but still owed
about $5,000.
Struggling to make
payments to the
hospital, Smith also
couldn’t pay her cell-
phone charges and her
account was closed. Both the hospital bill and
cellphone debt were on her credit report.
Smith saw an ad for a “credit repair”
company that promised to “?x” her poor credit
report for a fee. A friend told her that this was
a scam. Not knowing what else to do, Smith
went to her local microenterprise agency to
beg for the $1,500 she estimated she needed
to launch her sewing business.
There, Smith was reassured to learn she
could repair her credit history herself. Working
with a staff member of the microenterprise
agency, Smith ?gured her income and her cost
of living. She looked for ways to cut her living
expenses and also took an extra shift on the job
each week.
For years, she
hoped to start
her own sewing
business and
leave behind her
minimum-wage
retail job.
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With a little more income and reduced
expenses, Smith had $50 a week to apply to her
debts. The cellphone bill was just $150. She and
her microenterprise adviser decided to erase that
debt ?rst. In three weeks, it was paid.
The hospital bill was harder because it was so
large. Together, she and her adviser met with
hospital accounting personnel to work out a
payment plan. Smith agreed she would pay $50
a week initially and would try to increase the
amount as her income increased from her regular
job and her sewing business. The parties agreed to
meet again in six months to reassess the situation.
The microenterprise agency, after
watching Smith make good-faith efforts on her
payments for several months, agreed
to loan her $500 through a special loan
program that disregards credit history.
This allowed her to buy a commercial
sewing machine and convert a spare
bedroom to a workshop. Smith took
?nancial literacy classes through the
agency, worked one on one with a
mentor, and began to expand her
business, primarily through word of
mouth from satis?ed customers.
As months went by, Smith was
able to scale back her retail job’s hours
for her more lucrative sewing work.
She paid more toward her hospital
debt and also paid off her $500 start-
up loan. The microenterprise agency
then loaned her $1,000, which allowed her to
buy a second sewing
machine and hire another
seamstress part-time to
handle routine sewing.
After nearly two years,
Smith paid off the hospital
debt and celebrated the
?nal payment with a
dinner for family and
friends. Smith felt her
business future was ?nally
on the right track.
With a little
more income
and reduced
expenses,
Smith had $50
a week to apply
to her debts.
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5
WRITING A BUSINESS PLAN
No one knows your business like you
know it, so don’t hire an “expert”
to write your business plan.
pl an
Think of a business plan as your blueprint
to building a successful enterprise. Just as a
carpenter should never start hammering away
on a project without a blueprint, you should
never jump into a business without a plan.
No one knows your business like you
know it, so don’t hire an “expert” to write your
business plan. Doing it yourself also will help
you focus your business idea, ?gure out who
your customers will be, and chart your
operational and ?nancial needs. A good plan
also will show you if your idea can succeed.
Plus, it’s easier to ?x any problems that appear
while they’re still on paper.
Even after you launch your business, a plan
can help guide you from the start-up phase to
stability. A plan also is a must if you’re going to
seek ?nancing. All in all, creating a business plan
is a good idea: Studies show that businesses that
have plans perform better and are more likely
to succeed than those that lack plans.
You can ?nd many books, courses, and
Web sites devoted to writing business plans.
For a small business like yours, you can boil
down your business plan to a few key elements.
Remember: Your local Microenterprise
Development (MED) organization can offer
guidance and training while you’re putting
the plan together.
Writing a business plan may seem like
a daunting task. At your local MED
organization, however, you’re likely to ?nd
courses that will teach you how to write a
business plan. Staff members also will be
available to offer suggestions and help as you
go through the business-planning process.
Take Your First Step
A feasibility analysis is a simple ?rst step to
help you decide if you are on the right track
with your business idea—
before you spend long
hours on a complete
business plan. The
analysis, only a few pages
long, will answer two key
questions: Is there
suf?cient demand for the
product or service and can
the product or service be
provided pro?tably?
To start, write a few
paragraphs that
summarize your business
idea. Then, brie?y outline the market for your
product or service. This includes the growth
potential of the industry as a whole as well as
speci?c demand for your product or service.
Next, explain your product’s or service’s
advantages over competitors’ offerings. The
last section of your analysis will look at basic
?nancial measures: Can you price your product
or service to be competitive in the marketplace
and still cover your expenses? To do this,
Think of a
business plan
as your blueprint
to building a
successful
enterprise.
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n i n g
perform a break-even
analysis, described in detail
in Chapter 6, which shows
the total sales you need to
make to cover your costs.
If you ?nd the number of
units you must sell or your
selling price are impossibly
high, stop here. There is no
need to move ahead on a
full business plan until you ?gure a way to trim
costs or increase sales. If the analysis is positive,
then continue into a full-blown business plan.
Describe Your Business
A business description begins your business plan.
It explains what the business will do or make,
whom it will serve, where it will be located,
when it will operate, and why you’re doing it.
Answer these questions to gather information
to write your business description:
• What product will I make or service will I provide?
• Am I being realistic about my idea? Do I have the
skills, ?nances, and equipment to carry out my idea?
(For instance, starting a full landscaping business
takes a lot of money, but beginning a lawn mowing
and snowplowing business is a lower-cost alternative.)
• Am I starting a new business, taking over or expanding
an existing one, or buying a franchise?
• Will it be my full-time or part-time employment?
• Why am I going into this business?
• Why is there a need now to start this
business in this area?
• Who will be my customers and how
many of them are there?
• How will my business be different
from similar businesses?
• When and where will I do business? How will my
locations and hours bene?t my customers?
Analyze the Market
A market analysis is the part of the business
plan that describes the demand or need for your
proposed business. A successful business offers
a service or product that customers can’t easily
?nd elsewhere, or that is better, cheaper, or
otherwise different from competitors’ offerings.
It also offers a product or service for which
demand is steady or growing. Typewriter repair
doesn’t have much of a future, for instance, but
computer repair does!
Analyzing the market will involve more
than checking listings in the phone book, or
If the analysis
is positive,
then continue
into a full-blown
business plan.
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driving through the neighborhood to count
similar businesses to the one you’d like to start.
You will be able to ?nd some of the information
you need through the public library, the
Internet, or government of?ces. You may also
?nd help through business associations, such as
the Chamber of Commerce. Answer these
questions to gather information to write your
market analysis:
• How much do I know about my competitors and how
they do business? Are their businesses growing? What
are their strengths and weaknesses? How will my
business be different from theirs? How can I compete
with them?
• How much do I know about the customers I want to
attract? How big is my target group of customers?
Is the group growing? Is their need for my product
or service increasing? Where do they live? What are
their incomes? Is this target group big enough to
support my business?
• How much do I know about the economy and its
impact on my business? Is the local economy
growing, steady or weakening? How will its con-
dition affect my business? Are there national or
international economic changes that will have
an impact on my business? How will I deal with
economic changes, local or international, that
might hurt my business?
Reach Out to Customers
A marketing plan is the part of your business
plan that explains how you will attract and keep
customers using pricing, advertising, and
promotion. You may have the best business in
the world, but it will fail if prospective
customers don’t ?nd out about it. The
marketing section also includes sales projections,
which are your best estimates of how many
products or services you expect to sell under a
variety of conditions. Answer these questions to
gather information for your marketing plan:
• What’s the best way to reach the people I want to be
my customers? Can I reach them through television,
radio, or newspaper advertising? Can I mail them
information about my business? Can I join forces with
another business that sells a different product, but
deals with my target customers? For instance, a
child-care provider might market his or her services
with a diaper service or a toy store. What will these
different strategies cost? What option or options
reach the most people for the best price?
• How will I portray my product or services in order
to attract customers?
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• Do I have a catchy, memorable name for
my business?
• What prices will I charge for my services or
products? Why will these prices be attractive to my
target customers? Will these prices cover my costs
and allow me to make a pro?t? How will my prices
compare to my competitors’ prices?
• How many sales do I expect to make in a year?
Typically, you forecast sales for the “best case,”
“most likely case,” and “worst case” scenarios you’ll
encounter, with explanations of what factors would
lead to each case.
Research Marks the Spot
There’s no quick commute for Tee Tanaka. The
former banker opened his Japanese restaurant
Moshi Moshi in Boulder, Colorado, about 35
miles from his Denver home. His marketing
research told him it was the place to be.
“I thought I would ?t into the Boulder
niche,” said Tanaka, a native of Japan who has
lived in the United States for nearly 40 years.
With help from his daughter, who works in
the University of Colorado’s School of
Entrepreneurship, Tanaka researched the
Boulder market. He found that residents of
Boulder, thanks to CU’s presence, are largely
young, active, and health-conscious. Tanaka
visited other successful Boulder restaurants,
including Noodles & Co., a restaurant that sells
international pastas that has expanded to several
states from its Colorado roots.
Tanaka’s ?ndings helped him re?ne his
mother’s traditional recipes for his target
customers: college-age and health-conscious
diners. For instance, he moved to a higher
quality, low-fat beef for his beef and noodle
bowl rather than the traditional fatty beef. He
dropped deep-fried dishes, such as tempura, and
uses only a little sesame oil in food preparation.
Tanaka also put Moshi Moshi—the name is
Japanese slang for “quick”—on what he called a
“strict business approach.” He looked for every
possible way to cut costs, even spending Sundays
going over ?nancials and taking care of details.
“That comes from my business background,”
said Tanaka. His partners in his limited liability
corporation (LLC) are former
colleagues from his 30 years
in banking. They also have
know-how and “great ideas,”
Tanaka added.
The LLC was formed
in 1999, but Moshi Moshi
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didn’t open until February
2001 after 14 months of
intensive work. The
partners met with
restaurant and kitchen
consultants and other
experts to re?ne Tanaka’s
concept. Finding the right
space took the most time.
Tanaka had hoped to
convert existing space for the restaurant, but
nothing he found was quite right. He ?nally
settled on a building under construction on
Boulder’s downtown pedestrian mall.
The location turned out to be a more
expensive choice, but a good one. Tanaka had
considered locating adjacent to the university.
One fact his research had missed: Boulder’s
restaurant business drops off in the summer
when CU has fewer students on campus. The
mall, though, is less affected by student
population changes. “Sometimes, it’s just a matter
of luck,” Tanaka said of his location choice.
Hard work and attention to the bottom line
have gotten Moshi Moshi through dif?cult
economic times. “I probably would not have
existed through those obstacles if I had not
taken the austere business approach I did,”
Tanaka said.
He still hesitates to call Moshi Moshi a
success, although business is good. He’d like to
add other locations in the Boulder-Denver area,
but, at age 62, he wants to ?nd someone who
will take over the day-to-day responsibilities.
Still, he’s happy to realize his dream, even if it
comes with ups and downs.
“It’s a ‘cry one minute, laugh the next’ sort
of business,” Tanaka said.
Projecting Sales: An Example
Imagine you want to start a home computer
repair business. Using census data, you
determine there are 1,000 residences within
?ve miles of your business. Further research
shows 80 percent, or 800 homes, have home
computers. Your research shows that 75 percent
of owners nationally need their computers
repaired or upgraded during a year. That
means 600 (.75×800) homes in your marketing
area might need services each year. You have
found only one competitor in your marketing
“It’s a ‘cry one
minute, laugh
the next’ sort
of business.”
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area. Because you have priced your services
lower than the competitor and plan an
aggressive marketing campaign, you believe
you could attract a third of the potential
market, or 200 computer owners, during the
?rst year—your “most likely case” scenario.
You believe the average customer will require
$100 of your services, so your income before
expenses will be $20,000 a year. Your “best
case” scenario envisions your marketing efforts
being more successful and attracting half the
potential market, or 300 computer owners, for
a gross of $30,000. In your “worst case”
scenario, you estimate what will happen if
people have stronger-than-expected relationships
with your competitor. In that case, you estimate
you will capture only a sixth of the market, or
100 customers, to make $10,000.
Organize the Day-to-Day Operations
The operations and management parts of your
business plan explain who will be involved in
your business and how you will produce the
goods or services to sell. Answer these questions
to gather information for these parts of the plan:
• If you are making a product, what materials and
supplies will you need? What tools, machines,
facilities, or furniture do you need? Where will you
get them? What do they cost? How much inventory
(extra materials) will you need to keep on hand?
• If you are offering a service, how will you provide
the service? What materials or equipment, if any,
do you need to provide the service?
• How will you be certain you are giving customers
quality goods or services? What warranties or
guarantees will you make on your products?
How will you handle customer service, complaints,
repairs, and returns?
• How many people will be involved in your business?
What will each person do? What role will you take?
What special skills or training do you or your
employees have to help the business succeed?
Do you have advisers who are going to help you?
Who will take responsibility for the business?
(This probably will be you.)
Business plans also include ?nancial
analyses and detailed examinations of startup and
expansion costs, including cash-?ow projections
for several years. We will look at these parts of
your business plan in the next chapter.
Set a Course with a Business Plan
Beaulah Williams, who lives in the Maryland
suburbs of Washington, D.C., ?rst learned to
sew at age 8, and made beautiful clothes for
herself and her children for many years. It was
only after she learned business skills, however,
that she was able to turn her sewing know-how
into a thriving business.
In 1984, she and her husband separated
and she began raising their four children alone.
By 1995, she was struggling ?nancially on part-
time work, government bene?ts, and child
support. She happened to read a newspaper
advertisement about the Foundation for
International Community Assistance (FINCA),
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a microenterprise program, in nearby
Washington. There, she learned the skills to
help her develop her business idea. Learning
to write a business plan was her most valuable
lesson, Williams said.
“In doing a business plan, you have to do
research,” she said. “I came to understand you
will not want to do the same business that other
people are doing.” Williams narrowed her
business idea. She decided to concentrate on
making custom clothing for individuals and
dropped her plans to also make wedding dresses
and children’s clothing, which were areas in
which she found she would have the most
competition. “The
business plan makes
you focus,” she said.
Her home-based
business, B.B. Design,
opened in 1995 with a
$500 loan from FINCA
for a new
sewing machine. Williams offered both African-
inspired and American clothing. The business
grew and she was able to take a larger owner’s
draw by 1997. Her success story was told in
major newspapers and on network television,
and she was invited to speak at the United
Nations General Assembly in 2000 about the
bene?ts of microcredit. As she became better
known, her business began selling clothes all
over the country.
A few years later, however, Williams
decided to put her business on the back burner
while she completed a degree in divinity. She
continues to do some alterations and sewing,
but primarily designs and makes unusual
minister’s robes, which she prices at $900 to
$1,000 each. “Each summer, I’ll be sewing for
tuition,” she said.
Williams has shared her hard-earned
business knowledge as well as her sewing skills
with disadvantaged women in homeless shelters.
Several of the women have started
their own sewing businesses.
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Your “best case”
scenario envisions
your marketing
efforts being
more successful
and attracting half
the potential
market…
KEY FINANCIAL SKILLS FOR
MICROENTREPRENEURS
6
dev el
Earlier in this booklet, you learned how to put
your personal ?nances in good order. Keeping
your business ?nances on track is just as
important and uses some of the same skills.
In fact, learning and using key ?nancial
skills may be the best step toward success you
can take as you go into or expand your
business. The Women’s Initiative for Self-
Employment, a microenterprise development
program in San Francisco, discovered that its
most successful clients frequently used basic
?nancial tools, such as record keeping, cash-
?ow management, and break-even analysis, in
day-to-day business activities. These tools also
will help you complete
your business plan.
Your local
Microenterprise
Development (MED)
organization is the
perfect spot to stop
if you’re interested in
learning or improving
your ?nancial skills.
You are likely to ?nd
training classes in
business development,
staff and teachers to
offer technical
assistance, and more.
Managing Your Cash Flow
Cash ?ow is the money coming into and going
out of your business. Your customers pay you
(money in) and you pay your suppliers and
overhead (money out). Cash ?ow is the lifeblood
of your business. Obviously, you want enough
money on hand at any time to cover expenses.
Businesses, especially new ones, typically run
into trouble with cash ?ow because
they: (1) fail to
recognize
seasonal trends
in their business, (2)
take too much cash from
the business for living
expenses, (3) expand the business too fast, or (4)
extend credit to customers.
Managing cash ?ow involves keeping
track of payments you know you’ll receive and
what bills you know will be due. Cash ?ow
projections are included in your business plan.
Still, even after your business is launched,
projections should be done frequently if you
want to spot and head off cash-?ow problems.
When your projections show a problem
developing, you can sometimes “tweak” your
cash ?ow to avoid crises. One way is to
develop relationships with your suppliers so
they’ll be willing to extend your payment time
occasionally. This is called “managing accounts
payable.” Another way is to buy and keep as
little as possible in your inventory of materials.
When your
projections show
a problem
developing, you
can sometimes
“tweak” your
cash ?ow to
avoid crises.
39
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A third way is to develop relationships with
your customers that encourage them to pay on
time—or even a little early, in return for a
discount, assuming that offering one doesn’t
hurt your bottom line. Finally, if you have a
lender helping you ?nance your business, keep
him or her informed about how things are
going. If you run into a cash-?ow problem,
your lender may be more willing to help if she
or he understands what you’ve been doing.
There are many computer programs and
printed documents that help you estimate cash
?ow. Below is a simple six-month format you
can use.
Cash in bank: Money in business checking at
?rst of month.
Petty cash: Money on hand in cash register
or petty cash box at ?rst of month.
Cash sales expected: Payments you will receive
for goods or services.
Total receipts: Sum of the ?rst three numbers.
Spending for month: Includes rent, utilities, mate-
rials, salaries, payments on purchases made on credit,
deposits made on expenses such as utilities, etc.
Cash balance: Subtract spending from total
receipts. If it’s a negative number, you have a cash-
?ow problem.
Figuring a Break-Even Point
When you run a business, you want to make
money—but how do you know how much
you’ll need to reach a pro?t? A break-even
analysis gives you the dollar amount you must
take in to cover all your costs of doing business.
Like a cash ?ow projection, a break-even
analysis is both part of your business plan and a
tool to use as your business evolves.
Gathering information for a break-even
analysis is a lot like preparing your personal
spending plan. First, add up all your monthly
business expenses, ?xed and variable, including
the rent or mortgage on your business space,
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January February March April May June
Cash in bank
Petty cash
Cash sales expected
from accounts receivable
TOTAL receipts
Spending for month
CASH balance
utilities, telephone, insurance, employee salaries,
marketing, and taxes. If an expense is an annual
one, such as your business insurance, divide the
annual premium by 12 to get a monthly ?gure.
If expenses vary, such as telephone or supplies
for manufacturing, enter the amount you’re sure
you’ll spend each month. When you have a total,
that is the amount you must take in through
your business to break even.
You should calculate your break-even
point regularly after you start your business—
say every three to six months. Expenses have a
habit of creeping up, and by analyzing your
break-even point frequently, you’ll help avoid
?nancial trouble.
If you ?nd your break-even point is
creeping upward, take steps to cut costs. This is
similar to plugging
spending “leaks” in
your personal
?nances. You may be
able to lower your cost
of doing business by
?nding cheaper
materials or keeping
fewer materials in
inventory. You may be
able to trim expenses,
such as marketing or
insurance. Finally,
consider raising
prices. Unless they’re
in a very competitive market, most small
businesses can raise prices 4 to 5 percent without
much customer reaction.
The goal, of course, is to make enough
money so you can pay yourself or put funds
into improving the business. However, you
?rst have to determine your break-even point.
To ?nd the point, use this formula:
BE=FC÷(P-VC)
BE=Break-even
FC=Fixed Costs
P=Price
VC=Variable Costs Per Unit
An Example of Break-Even Analysis
Suppose you are starting a business to sell
widgets and you want to calculate your break-
even point. The break-even point is the point at
which you’re selling enough widgets to cover
your variable costs plus your ?xed costs.
In your widget business, you plan to sell
each widget for $12, your P in the equation.
Your ?xed costs (FC)—rent, utilities, insurance,
When you run
a business, you
want to make
money—but
how do you
know how much
you’ll need to
reach a pro?t?
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and so on—add up to $50,000. Your variable
costs, primarily labor and materials, equal $2
per widget for your VC. Your break-even point,
then is:
BE=$50,000÷($12-$2)
BE=$50,000÷$10
BE=5,000 units
Therefore, if your research shows you can
sell more than 5,000 units, you’ll make a pro?t.
You’re in business!
The break-even point for a business is the
volume of revenue that must be reached before
all ?xed expenses are covered. The calculation is
typically done on a monthly basis, so the
analysis must take into account the
monthly portion of items that are
paid quarterly or annually. You must also know
the gross pro?t margin, which is gross pro?t
(sales - cost of goods sold) divided by sales.
For example, if your monthly ?xed
expenses are $5,000, and your gross pro?t
margin is 25 percent, your break-even revenue
amount is $20,000 ($5,000 divided by .25).
Therefore, you will not begin to make a pro?t
until your revenue exceeds $20,000 each month.
You can do a break-even analysis before
you even begin your business based on
projections of gross pro?t margin and ?xed
expenses. But your early estimates and your
actual numbers may be very different. After
three to six months in
business, you should
compare
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BE=FE÷GPM (Gross Pro?t Margin)
projections to the real-world results and
reassess, if necessary, what volume is required to
reach break-even levels. As the business grows
and these numbers continue to change, it is a
good idea to re?gure your break-even point
every six to 12 months.
If your revenues are less than expected,
you might want to try to lower your break-
even volume. You can do so either by lowering
your direct costs or raising your prices. Even a
small price increase can have a signi?cant
impact on your bottom line.
In summary, a break-even analysis is critical
for a small business
owner to calculate and
understand. Any new
business must be able to
predict what gross sales
volume level is necessary
before reaching the
break-even point. It’s
important to be able to
assess your early pre-
dictions, determine how
accurate they were, and
check whether you are
actually on track to make
the pro?ts you expected.
Even once your business
has matured, you should
make a point of
reviewing your current
break-even point and try
to ?nd ways to reduce that ?gure in order to
increase pro?ts.
Calculating an Owner’s Draw
The money you take out of your business to
pay your personal household expenses is called
an “owner’s draw.” If you want your business to
be your primary source of income, you will want
to build your business revenue to the point at
which you cover not only all business expenses,
but all personal expenses, too. That may not
happen for months or years after you start your
business. You may have to meet your personal
expenses in the meantime by working another
job or using your savings.
Deciding how much money to take from
your business is more involved than simply
taking anything above your break-even point.
Corporations and owners of sole proprietorships
pay taxes based on the equity built up in the
business. Equity means the net worth of your
company. It is calculated by adding up all your
assets (cash, value of any business property you
own, etc.). Equity increases as you invest money
in your business or make a pro?t. Equity
decreases as you withdraw money or have a loss.
Keeping Records
Tracking business information is a necessary—
if sometimes tedious—part of being the boss.
Good records can easily show you whether
business is improving, what items are selling,
and what changes you might need to make.
Good records
can easily show
you whether
business is
improving,
what items
are selling, and
what changes
you might need
to make.
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Records also will help you prepare pro?t and
loss statements and balance sheets, vital for
your dealings with creditors or lenders.
Records also will make tax preparation less
painful. It’s a good idea to set aside some time
every day to work on your records.
You may need to tailor the kinds of records
you keep to your type of business. Contact your
accountant or tax adviser for more help.
Generally, you’ll need either a paper or com-
puter-based version of:
• A checkbook register to list to whom, for what,
how much, and when you write checks on your
business checking account. Separate business and
personal checking accounts are essential to make
tax preparation and accounting easier. You may
open both accounts at the same bank.
• A cash receipts book to track what payments were
received, from whom, and for how much.
• A sales journal to record business transactions.
• A voucher register to list bills, amount owed, due
date, and payee.
• A general ledger or a revenue and expense journal
to record receipts and expenditures.
Keeping a Balance Sheet
A balance sheet shows the assets, liabilities, and
equity in your business on a given day. Think of
it as a ?nancial snapshot of the business. Like the
break-even analysis and a cash-?ow projection, a
balance sheet will go into your business plan and
also will be useful in the day-to-day running of
your business.
Imagine a page folded in half down the
middle. The left side will list all your business
assets: anything of value that is owned by or
legally owed to the business, including cash,
petty cash, accounts receivable, inventory,
investments, and ?xed assets such as land,
buildings, improvements you’ve made,
equipment, vehicles, and furniture.
The right side will list all your liabilities:
all debts, obligations, and claims payable in the
coming year including accounts payable, taxes,
payroll, and long-term liabilities. This side of the
sheet also includes your equity or net worth in
the company. This includes stock if you have a
corporation, or equity if you have a partnership
or proprietorship, and retained earnings or
withdrawals. On a balance sheet, the total assets
always equal total liabilities plus net worth.
Exit Strategies
When so much of your energy is going into
expanding or launching your business, you may
be surprised to hear you should also think about
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how you should get out. This is what’s called
an “exit strategy.” It’s important to look ahead,
because as one expert said, “What good does
it do to climb the ladder of success only to ?nd
the ladder’s leaning against the wrong wall?”
Exit strategies are required whether you
succeed or fail. Here are several options:
• Sell your business. Many a microentrepreneur
dreams of building a successful business, then
selling it for a tidy pro?t to fund retirement or a
new venture. To accomplish this, you must keep
good records and build a business structure that
someone else could step into with some training.
• Pass a successful business on to your
children when you retire. You must decide
whether your children would buy the business, or if
you would save enough on which to retire so you
could simply give them the business.
• Close the business. Maybe your successful
business isn’t easily sold or transferred. You can opt
to sell equipment, buildings, and other assets, and
use the proceeds for retirement or a new venture.
• Cut your losses. Not every business succeeds, of
course. If you are struggling to stay in business,
you must decide at what point you would say
“enough.” If you reach that point, consider whether
you would liquidate assets or sell the business to
pay loans or other creditors. Think about what
kinds of fallback jobs you could seek. This exit
strategy isn’t pleasant, but it could be necessary.
Do You Need a Computer?
Some entrepreneurs love their computers and
business software. You must decide whether
setting up a computerized system to track your
business ?nances will
be more of a help or a
hindrance. If you’re going
to save time, record
keeping via computer is
great. If you’re going to
spend hours setting up the
system and learning to use
software programs, you
might be better off with
the paper versions of
?nancial records. You can
?nd these documents at
most of?ce supply or
stationary stores.
If you take the
computer route, there
are many choices in
?nancial software:
Quicken, Microsoft Money, Excel, MYOB
AccountEdge, QuickBooks, and Peachtree
Accounting are just a few of the titles you’ll ?nd.
Quicken and Money feature single-entry
bookkeeping, which is the type of bookkeeping
most small businesses use.
Keep in mind, a computer can also help
your marketing, research, and customer service
efforts by opening you to Web-based resources.
Also, if you plan to do business with the
government or major corporations, they will
expect you to have e-mail and a Web site.
You must
decide whether
setting up a
computerized
system to track
your business
?nances will be
more of a help
or a hindrance.
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7
DO I NEED FINANCING?
Most business owners need some
kind of ?nancing, whether they’re
running start-ups or expansions.
bu s i n es s l o
When and where to get ?nancing for your
business is one of the most dif?cult decisions
you’ll make as an entrepreneur. Even if
?nancing is not something you’re considering
now, the issue will probably come up
eventually. Most business owners need some
kind of ?nancing, whether they’re running
start-ups or expansions.
When they think of ?nancing, most
business owners think of bank loans. There are
many other options. In fact, you may be able to
avoid borrowing. Answer these questions:
Do I Truly Need Financing?
Consider whether you can scale down your
business plan or slow the expansion of your
existing business to avoid borrowing money.
Instead of starting, say, a landscaping business,
consider starting with
lawn mowing and snow-
plowing. You’d need less
equipment—and less
money. Then, by setting
aside some savings as you
build your business, you
could later expand into
landscaping.
Are There Other
Resources I Can Use?
If you’re buying someone’s
business, you may be able
to get an “owner
carryback,” which means the seller would let
you pay him or her in installments spread over
months or years. You would use the cash ?ow
from the business to make the payments. If
you’re expanding an existing business, perhaps
your suppliers would extend the time you have
to pay for materials, or your customers would
pay deposits when they place orders.
Can I Use a Credit Card?
If you are making a relatively small business
purchase that you can pay off in a short time,
you may want to put it on a credit card. One
advantage of this approach is that you probably
have a credit card already and could avoid the
loan-application process. Paying back the charge
also would help you establish yourself as a
dependable borrower and help you secure a loan
later. Disadvantages include the high interest rates
credit cards carry and the limits on the total you
can charge.
Most business
owners think
of bank
loans when
they think of
?nancing.
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oan s
Can I Do it Myself?
In Chapter 3, you learned how to create a
household spending plan, and how just a small
amount saved each month can add up. By
plugging more “spending leaks” in your
personal or business ?nances, you may be able
to step up your savings plan and fund your
business expansion or
purchase without
incurring more debt.
Where to Get
Financing
After you’ve answered
these questions, you may
decide you still need
outside ?nancing. Where
can you get the money?
The answer to that
question may depend on
the type of business you
have, and why you want
money. Here are some
options to consider:
Family and Friends:
Borrowing from people
you know well is a popular
way to ?nance small businesses. Always treat such
loans seriously by paying back the money on time
with any agreed-upon interest. You also should
put your loan agreement in writing.
Microenterprise Development (MED)
Organizations: These local, community-based
programs specialize in small loans to ?rst-time
or low-income borrowers who don’t have
access to the usual lending sources. In fact,
MED programs were created in large part to
provide ?nancing to these groups. Most MED
programs operate their own loan funds, which
usually get support from public agencies,
corporations, or foundations. Some MED
programs also partner with traditional ?nancial
institutions to create lending programs. If you
seek a loan from a MED organization, the
staff, the board of directors, or a volunteer loan
committee may review your application and
decide whether to give you funding. Some
programs, however, use what’s called “peer
lending” in which a group of small-business
owners make lending decisions. The size of
loans made by MED programs varies from as
little as $500 to tens of thousands of dollars. You
may ?nd you can apply for a “stepped” loan that
gives you a small amount to get started and
demonstrate an idea is workable, then gives
you additional funding as you develop your
business. Interest rates vary from organization
to organization. To ?nd a MED program, visit
www.microenterpriseworks.org and click
Microenterprise Organizations Near You.
Community or Economic Development
Agencies: These organizations usually are
sponsored by city, county, or state governments.
An “angel” is
an individual
who makes an
investment in a
business and
becomes part
owner of the
business in
return.
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They work to improve the local economy by
lending money to help businesses start or grow,
and frequently support low-income housing or
other improvement projects.
“Angel” Investors: An “angel” is an
individual who makes an investment in a business
and becomes part owner of the business in return.
They can be hard to ?nd. If you want to ?nd an
angel, your best bets are to try people who know
your business and know you, such as clients,
suppliers, and friends. Angels expect a return on
their investment. The amount expected can vary.
They generally take an active role in business
decisions since they are part owners. They also
bring expertise and contacts to a business.
Banks or Savings
and Loans (S&Ls):
Although you may
think of these
institutions ?rst
when you need
?nancing, we’ve put
them at the bottom of
the list on purpose.
Banks and S&Ls
aren’t always
interested in making
small loans to small
businesses. If you
have a good
relationship with a
bank or S&L, it
doesn’t hurt to ask for help. The interest rate on
such loans usually is the prime rate (the interest
rate banks charge their best commercial
customers) plus two percentage points.
Remember that ?nding the right lender for
your needs may not be easy. If one lender turns
you down, ask him or her for ideas on other
sources to try. Keep looking. For ideas of
resources available in your community, go to
the Web site for the SBA’s Microloan program
at www.sba.gov and click Financing and then
Micro-Loans. The SBA funds community-based
intermediaries that, in turn, make loans up to
$35,000 to eligible borrowers.
The Language of Lending
Here are some terms you should know if you’re
going to seek ?nancing:
• Loan: Money you borrow that you must pay back.
• Principal: The amount of money you borrow.
• Interest: What you are charged for borrowing
money. The interest rate is expressed as a
percentage. The higher the rate, the more you’ll
pay. Rates change with the economy.
• Loan fees: What the institution or individual from
which or whom you borrow may charge you in
addition to interest. Fees usually pay for
processing your loan.
• Collateral: An asset, such as a car, house, or
other property, that you agree the lender may take
if you do not meet the terms of your loan.
The SBA funds
community-based
intermediaries
that, in turn,
make loans
up to $35,000
to eligible
borrowers.
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• Default: If you fail to pay back the loan on time, if
you ?le bankruptcy, or if you fail to follow other
terms of your loan, you are considered in default
and could lose your collateral.
• Line of credit: A credit line is like a pot of money you
can dip into when necessary. The credit line has a
limit and carries interest and fees.
The Money Struggle
Charlie Reed knows how hard it can be to ?nd
money to launch or expand a business.
“To me, entrepreneurship is whether you can
?nd the working capital, and then, can you get the
orders to pay off the
working capital,” said
Reed, owner of Cate’s
Candies of Denver,
Colorado.
In 1997, Reed was a
homeless cocaine and
alcohol addict in Florida.
His business evolved
almost by accident after
he entered a residential
program to treat his
addictions.
“I met a really cute
lady and wanted to bake
her a birthday cake,”
Reed recalled. While
buying coloring for
frosting, he bought lollipop sticks on impulse.
With leftover cake ingredients, he made a batch
of ?ower-shaped lollipops that sold out
immediately to his fellow residents. He later
made a box of rose-shaped lollipops for his
daughter Cate, then 9 years old, and stamped
the box Cate’s Candies. With no money, no
business skills, and an 8-quart kettle, Reed
was in business.
A month later, Reed had sold his candy
?owers to 26 shops in south Florida. His
success drew the attention of distributors and
an investor. But success was ?eeting. He landed
a huge order from a national convenience store
chain, but his ?nancial backer couldn’t provide
the capital Reed needed to meet the order. Reed
went out of business.
He moved to Kentucky to live with his
sister, and painted barns so he could earn money
to pay off his former employees and creditors.
“My sister wouldn’t let me give up,” Reed
recalled. She loaned him a few hundred dollars
and urged him to try again.
In 2000, he loaded his candy-making
equipment into his car and drove to Denver,
where his daughter lived. That November,
Cate’s Candies opened anew. Again, Reed found
potential investors, and again, they couldn’t come
up with the extra money he needed when the
orders rolled in. He hired a consultant and
obtained loans through the Denver Mayor’s
Of?ce of Economic Development and Business
Capital of Colorado, which specializes in
innovative loans for small businesses.
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“I’ve had one
goal since the
very beginning:
to let my
daughter know
I’m not a drug
addict or a
scumbag.”
“Just because we had $50,000, we weren’t a
success,” Reed said. The money was soon gone
and Reed was missing loan payments. He drove
to a trade show in Reno, Nevada, selling candy
from the trunk of his car on the way. He came
home with $49,000 in orders.
He scrambled to ?nd new investors through
word of mouth and was able to move into a new
building and buy more equipment. The city also
gave him a bigger loan. As 2003 began, business
was growing and Reed was optimistic.
“I’ve had one goal since the very beginning:
to let my daughter know I’m not a drug addict
or a scumbag. Someday,” he vowed, “my
daughter will ring the bell at the New York
Stock Exchange at a public (stock) offering
for this company.”
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8
INSURANCE AND TAXES
Imagine if you’d built a thriving
business, only to see it wiped out
by a ?re or lost in a lawsuit.
s e
Insuring Your Business
Imagine if you’d built a
thriving business, only to
see it wiped out by a ?re or
lost in a lawsuit. That’s
why you need insurance,
no matter how small your
business.
Different businesses
require different types
and amounts of insurance.
For example, a bar or
restaurant that serves
alcohol would require
liquor liability insurance. If you have employees,
you would need workers compensation
insurance. Call your local microenterprise
agency or an insurance agent for guidance and
advice on types of insurance you may need.
Don’t forget to check your personal insurance
coverage. If your home was destroyed or you
were held liable in a non-work-related auto
crash, the ?nancial impact could also affect your
business if you’re not insured. Review this
checklist before you
speak to an agent:
?I own a building, inventory, a computer system,
or other property for my business.
Ask about property insurance, which protects
you in case of ?re, theft, and wind damage.
Floods, earthquakes, and certain other disasters
often aren’t covered, but you may be able to
buy separate policies if these excluded events
are of concern.
?I could be sued by a customer or someone else
affected by my products or services.
Ask about liability insurance, which covers
you in case you’re sued for property damage
or injury connected with your business.
Businesses often buy “commercial general
liability” policies, which carry limits on the
amount the insurance company will pay.
“Umbrella” liability policies add extra
protection for catastrophes in which a number
of people are injured. There are many other
kinds of liability insurance, some of them
designed for speci?c businesses.
?I drive vans, trucks, or cars—or my
employees use theirs—in my business.
Ask about automobile insurance. It works a lot
like the car insurance you buy for your personal
vehicle, but is written in the name of the person
or business that holds the title on the business
vehicle. If an employee is using a personal car
for business, be sure your policy is written to
cover that use, too. Ask about vehicle damage
and liability coverage.
Different
businesses
require different
types and
amounts of
insurance.
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cu r i t y
?I own a retail store, small of?ce, or an
apartment building.
Ask about a business owner’s policy (BOP). This
combines several essential coverages in a single
policy for owners of “low hazard” businesses.
This policy can be tailored to your business needs.
?I work out of my home.
Ask if you need coverage beyond homeowners’
insurance. If you have customers coming to your
home, you should have liability insurance in case
they injure themselves on your property.
You also may need extra coverage for a
business computer, inventory, or
business vehicles kept at your home.
?I have no health insurance.
You need health insurance!
If you, your spouse, or your
child were to develop a life-
threatening illness or
injury, or require
major surgery, the
mounting
medical bills
could quickly
wipe out
your
?nancial
reserves
and ruin
your business. Many large insurance companies
and professional organizations market policies
designed for small businesses.
? I’m concerned about less-common occurrences.
Depending on your business, you may need
policies that cover you in case of business
interruption, ?oods, earthquakes, pollution,
professional liability, or machinery breakdowns.
Talk to an insurance agent for details.
Cutting Through Red Tape
In addition to getting the right kinds of
insurance, you also must learn what business
permits, licenses, and tax laws apply to your
company. It’s best to
handle this as soon as
possible. Failure to cut
through “red tape” can
hurt the chances that
your business will grow
and succeed.
Business permit
and license requirements
vary from city to city
and state to state. They
also vary by type of
business. For help in
deciding what
regulations apply to
your business, talk
to your local micro-
If you have
customers
coming to your
home, you should
have liability
insurance in
case they injure
themselves on
your property.
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enterprise agency or small business development
center. You also can use the Internet to look at
your city’s and state’s Web pages for licensing
and other regulatory information.
You are already familiar with the need to
pay personal income taxes every year. You may
even prepare your personal state and federal tax
returns yourself. Still, consulting with a trained
tax adviser is the best way to understand your
business tax obligations.
At a minimum, you’ll withhold federal
and state income taxes and Social Security
(FICA) taxes from the wages of any employee
you hire. If you’re working alone, you’ll still
pay self-employment tax for Social Security
and estimated quarterly income tax payments
that are due Jan. 15, April 15, June 15, and
Sept. 15 (or the business day closest to each
date if they fall on
weekends or holidays).
How you handle your
business taxes depends in part on the business
structure you created. If you own a sole
proprietorship, you can take care of your
business taxes by ?ling a Schedule C with your
personal tax return. If you have a partnership,
limited liability corporation, S corporation, or
C corporation, you are required to ?le a
separate business tax return in addition to your
personal return. The Internal Revenue
Service’s Tax Guide for Small Business
(Publication 334) is a good overview of small-
business taxes. The IRS Web site
(www.irs.gov) also lists helpful publications for
partnerships (Publication 541) and
corporations (Publication 542).
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How you
handle your
business taxes
depends
in part on
the business
structure
you have.
9
NETWORKING AND GETTING HELP
There are many organizations,
clubs, education groups, and
government agencies ready to
extend helping hands.
a s
Running your microenterprise may feel lonely at
times. When questions or concerns arise, where
can you turn? There are many organizations,
clubs, education groups, and government
agencies ready to extend helping hands. Their
programs include networking with other
entrepreneurs, basic training for start-ups, and
more sophisticated help for expanding businesses.
Basting a Bright Future
Everyone in Mike McCrea’s family knew
he made delicious barbecue sauce. It was the star
of many a cookout and picnic.
During the 21 years he
worked for a hazardous
waste company, the
Denver man dreamed
about starting his own
company to make and sell
barbecue sauce.
In 1999, McCrea,
known to friends and
customers as Big Mike,
started selling his sauce
from the back of his car. A
year later, he moved the
operation to the Denver
Enterprise Center’s Kitchen Incubator. With its
affordable equipment and working space, the
incubator allowed McCrae to concentrate on
launching Big Mike’s BBQLLC.
He also received a $30,000 loan from the
MicroBusiness Development Corporation, with
which he bought equipment and improved
product packaging. Next, he expanded his
business to include catering and additional
products including chili. His revenues have
grown from $30,000 the ?rst year to more than
$100,000 in 2002. He recently sealed contracts
with a grocery store chain and stadium in the
Denver metro area.
“The loans and counseling I received from
microenterprise organizations have been the key
to my growth,” McCrae said. “I am optimistic
about the future.”
One of the ?rst places to look for help
is your local Microenterprise Development
(MED) agency. These programs offer a vast array
of services all keyed to microentrepreneurs such
as you. While each MED organization is set up a
little differently, they are likely to be places where
you can improve your ?nancial literacy through
classes, brochures, booklets, and counseling or get
training in business development topics. Their
staffs can offer technical assistance on business
matters, or help you reach new markets with
your business. Many of them also can help you
build assets through matched savings programs.
More information on ?nding help is in the
“Recommended Resources” section on page 61.
Review this checklist to gauge your needs:
Everyone in
Mike McCrea’s
family knew he
made delicious
barbecue
sauce.
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s i s t an ce
?I’ve never started a business before.
If you’re new to the business world, you may
need some basic ?nancial education and
counseling. Contact your local microenterprise
agency. It will offer classes, group meetings, or
other organized sessions to teach you how to
write a business plan, keep ?nancial records and
learn other business basics. It also will be able to
refer you to organizations or clubs that help new
entrepreneurs. Small Business Development
Centers, funded by the SBA, also provide
management and technical assistance to small-
business owners and aspiring entrepreneurs.
? I want to know more about business incubators.
Incubators nurture young companies and help
them survive the critical start-up period. They
usually offer hands-on management help,
?nancing sources, and business support services.
Incubator companies generally share of?ce space
and services under one roof. After a few years,
companies graduate from incubators and go out
on their own. Sometimes incubators help a
variety of companies and sometimes they
concentrate on a particular industry.
?I’d like to meet other business owners in
my community.
Your local Chamber of Commerce is a good place
to start. This organization is made up of business
owners dedicated to improving the local economy.
If you’re in a big city, your chamber may have
separate meetings for people in certain industries
or certain geographical parts of the metro area.
Service organizations, such as Lions Club
International or Rotary International, also offer
chances to network with other business owners.
?I’m growing my business and need more
sophisticated help.
First, contact your local microenterprise agency.
Some of its offerings may be right for you.
Community colleges, universities, and for-pro?t
business schools also provide more advanced
business courses.
? I’m going to start a home-based business.
Many organizations offer support for at-home
entrepreneurs. The American Association of
Home-Based Businesses offers newsletters and
tip sheets on running
businesses at home.
Membership is free. The
National Association for
the Self-Employed, which
charges a membership fee,
provides information on
business development and
access to services.
?I need tax help.
The IRS sponsors the
Volunteer Income Tax
Assistance (VITA)
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Incubators
nurture young
companies
and help them
survive the
critical start-up
period.
program, which offers free tax help for people
with low to moderate incomes. VITA sites are
staffed by IRS employees or trained volunteers.
Many of the sites offer electronic tax return
?ling, which gets refunds to taxpayers in about
half the time of paper ?ling. To learn more,
visit the IRS Web site (www.irs.gov), type
VITA in the search box, and click the
document Tax Tip 2003-53: Volunteer Income
Tax Assistance. You may also call the IRS for
information at 1-800-829-1040. The AARP
also provides assistance for older persons
through its Tax-Aide Program. For
information, call 1-888-227-7669 or visit the
organization’s Web site, www.aarp.org. Also,
check the SBA Web site, www.sba.gov, pull
down the Hot Items menu, click Business
Advisor, and then click Taxes.
? I need one-on-one help from an
experienced business owner.
You may need a “mentor.” A mentor
volunteers his or her time to guide you through
starting or growing your business. Mentors are
experienced in small business or in your ?eld.
Mentoring is a long-term commitment that
lasts months or years. Your local microenterprise
agency may be able to match you with a
mentor. You may be able to ?nd a mentor
yourself through meetings of local business
or service organizations. Another resource
is SCORE, or Service Corps of Retired
Executives, a national, nonpro?t organization
of current and former executives and business
owners who counsel and mentor free of charge.
Smoothing a Path to Success
Without her mentor, Diane MacFarlane says
she might never have launched her business,
a recycling center called Dyna’ Mac’s
Redemption House.
MacFarlane, a single mother of two living in
Bowdoin, Maine, was referred in 1992 to Project
Soar, a self-employment program for welfare
recipients. MacFarlane wanted to start a
recycling business, but another woman in her
class failed in an attempt to open a can and
bottle-recycling center in a nearby town. That
made MacFarlane’s road even harder.
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Project Soar’s staff and her fellow students
urged MacFarlane to stick with her plan. In
addition to business training and access to
capital, Project Soar gave MacFarlane a
mentor—an experienced businesswoman—
for one-on-one advice and guidance.
“She was awesome,” MacFarlane said.
“I could call on her whenever I had a question.
We met every two weeks to a month.”
MacFarlane’s mentor helped her pursue
a deal on a building for the recycling center.
The owners wanted more rent than MacFarlane
could pay. MacFarlane’s mentor checked out the
building and realized MacFarlane could take
advantage of the fact it had
been vacant for years. She
urged MacFarlane to give the
owners a “take it or leave it”
offer within MacFarlane’s
budget—and they took it! Dyna’ Mac’s
opened in 1993 in Auburn, Maine.
Today, Dyna’ Mac’s Redemption House
continues to prosper. MacFarlane employs
two to three part-time employees. In 1995,
she began renting extra space in her building
to crafts vendors, a “fun” sideline that booms
at Christmas. She’s considering adding a
convenience store to her location. In 1998,
MacFarlane was named Maine’s Welfare-
to-Work Entrepreneur of the Year.
MacFarlane still sees her mentor
occasionally, but they rarely talk business.
“She’s more a friend now,” MacFarlane said.
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MacFarlane’s
mentor helped
her pursue a deal
on a building for
the recycling
center.
Conclusion
We’ve covered a wide range of skills in this
booklet. You’ve learned personal skills such
as setting ?nancial goals, creating a spending
plan, building your ?nancial reserves, and
controlling debt. You’ve also learned business
skills such as developing a business plan,
tracking your business ?nances, considering
?nancing, and ?nding support. Together,
these business and personal skills will help
put you on secure ?nancial footing. It’s up
to you now to begin putting these skills to
work in your home and business.
As your business grows, you may want
to look into other resources for expanding
your knowledge and sharpening your skills.
Look at the list of Web sites in the
“Recommended Resources” section below
for additional resources.
The path of a microentrepreneur
may not always be easy, but it’s always
exciting. Good luck as you take charge
of your ?nances and pursue
your dream.
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Recommended Resources
The Internet provides more information about
organizations and programs that provide help
to microentrepreneurs and small-business
owners, including information about
investments. Sites to visit include:
• www.abilitiesfund.org: The Abilities Fund is a
national organization that helps entrepreneurs
with disabilities.
• www.asbdc-us.org: The Association of
Small Business Development Centers offers
management and technical assistance to
entrepreneurs. The Web site can locate a
nearby center for you.
• www.brill.com: Brill’s Mutual Funds
Interactive is a source of investment
information.
• www.cldavis.com: This privately maintained
site provides links to Web sites of Small
Business Investment Companies (SBICs) that
are licensed and regulated by the SBA.
• www.entreworld.org: EntreWorld is a public
service of the Ewing Marion Kauffman
Foundation. The site includes a special search
engine for Internet entrepreneur offerings.
• www.irs.gov: The Internal Revenue Service
Web site lets you download tax forms and
booklets on business and personal tax matters.
Find information about its Volunteer Income
Tax Assistance program by typing VITA in the
search box and clicking the document Tax
Tip 2003-53. You may also call the IRS for
information at 1-800-829-1040.
• www.jbsba.com: The American Association
of Home-Based Businesses is hosted on this
site, providing free information to those who
sign up.
• www.mfea.com: The Mutual Fund Education
Alliance will help you research different types
of mutual funds.
• www.microenterpriseworks.org: The
Association for Enterprise Opportunity (AEO)
can link you to microenterprise organizations
in your community.
• www.nase.org: The National Association
for the Self-Employed focuses on
microentrepreneurs and self-employed
people, providing them with support and
bene?ts.
• www.nbia.org: The National Business
Incubation Association (NBIA) will link you
to NBIA-member incubators near you.
• www.sba.gov: The U.S. Small Business
Administration offers a wealth of information
on starting and growing a business. The
Other Resources button links you to dozens
of organizations dedicated to helping small
businesses. For information on loans, click
Financing, and then click Micro-Loans. This
page will provide you with sources in your
community that offer loans up to $35,000
to eligible borrowers.
• www.score.org: The Service Corps of Retired
Executives (SCORE) has 10,500 volunteer
members and 389 chapters in the United
States. The Web site can guide you to the
chapter nearest you. SCORE’s toll-free
telephone number is 1-800-634-0245.
• www.uschamber.org: The U.S. Chamber
of Commerce can link you to a chamber
in your community.
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Acknowledgments
Financial Planning for Your Microenterprise was
prepared speci?cally for the Association for
Enterprise Opportunity as a public service by the
Denver-based National Endowment for Financial
Education
®
; William L. Anthes, Ph.D, President;
Brent A. Neiser, CFP, Director of Collaborative
Programs; and Jeannette Herreria, Project Manager
of Collaborative Programs.
The National Endowment for Financial
Education (NEFE) is a nonpro?t foundation
committed to educating Americans about
personal ?nance and empowering them to
make positive and sound decisions to reach
?nancial goals. The National Endowment for
Financial Education, NEFE, and the NEFE
logo are federally registered service marks of
the National Endowment for Financial
Education. For more information about the
National Endowment for Financial
Education, visit its Web site at
www.nefe.org.
The Association for Enterprise
Opportunity (AEO) is a national
association of organizations and
individuals committed to
microenterprise
development.
It provides members
with a forum,
information, and a voice to promote enterprise
opportunity for people and communities with
limited access to economic resources. AEO also
represents the U.S. microenterprise agenda in
the growing international community.
Membership in AEO is open to practitioners,
individuals, public agencies, funds, and others
who share in AEO’s mission. For more
information about AEO, visit
www.microenterpriseworks.org
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Special thanks to all volunteer models and to those
who provided photos—Linda Torres-Winters
“Lindita” of Linditas Inc.; David Tenenbaum of
Rocky Mountain Spice Co.; Diane Fresquez of For
Heaven’s Sake; Travis Collins, Crystal L.
O’Donnell, and Charles Reed of Cates Candies;
David Amman of Business Capital of Colorado Inc.;
Tina Garcia of Mobile T’s Manicures; Jill Hennen;
Fanjarivo Rakotonirina of Tropical Items
Madagascar; Ding-Wen Hsu of Paci?c Western
Technology, Ltd.; Ching Chih Lei of Little
Shanghai Café; Chery L. Casting of Lin du Bois;
Kathy Zimmer of Southside Jazzercize Center;
Aaron Nahale of Setpoint Systems Corp.; Mike
McCrea of Big Mike’s BBQ; Melissa M. Rogers of
Euken Safaris Inc.; Dennis Wilson of Pangaea
Designs; Dave and Janie Shirley of Rattlebrain
Theater Co.; Cecilia Prinster of the Colorado
Enterprise Fund; Eugene R. and Brenda Koke,
Jamie Cathcart of Autoworks International; Synia
Gant-Jordan of the Hairnet; Beaulah Williams of
B.B. Design; Diane MacFarlane of Dyna’ Mac’s
Redemption House; Brett Long of Geeks on Call;
Nebojsa (Shon) Vukomanovic of The Sweet Life
Coffee Hause; Shar Bjerke of Absolutely Stitches.
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doc_669322886.pdf
YOUR MICROENTERPRISE
© 2003 National Endowment for Financial Education. All rights reserved.
Note: The content of this material is believed to be current as of this printing, but, over time,
legislative and regulatory changes, as well as new developments, may date this material.
This booklet is meant to provide general ?nancial information; it is not meant to substitute for,
or to supersede, professional or legal advice.
FINANCIAL PLANNING FOR
YOUR MICROENTERPRISE
TABLE OF CONTENTS
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association
Introduction..........................................................................................i
Common Types of Microenterprises ...........................................................................................iii
Are You Ready to Start a Business? ...........................................................................................iii
Are You Ready to Expand a Business? .......................................................................................iii
Where Do You Go for Help? ......................................................................................................iii
CHAPTER 1
Setting Your Goals...............................................................................1
Making a Dream a Reality ...........................................................................................................3
Dreams Do Come True ................................................................................................................4
CHAPTER 2
Where Has My Money Gone?...............................................................7
Step 1: Listing Your Income .........................................................................................................8
Step 2: Listing Your Personal Expenses .......................................................................................8
Step 3: Comparing Income and Expenses .................................................................................11
Step 4: Reviewing How You Did and Making Changes ........................................................11
Final Thoughts ............................................................................................................................12
CHAPTER 3
Building Your Financial Reserves and Assets .....................................17
Saving for Success ........................................................................................................................17
Tips for Finding ‘Hidden’ Cash for Savings .............................................................................18
Where Do I Put My Money? .....................................................................................................18
CHAPTER 4
The Debt Trap...................................................................................23
Credit Cards: Use with Caution .................................................................................................23
Tips for Using Credit Cards Wisely ...........................................................................................24
Are You Deep in Debt? ...............................................................................................................24
How to Get Out of Debt ............................................................................................................24
Is Bankruptcy a Good Choice? ..................................................................................................25
Getting a Credit Report ..............................................................................................................26
Repairing a Credit History .........................................................................................................28
for enterprise opportunity
CHAPTER 5
Writing a Business Plan.....................................................................31
Take Your First Step ..................................................................................................................31
Describe Your Business ..............................................................................................................32
Analyze the Market .....................................................................................................................32
Reach Out to Customers .............................................................................................................33
Research Marks the Spot .............................................................................................................34
Projecting Sales: An Example ....................................................................................................35
Organize the Day-to-Day Operations ........................................................................................36
Set a Course with a Business Plan .............................................................................................36
CHAPTER 6
Key Financial Skills for Microentrepreneurs.......................................39
Managing Your Cash Flow ........................................................................................................39
Figuring a Break-Even Point ....................................................................................................40
An Example of Break-Even Analysis .........................................................................................41
Calculating an Owner’s Draw ...................................................................................................43
Keeping Records ..........................................................................................................................43
Keeping a Balance Sheet ............................................................................................................44
Exit Strategies ..............................................................................................................................44
Do You Need a Computer? ........................................................................................................45
CHAPTER 7
Do I Need Financing? ........................................................................47
Do I Truly Need Financing? ....................................................................................................47
Are There Other Resources I Can Use? ...................................................................................47
Can I Use a Credit Card..............................................................................................................47
Can I Do it Myself? ...................................................................................................................48
Where to Get Financing .............................................................................................................48
The Language of Lending ..........................................................................................................49
The Money Struggle ....................................................................................................................50
CHAPTER 8
Insurance and Taxes .........................................................................53
Insuring Your Business ................................................................................................................53
Cutting Through Red Tape ........................................................................................................54
CHAPTER 9
Networking and Getting Help.............................................................57
Basting a Bright Future ..............................................................................................................57
Smoothing a Path to Success ......................................................................................................59
Conclusion .......................................................................................61
Recommended Resources ................................................................61
Acknowledgments ............................................................................61
You’ve probably all heard stories of corporate
giants’ humble beginnings, such as computer
giant Hewlett-Packard’s start
in a Silicon Valley garage,
or Starbucks’ birth with
a single coffee shop
in Seattle.
INTRODUCTION
am
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Owning a business is one of the most cherished
American dreams. All businesses, whether
they’re ranked in the Fortune 500 or making
only $500 a month, start just as your business has
or will: with ideas and energy.
You’ve probably all heard stories of
corporate giants’ humble beginnings, such
as computer giant Hewlett-Packard’s start in a
Silicon Valley garage, or Starbucks’ birth with a
single coffee shop in Seattle. Maybe you dream
of your own small business growing into an
economic powerhouse. Or perhaps you’d be
happy to run a small but successful business.
Either way, you
will need an under-
standing of ?nancial
matters to help you
as you work.
This booklet
will help you begin
to organize both
your personal and
business ?nances
through goal setting,
budgeting, and
acquiring basic
?nancial skills.
While good business
owners always
separate their personal ?nances from their
business ?nances, it’s important to apply good
skills to both sides of your ?nancial life.
Your personal
?nances can have a
big impact on your
business ?nances,
and vice versa. If
you’re just starting
out or expanding a
hobby or sideline business, the only ?nancial
track record you can show to prospective lenders
or investors is your personal one. If your
personal ?nances are in poor shape, you’ll stand
less of a chance of getting business ?nancing.
Your personal ?nancial problems also may
drain money from your business. Even if your
personal ?nances are in good shape, you need
a ?rm grasp of how much you spend, and for
what, if you want to know how much your
business must make to support you.
This booklet will help you identify key
?nancial skills you should develop in order
to succeed personally and professionally,
and how you can ?nd help from your
local Microenterprise Development (MED)
organization and other support groups as
you learn these skills and build your business.
One thing you should know as you pursue
your business dream: You’re not alone. A
study conducted in 1999 and published by
the ACCION Network in 2002 reported
approximately 13 million microentrepreneurs
in the United States. Typically, a microenterprise
is a sole proprietorship, partnership or family
Your personal
?nances can
have a big
impact on your
business
?nances, and
vice versa.
er i can dr eam
business that has fewer than ?ve employees and
capital needs of less than $35,000. According to
the U.S. Small Business Administration (SBA),
businesses are still considered small if they have
up to 500 employees, so microenterprises are
super-small businesses. Often, a microenterprise
is a one-person operation or the owner and a
couple of family members.
Microentrepreneurs come from all walks
of life. They start their businesses for many
different reasons. Some of them want to
supplement their income from low-paying jobs
or to replace income from jobs they have lost.
Others ?nd the ?exibility of owning a business
helps them balance family responsibilities with
work. Still others don’t have the training or
talent to ?nd professional jobs. For some,
microentrepreneurship is the avenue to
realizing dreams, expanding talents and
avoiding dead-end, minimum-wage employ-
ment. Do any of these motivations or situations
sound familiar to you? They may strike a
chord with you—or you may have your own
reasons for starting your microenterprise.
Microbusinesses have healthy survival rates.
The Aspen Institute’s Self-Employment
Learning Project tracked more than 400 clients
of Microenterprise Development programs from
1991 to 1997, and found that 49 percent were
still in business at the end of ?ve years. This
compares favorably to the SBA’s ?ndings that
76 percent of small businesses survive two
years and 47 percent
survive four years. You’ll
improve your chances of
success if you improve
your ?nancial skills.
Many resources are
available to help you start
or build your business.
Look ?rst to your local
MED organizations.
MED agencies provide a
variety of services—
although each offers slightly different assistance.
They may help you develop your idea and test
it to see if it’s workable. They may assist as you
write a full-?edged business plan, which will lay
out your strategy for success. They may guide
you as you research your market and develop a
marketing plan. They may even be able to help
you access new markets.
MED organizations also have access to
loans and other ?nancing that entrepreneurs
can’t ?nd elsewhere, and they may offer
matched savings programs. You’ll ?nd most
MED organizations have a wealth of classes,
training, and one-on-one mentoring that will
help you develop your skills and grow your
business. This could include ?nancial literacy
training, and legal or personal counseling.
Even after you launch your business, MED
organizations are there to give technical
assistance to keep you on the path to success.
Many resources
are available to
help you start
or build your
business.
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Common Types of Microenterprises
Some common types of microenterprises are:
• Repair services
• Cleaning services
• Specialty foods
• Child care
• Arts and crafts
• Clothing and textiles
• Computer technology
Are You Ready to Start a Business?
Answer the following questions:
• Do you have a clear idea for a business?
• Do you have experience in your chosen business?
• Are you motivated and determined to develop
this idea?
• Are you realistic about the potential your
idea has for growth and income?
• Are you familiar with basic ?nancial tools
such as bank accounts?
• Are you a good communicator?
• Do you have the self-con?dence to sell yourself
and your idea?
Are You Ready to Expand a Business?
Answer the following questions:
• Are your competitors growing their businesses?
• Do you plan to expand your current line of
business or branch into an associated ?eld?
• Have you examined the ?nancial bene?ts and
risks of expanding?
• Can you show you will gain economies of scale if
you expand? That means expansion allows you to
sell more of your goods or services, resulting in
lower costs per unit and more pro?t.
• Can you get the money, either internally or through
loan sources, to fund expansion?
• Can you keep your customers happy while you go
through “growing pains”?
• Do you have or can you hire the human resources
necessary for expansion?
• Do you have the people skills to direct more
employees and are you willing to turn over partial
control of your bigger business to others?
Where Do You Go for Help?
Microenterprise Development (MED)
organizations should be your ?rst stop as you
look for help in establishing or expanding your
business. Each MED organization is structured
a little differently. Some of them may specialize
in helping certain groups, such as female or
minority entrepreneurs, or in targeting certain
goals, such as the creation of jobs or ?ghting
poverty. Some may help new businesses get on
their feet, others may focus on helping existing
businesses grow, and still others may help both
new and old businesses. Each organization
typically receives funding from foundations,
corporations, and/or tax dollars.
You can ?nd out what kinds of MED
organizations exist in your community by
contacting the Association for Enterprise
Opportunity at www.microenterpriseworks.org.
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1
SETTING YOUR GOALS
Not every “someday” wish
requires money, but many
of them require
some ?nancial
resources.
mon ey r es ou r ce
How many times have you said to yourself,
“Someday…”?
You might have ?nished that sentence with:
• I’ll have a better house.
• I’ll drive a nicer car.
• I’ll get out of debt.
• I’ll be my own boss.
• I’ll have more time to spend with my family.
Not every “someday” wish requires money, but
many of them require some ?nancial resources.
How can you build the ?nancial foundation to
achieve your dreams? You have to work for
your dreams and believe you can achieve them.
It helps, too, if your family
and friends support and
help you.
Goal setting will help
you focus your energies
and move toward dreams
of a brighter, better future
with purpose, vision and
direction. Goal setting
comprises more than
making a simple wish
list. It involves developing
a list of clear goals and
setting a timetable for
reaching them. Some people call this the
SMART system, because you are choosing goals
that are Speci?c, Measurable, Achievable,
Relevant, and Trackable.
In other words, you’re pinpointing
a de?nite goal. A goal that you can measure,
is within your reach, ?ts into your life and
abilities, and can be followed step by step.
You wouldn’t, for instance, choose “climb
Mount Everest” as a goal if your current
exercise consists of walking to the bus stop!
It’s a goal that would be dif?cult to accomplish
without proper training. You wouldn’t pick
“make a lot of money” if you have no ideas to
make money. It’s a goal that’s not speci?c. You
wouldn’t decide to “teach at a university” if
you only have a high school degree. This is a
goal that’s not achievable without
accomplishing some intermediate goals ?rst.
With these guidelines in mind, think about
what you want for yourself and your family. List
speci?c goals, large and small. Then, choose the
appropriate goals for your business or your
personal life.
Choose
goals that
are Speci?c,
Measurable,
Achievable,
Relevant, and
Trackable.
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s
First, think about short-term goals—those
you can reach in about three months. These
might include saving enough money for the
children’s holiday presents, taking yourself
to the beach for a day, or buying a new cash
register for your business.
Then, consider medium-term goals that can be
reached in three months to about a year. These
might include trading in your car for the pickup
truck you’ve always wanted, learning to sew
your own clothes, or hiring another employee
for your business.
Finally, think about long-term goals that are
more than a year away. Perhaps you’ve always
wanted to go back to school for degrees or
certi?cations, start or expand your business,
or buy a home.
Reaching your goals requires planning.
Estimate the cost of each goal. Calculate how
much money you must set aside each week to
accumulate that amount in the chosen period
(short, medium, or long term).
For example, if you’d like to take your
family out for a special holiday dinner in three
months, and your favorite restaurant will cost
$100 for a family of ?ve, you’d need to save
about $7.75 a week for the next 13 weeks.
Obviously, bigger goals will take more
money and time, but by breaking down your
list step by step, each goal will be much easier
to attain.
These goal-setting skills can be applied to
your business dreams and personal hopes as
well. Paying off loans, increasing pro?ts,
expanding your product line, or adding locations
can be targeted just as
easily as buying a new
car, sending your
children to college,
buying a retirement
home, or remodeling
the kitchen.
In the remaining
chapters, you’ll learn
how to track your
spending, build your
?nancial reserves,
reduce your debt, and
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By breaking
down your list
step by step,
each goal will
be much easier
to attain.
master the business skills you need to achieve
your personal and professional goals.
Making a Dream a Reality
For four years in the early 1990s, Fanja
Rakotonirin lived and worked in tiny villages on
the edge of Madagascar’s rain forest, home to the
world’s only lemurs.
In a project funded by the U.S. Agency for
International Development, the Madagascar
native worked with villagers to lessen their
impact on the fragile ecosystem of the nearby
Ranomafana National Park. She helped
villagers start new
businesses including raising ?sh, pigs,
chickens, and honeybees. Rakotonirin grew to
love the people, although they were from
different tribes. “After four years, they
became like my family,” she recalled.
Then Rakotonirin left Madagascar to study
at the Montessori Education Center of the
Rockies in Boulder, Colorado. She tried to stay
in touch with the villagers, and thought all
was well. Upon returning for a visit in 2001,
however, she found the projects she had helped
start had failed. The villagers were desperately
poor and ill, and were turning again to the rain
forest for their livelihoods.
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3
“I cried and told my mom, ‘I just can’t
watch these people die. They are a part of my
life,’” Rakotonirin said. She decided to help the
villagers form a cooperative to make and sell
place mats, baskets, hats, bags, and other items
from raf?a, sisal, jute, and cotton. Rakotonirin
invested in materials and looms for weaving
and created designs for the weavers to use. Her
parents, still living in
Madagascar, helped,
too. She received her
?rst shipment of woven
items in August 2002
and Tropical Items
Madagascar was
in business.
Going from
teaching to business
was a big jump for
Rakotonirin. She got
help through the
MicroBusiness
Development
Corporation (MBD) in
Denver and the Service
Corps of Retired
Executives. She joined a
networking group and a
Boulder women’s business group. She read
everything she could ?nd and did extensive
research on the Internet. The help she received
from the MBD was particularly welcome.
“Without them, I don’t think my business
would exist,” Rakotonirin said.
She sells her items wholesale and
at festivals and craft shows. She keeps her
expenses low by doing her own bookkeeping
and using her husband, Georges Raelisaona, as
her webmaster. Brightly colored and
reasonably priced, the handwoven items have
sold well. Rakotonirin donates 5 percent of her
pro?t to the villages’ health-care programs and
5 percent to education programs.
Rakotonirin found that her village
weavers worked slowly. As interest in her
products has grown, she has had to ?nd
another, more-predictable production source.
She enlisted her family and her husband’s
family, and also is setting up a cooperative
factory, named Naturary (for natural
weaving), in Madagascar’s capital.
Rakotonirin continues to teach. Her
weekends are spent growing the business
and selling at fairs. An article about Tropical
Items in the Boulder newspaper in June 2003
generated a ?ood of calls. She’s optimistic she
will be able to make a difference in the lives
of many of her countrymen.
“Sales are very good,” Rakotonirin said.
“My business is blooming.”
Dreams Do Come True
Synia Gant-Jordan, a cosmetologist in Grand
Rapids, Michigan, wanted to open her own
4
Rakotonirin
donates 5 percent
of her pro?t to
the villages’
health-care
programs and
5 percent
to education
programs.
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hair salon. But with six
children—two of her
own and four she was
foster-parenting—it was
a struggle just to put
food on the table.
Synia worked in a
series of salons for several
years, but never forgot
her dream. In 1997, she
saw a ?yer for Grand
Rapids Opportunities for
Women (GROW), a
microenterprise agency.
She enrolled in a 15-week
class entitled, “Mind Your
Own Business.”
She was very
focused on her idea, and the training helped
her ?gure out step by step how to accomplish
it. She wrote a business plan that outlined
what she wanted to achieve. Several months
after Synia completed the training, her ?ancé,
Johnnie Jordan, found an abandoned building
he was certain would make a perfect home for
her salon. They scraped together the $5,000 in
back taxes to buy it, and did the remodeling
themselves. The Hairnet opened in 1997.
Today, Gant-Jordan’s clientele continues to
grow by word of mouth. She and Jordan, now
married, saved enough money to buy the lot
next to The Hairnet. Gant-Jordan planned to
break ground in the summer of 2003 on an
expansion that will more than double the size
of the salon. The addition will include a third
hairdresser booth, a nail technician booth, an
employee break room, an of?ce, and a play
area for customers’ and the owners’ children.
The success of her business makes Gant-
Jordan feel blessed. To re?ect that, she recently
changed the salon’s name to The Hairnet
with Blessings That Flow.
“We just kind of take it easy. We want
our blessings to ?ow—whatever is God’s will
with our business, home, and lives,” Gant-
Jordan said.
She was very
focused on her
idea, and the
training helped
her ?gure
out step by
step how to
accomplish it.
5
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2
WHERE HAS MY MONEY GONE?
s pen
If you’re like many people, you may not have a
good idea where your money comes from and
where it goes each month. There are times when
you feel pretty well off ?nancially and easily able
to meet your household expenses. Other times,
your empty pockets may baf?e you. Where has
all your money gone? A good money manager
has to be able to track the cash ?ow in and out,
keeping track of both personal and business
accounts. Your personal cash ?ow equals cash
?ow in minus cash ?ow out.
A spending plan can help you get control
and keep control of your money and your cash
?ow. A spending plan is essential to good money
management. It’s
more than a budget,
which focuses only
on monthly bills. It’s
a planning tool you
can use to get a
handle on your
?nances—at home or
in your business.
Examining your
?nances is an
important task. The
average family loses
30 cents out of every
dollar due to poor
spending habits,
according to experts.
In other words, you can give yourself a
30 percent “raise” if you ?nd and stop poor
spending choices. Think of what that amount
of money could do for your personal ?nancial
stability, not to mention your business!
Let’s start by creating a spending plan for
your personal ?nances. Follow these four steps:
1. Identify your income
2. List your expenses
3. Compare income and expenses
4. Review how you did and make changes
A few tips before you start: If you have a
spouse and children, involve them in creating
the spending plan. Strive for accuracy as you
list income and expenses. Collect and use all
the ?nancial information you can ?nd in your
records and ?les.
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7
The average
family loses
30 cents out
of every dollar
due to poor
spending habits,
according to
experts.
di n g
Step 1: Listing Your Income
Review your pay stubs, your bank account
deposits, and other records to ?ll out the above
table. Remember that income doesn’t always
come in monthly allotments. You may have to
multiply or divide in order to ?gure
out what the monthly contribution is from a
particular source. For instance, if you’re paid on
the 15th and 30th each month, you’ll have to
multiply your net pay from a single check by
two. If you receive child support every quarter
(every three months), you’ll have to divide the
amount by three.
Step 2: Listing Your Personal Expenses
It’s usually harder to list where you spend your
money than it is to see where you get it. Some
people ?nd it helpful to keep a spending diary
before taking on this part of a spending plan.
To create a diary, take a piece of paper and
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Source of Income Amount Each Month
Your wages/salary (after taxes)
Wages/salary earned by others in the house
Income from self-employment
Interest, dividends
Child support
Pension
Social/Supplemental Security
Gifts
Tax refund
Advance Earned Income Tax Credit
Public assistance (food stamps, housing)
Other income
TOTAL
My Income Worksheet
write the days of the week across the top. Each
day, write down how much you spend, and for
what. Carry a little notebook with you or save
receipts to make this task easier. At the end of
the week, add your expenses. Continue doing
this for about a month.
Also, look at several months of your credit
card statements, your checkbook register, and
your bank statement (particularly if some of
your payments, such as your mortgage or your
cable bill, are automatically withdrawn from
the bank).
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Expenditures Amount
House payment or rent
Heating bill (gas or fuel oil)
Electric bill
Water bill
Telephone bills (local, long distance, cell)
Cable bill
Groceries
Snacks/meals eaten out
Transportation (bus fare, gas for car,
tolls, car repair, car insurance)
Alimony or child support payments
Child care
Elder care
Doctor/dentist bills
Pet expenses
My Expense Worksheet
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10
Expenditures Amount
Union/professional dues
Clothing/uniforms
Education/training costs
Children’s school expenses
Dry cleaning
Laundry
Personal expenses
(children’s allowances, toiletries, etc.)
Home improvement and repairs
Gifts
Holiday spending
Life insurance premiums
Health insurance premiums
Property or renters’ insurance premiums
Disability insurance premiums
Church or other charitable donations
Loan payments
Credit card payments
Entertainment
Savings
TOTAL
My Expense Worksheet (continued from previous page)
Remember: Just as income doesn’t always
arrive in monthly amounts, expenses sometimes
occur only once or twice a year. Don’t forget
annual insurance payments or other occasional
expenses as you ?ll out the previous worksheet.
If you have a car insurance payment of $360
due once a year, for instance, you will have to
allow $30 a month ($360 divided by 12) in your
spending plan.
Step 3: Comparing Income and Expenses
To compare income and expenses:
Write down your total monthly income from
Step 1: _______________________________
Write down your total monthly expenses from
Step 2: _______________________________
Compare the two numbers.
Step 4: Reviewing How You Did and
Making Changes
If you have more income than expenses, that’s
terri?c. You can put that extra money toward
reaching your goals. If expenses are greater than
income, you need to get back on track. That
will require either reducing your expenses or
increasing your income.
You can consider taking on another job,
?nding a better-paying job, or having other family
members take on paid work to increase your
household income. You also can reduce expenses
by setting target amounts in each expense category.
This will guide you on how much you can spend
without exceeding your income.
Look at your expenses. Some of them can’t be
reduced without making major changes in your
life. These are called “?xed” expenses. Rent or
mortgage payments are examples of ?xed
expenses. You can’t really cut your housing costs
unless you’re willing to pack up and move to a
cheaper residence. Other costs are more under
your control. These “variable” expenses would
include food, gifts, entertainment, and clothing.
Examine your list of expenses and mark
each one, either with a “V” for variable or with
an “F” for ?xed. Look at each “V” and decide if
you can reduce your spending on each item. Can
you ?nd enough to cut so your total expenses are
less than your total income?
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11
Keep tracking what you spend in your
spending diary. Then, once a month, using
the worksheet starting on page 13, list all your
expenses and income, and compare what you
planned to make and spend with what you
actually made and spent.
Adjust future variable
expenses to balance the two.
For example, if you
planned to spend $300 for
groceries but actually spent
$350, you’ll have to look for
ways to cut $50 from next
month’s expenses. Or,
maybe you can ?nd a way
for your business to bring in
another $50 in pro?t.
Don’t give up, or
become too hard on
yourself, if you continue to ?nd your
income and expenses out of balance. It
happens to everyone. You can change your
plan if you have made adjustments and still
?nd you’re out of balance. Perhaps you’re
beginning to realize that the monthly
amount you set for groceries is just too
small; you know that now because you’re
always exceeding the amount you
budgeted. You might be able to trim costs
from other categories—cut back on gifts
or forego movies, for example.
The important part is to keep
planning. The personal ?nancial skills you
develop will help you—at home and in
business—whether you’re making $10,000 or
$100,000 a year.
Final Thoughts
Perhaps you’re thinking, “I’m a business owner.
Why do I need to master these personal ?nancial
skills?” Knowing how to make and use a personal
spending plan will aid you with your business.
First, you’ll have control of your personal ?nances
so they won’t have a negative
impact on your
business. Second, the skills you use in your
personal spending plan are similar to those you’ll
use in your business ?nances. You’ll learn more
about these skills, such as cash ?ow projections
and break-even analysis, in Chapters 5 and 6.
Don’t give up…
if you continue
to ?nd your
income and
expenses out
of balance.
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Source of Income Planned Actual Difference
Net wages/salary (after taxes)
Other family members’ wages
Income from self-employment
Interest, dividends
Child support
Pension
Social/Supplemental Security
Gifts
Tax refund
Advance Earned Income Tax Credit
Public assistance
Other income
TOTAL
My Spending Plan Worksheet
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My Spending Plan for Expenses Planned Actual Difference
House payment or rent
Heating bill
Electric bill
Water bill
Telephone bills
Cable bill
Groceries
Snacks/meals eaten out
Transportation
Alimony or child support payments
Child care
Elder care
Doctor/dentist bills
Pet expenses
Union/professional dues
Clothing/uniforms
Education/training costs
Children’s school expenses
My Spending Plan Worksheet
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My Spending Plan for Expenses Planned Actual Difference
Dry cleaning
Laundry
Personal expenses
Home improvements and repairs
Gifts
Holiday spending
Life insurance premiums
Health insurance premiums
Property or renters’
insurance premiums
Disability insurance premiums
Church or other charitable donations
Loan payments
Credit card payments
Entertainment
Savings
TOTAL
My Spending Plan Worksheet (continued from previous page)
3
BUILDING YOUR FINANCIAL RESERVES AND ASSETS
You’ve examined your income and
expenses and started to bring them
into balance.
f i n an ci al
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Saving for Success
You’ve considered your goals, both short term
and long term. You’ve examined your income
and expenses and started to bring them into
balance. Now it’s time to look for ways to
save money.
Saving money will help you reach your
goals, both personal and professional, and will
protect you in “rainy day” emergencies.
Savings will help you build your assets—
things of lasting value such as a home, a
building for your
business, or a retirement
fund.
Even a little bit of
money set aside can make
a big difference over time.
For example, if you
would save just $30 a
month—a dollar a day—
in a tax-free retirement
fund that pays 5 percent
interest, you would have
$12,331 in 20 years, and
$45,781 in 40 years.
You say the money
you earn each month
disappears before you can
set anything aside? The
secret to successful saving
is to pay yourself ?rst.
Each time you get a
paycheck from an employer or a payment
comes into your business, put some money
into savings.
If you are working for an employer,
you may be able to have part of each paycheck
deposited automatically into a savings account.
If you have a bank checking account, ask if
you can set up a savings account and
automatically direct a set amount from
checking to savings each month. However you
do it, make savings your priority. After all, you
can’t spend money you never actually have in
your pocket!
You also can examine your spending to
identify “leaks.” For instance, do you stop on
the way to work for coffee or a donut each
weekday morning? Even if you only spend
$1.50 a day, the amount adds up: $7.50 a week
equals $30 a month, which equals $360 a year!
You “need” that coffee each morning, you
say? Learn the difference between wants and
needs. Needs are necessities that you must
have to live. Groceries, safety equipment for
work, and children’s school supplies are
examples of needs. Dinner out, a vacation
home, and renting movies every weekend are
examples of wants.
You don’t have to give up every pleasure,
but you do have to recognize the importance
of paying for needs ?rst if you’re going to be
able to save.
You don’t have
to give up every
pleasure, but
you do have to
recognize the
importance of
paying for needs
?rst if you’re
going to be able
to save.
r es er v e
Tips for Finding ‘Hidden’ Cash for Savings
Consider the following:
• Put $1 a day plus your spare change in your purse
or pocket into a jar each night. By adding your
change to a $1 each day, you’ll probably end up
with about $50 at the end of the month.
• Don’t spend bonuses, tax rebates, or other
unexpected income.
• Send in product rebates. Use grocery coupons to
reduce your food bills. Put the money you get from
both sources into the bank.
• If you’ve just paid off a loan, keep “paying” the
loan amount to savings.
• Be a thrifty shopper. Buy generic or store brands
instead of big-name, heavily advertised brands of
food and clothing. Shop at discount stores. Buy
staples and nonperishable foods in bulk. Check out
thrift stores and yard sales.
• Give up expensive habits such as smoking
tobacco, playing the lottery, or going out and
spending money frequently with your friends.
Instead, ?nd things to do with your family
and friends that are inexpensive.
• Follow the “Rule of Three.” Compare at least three
companies’ prices before making a big purchase
or hiring a service.
Where Do I Put My Money?
As you begin to accumulate savings, you’ll want
to keep the money somewhere safe—not in a jar
or cardboard box or under the mattress! Many
types of ?nancial institutions offer safe places to
keep your savings.
Banks, credit unions, and savings and loans
are the most common places people put their
savings. In return for putting your money in
these institutions, you are paid “interest,” which
is ?gured as a percentage of the amount you
have in your savings account. Banks and savings
and loans usually are set up to make pro?ts—
that is, they use your money to make money for
themselves while still paying you interest. Credit
unions are set up as cooperatives. The people
who put their money in each credit union
become the owners. Credit unions must make
enough money to cover expenses, but aren’t
trying to make pro?ts
for outside owners.
Sometimes credit
unions offer better rates
for savings accounts or
loans because of this.
Most banks,
savings and loans, and
credit unions are
insured and supervised
by the federal govern-
ment. If one of them
goes out of business
because of ?nancial
troubles, the govern-
ment makes sure
customers get their
money back, up to
$100,000 per person.
Banks and savings and
loans are insured
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As you begin
to accumulate
savings, you’ll
want to keep
the money
somewhere
safe—not in a
jar or cardboard
box or under
the mattress!
through the Federal Deposit Insurance
Corporation (FDIC) while credit unions are
insured by the National Credit Union
Administration (NCUA). Look for FDIC and
NCUA logos in institutions, on booklets and
brochures, and on Web sites.
It’s a good business practice to set up
separate business and personal accounts. That
means you actually could end up with four
accounts—two savings, one personal and one for
your business, and two checking, one personal
and one for your business. It’s all right to set up
all these accounts in one institution. However, if
you’re saving for long-range business expenses,
such as replacement of equipment every few
years, you might consider putting your business
savings in a ?nancial institution or account that
pays higher interest for longer-term investments.
See the the list of different investment tools,
starting on page 20, to see if one works for you.
But regardless of your savings needs,
you’ll probably need to create basic savings and
checking accounts. To decide which institution
is right for you, ask:
• If the institution is conveniently located to your
home or your business?
• If it is open on the days and during the hours you
will need to use it?
• If you pay a fee to open a checking or savings
account?
• If you have to deposit a minimum amount
to open an account?
• If there are any fees to keep accounts open?
• If you bounce a check, what do you have to pay? Is
overdraft protection available?
• What interest rate does the savings account pay?
(Sometimes you’ll ?nd checking accounts pay
interest, too. Compare institutions’ rates on this, too.)
• If you have to keep a minimum amount of money
in either checking or savings accounts to avoid
fees? (“Free” checking accounts sometimes
require a minimum balance, which limits your
access to your money.)
• Are you comfortable with the staff? Do they speak
your language? Do they answer questions willingly
and clearly?
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Savings accounts in
banks, savings and
loans, and credit
unions are safe but
usually pay very low
interest rates, so your
savings don’t grow
very fast. You might
consider putting some
of your savings for
longer-term goals in
these types of accounts:
Employer retirement
plans: If you are employed at a salaried or wage-
paying job outside your microenterprise, your
employer may offer some kind of savings plan
such as a 401(k) or a Savings
Incentive Match Plan for
Employees (SIMPLE). You
choose an amount of money
that is then subtracted from
your paycheck and invested in
the plan, often with the
employer matching some or all
of your contribution. These
plans have varying degrees of
risk, depending on where you
invest your money. You also
must leave your money in the
account, or pay penalties to
remove it, until you are 59
1
?2
years old.
Retirement plans for the self-employed: If you
are a sole proprietor, you may create an
individual 401(k). This form of retirement
account has several advantages: You usually can
make larger contributions to this type of plan
than you can through a pension plan or regular
pro?t-sharing plan, and you don’t have to
contribute a ?xed amount each year. This is a
plus if you have a cash-?ow problem one year,
or want to take a larger owner’s draw. Small
businesses also can create Simpli?ed Employee
Pension (SEP) plans that don’t require ?xed
contributions each year. SEPs allow you to
make contributions after the tax year is ended
and you know what your pro?ts are. As a
general rule, plan contributions must be made
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You might
consider putting
some of your
savings for
longer-term
goals in…
on behalf of all employees who meet certain
eligibility requirements.
Individual Development Accounts (IDAs):
Your local Microenterprise Development (MED)
organization may offer these. IDAs are
partnerships among ?nancial institutions,
faith-based organizations, community-based
nonpro?t groups, schools, and others. They are
designed for small business owners and others
who don’t have access to employer-based
retirement savings plans. When you make a
deposit in an IDA, your contribution is matched
by partner organizations, sometimes dollar for
dollar, sometimes by $2 or $3 for each dollar
you save. IDAs have become very popular
among organizations that foster microenterprise
development. More than 350 communities have
programs that support IDAs.
Mutual funds: Mutual funds allow you to
participate in the stock market with less risk
than if you bought individual stocks directly.
Many ?nancial institutions offer mutual funds.
The manager of a mutual fund pools money
from many people to invest in many companies’
stocks, bonds, or other assets. With multiple
stocks in the fund, a drop in the value of one
stock has less impact on the fund’s total value.
Still, if the whole stock market goes down,
mutual funds do, too. You can research different
types of mutual funds online or at the library.
See the “Recommended Resources” section on
page 61 for some suggested Web sites.
Certi?cates of Deposit (CDs): Many ?nancial
institutions offer CDs as well. CDs require you
to make a minimum investment, then leave
the money deposited for a speci?c period. (For
example, you might buy a $1,000, three-year
CD.) The longer the
time, the higher the
interest rate you are paid
on your money. CDs
have higher interest
rates than ordinary
savings accounts, but
you don’t have easy
access to your money.
Treasury securities:
These include bonds,
bills, and notes issued by
the federal government.
Their interest rates are
guaranteed as long as you
hold the securities to maturity (the time at
which the government returns your money plus
interest).
Money market funds: Money market funds pay
higher interest rates than savings accounts, but
require high minimum balances ($2,500 in some
cases; each institution is different). You also may
be limited in how many times you can make
withdrawals, and the minimum amount you
may withdraw at once may be high. These
funds usually are not insured.
21
IDAs have
become very
popular among
organizations
that foster
microenterprise
development.
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THE DEBT TRAP
When you buy on credit, you
use someone else’s money to
buy what you want.
cr edi t adv i ce
It’s easy—maybe too easy—to buy things on
credit. When you buy on credit, you use some-
one else’s money to buy what you want. In
return, you agree to pay back the credit card
company, bank, or
other credit source in a
speci?c amount of
time—and with
interest. Interest is
expressed as a
percentage of the
amount you borrowed,
which is called the
principal. If you
borrowed $100 at 5
percent interest, you’d
owe $105 at the end of one year, or $100
principal and $5 interest.
If you make payments according to
the agreement, without bouncing checks or
making late payments, it’s said you have
“good” credit. Good credit is vital to maintain
if you’re going to borrow money for your
business or for a large personal purchase. Few
people have the cash to buy a major item such
as a car or a business computer system.
Credit Cards: Use with Caution
Credit cards have many advantages. They’re
convenient. You don’t have to carry large
amounts of cash for purchases. If
your card is lost or stolen,
you’re liable only for the ?rst $50 of
unauthorized charges if you report the card’s
loss right away. You may also ?nd a credit card
is a requirement at times—such as when
you’re making a hotel reservation, renting a
car, or buying something on the Internet. You
can even use credit cards to establish good
credit by showing you can promptly pay back
the credit
card
company.
Cards also
can help
business
owners buy
supplies or
equipment.
But
credit cards’
very ease of use and availability can cause
problems if you get carried away with
purchases. Credit cards carry very high interest
rates—sometimes 20 percent or more—and if
you can’t pay off the total you charge on the
card each month, interest builds up quickly.
Card issuers typically require you to pay off
just 2 percent of the total amount you owe
monthly. If you charged $1,000 on a card
carrying 20 percent interest, and paid only the
minimum each month, it would take you more
than nine years to pay the debt. You’d end up
paying $2,073 in interest and principal.
Good credit is
vital to maintain
if you’re going
to borrow
money…
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Tips for Using Credit Cards Wisely
Consider the following tips for using credit
cards wisely:
• Look for cards that carry no annual fees and low
interest rates.
• Use them only to make important purchases; not
for clothing, food, or entertainment.
• Keep track of your credit card purchases on your
spending plan—as soon as you make them—so a
big bill doesn’t surprise you when it comes.
• Limit the number of cards you use to one or two.
• Consider using a secured credit card. These require
you to deposit money in a special account to cover
your purchases.
Are You Deep in Debt?
Credit cards aren’t the only form of debt. Bank
loans, car loans, home mortgages, business
loans, and other borrowing can add to your
debt load. How do you know when you have
too much debt?
Lenders use
something called a
debt-to-income ratio
to gauge how much
debt you can afford.
To calculate your
ratio, divide your total monthly debt payments
by your gross (before tax) income. For example,
suppose you pay $800 for a mortgage, $200 on
a credit card, and $150 for a student loan for
a total each month of $1,150. If you and your
spouse together make $4,000 a month, your
debt-to-income ratio would be $1,150 divided
by $4,000 or approximately .29 (29 percent).
Lenders want your ratio to be below 36
percent (25 percent if you pay rent and
have no housing debt).
You probably don’t need to calculate
your debt-to-income ratio to know if you have
a problem. If you’re struggling to meet your
expenses each month, missing loan payments,
bouncing checks, working an extra job to make
ends meet, have been refused credit, or are
getting telephone calls or visits from bill
collectors, you know you need help.
How to Get Out of Debt
If you’re going to build a thriving business,
you must keep your personal debts to a
manageable level. If you’re buried in debt,
you’ll ?nd it dif?cult or impossible to borrow
money for your business. Also, making big
Credit cards
aren’t the only
form of debt.
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debt payments may drain money from your
business. Here are ?ve steps to help you trim
your debt:
Step 1: Figure out where you are in debt.
Do you owe money to a couple of companies
or many? Are you paying late fees or high
interest rates on minimum payments?
Step 2: If you owe only a handful of
companies, see if you can negotiate smaller
payments, at least for a while.
Step 3: If you owe many businesses, consider
seeking help from a nonpro?t consumer debt
counselor, such as Consumer Credit Counseling.
Such counselors will help you set up a payment
plan. (Avoid “credit repair” companies, which
require you to pay a fee to “?x” bad credit.
Check a counseling company’s history with the
Better Business Bureau or the state attorney
general’s of?ce.)
Step 4: Take a hard look at your spending
plan and see if you can ?nd ways to cut
expenses or increase income. Pay your debts
with any additional money you can manage to
save or earn.
Step 5: Don’t ignore bills and past-due
notices. A poor credit history will haunt you
for years.
If you get caught in the debt trap, you’ll
?nd that creditors or their representatives will
call you repeatedly at home and even at work.
You can curtail calls at work by sending a
letter to the collection agency, requesting that
calls to your workplace stop. You must write,
not call. Keep copies of the letters and mail the
originals—with Return Receipts Requested—
to the credit agencies. If calls do not stop,
contact your state attorney general’s of?ce.
Beware: If you do not pay your debts, your
creditors can go to court and seek permission
to take one-fourth of your take-home pay (if
you are working for an employer). This is
called “garnishing” your wages, or “wage
garnishment.” If more than one creditor
garnishes your wages, your employment
can be affected.
Is Bankruptcy a Good Choice?
Bankruptcy is a legal way of helping individuals
and businesses deal with debts when they owe
much more than they can pay. While
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bankruptcy can erase many
debts, it doesn’t excuse you
from everything you owe.
Generally,
there are two types of
bankruptcy: liquidation
and reorganization. In
liquidation, known as
Chapter 7, your business
assets or personal assets are
liquidated (sold) and the proceeds are used to
pay your debts. You may be able to keep some
personal assets. The other type of bankruptcy,
reorganization, allows you to work out a
court-supervised plan to pay your creditors.
Consumers generally ?le for reorganiza-
tion under Chapter 13 while businesses or
individuals with debts exceeding Chapter
13 limits ?le under Chapter 11.
Bankruptcy should be considered
only as a last resort. Because bankruptcies stay
on credit records for seven to 10 years,
depending on the chapter under
which they’re ?led, they will
make it dif?cult for you to
obtain ?nancing to start or
grow a business, buy a
home, or obtain other
personal or
professional
loans.
Getting a Credit Report
Several agencies track your borrowing and
payment history. These agencies are contacted
for reports on your credit history whenever you
seek future loans or apply for credit cards.
If you’ve had dif?culties with debts in the
past—you’ve been unable to pay a loan or been
late with a lot of bill payments, for example—
the thought of asking for your credit reports
could be a little worrisome. You’re not alone.
Many people who have had
credit problems feel
uncomfortable
Bankruptcy
should be
considered
only as a
last resort.
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about looking at their reports. Facing your fears
is a good idea, however. You may ?nd mistakes
that you can ask to have corrected. Even if
everything in the reports is correct, you can see
where you can make changes. Beginning to
build good credit shows prospective lenders
you’ve turned over a new leaf.
Your state may require reporting companies
to provide consumers with one or two free credit
reports each year. You also are entitled to a free
report if you’ve been turned down for a loan or
credit, provided you request a copy of the report
within 60 days of being rejected. Otherwise, you
will pay a small fee for a report.
The companies that provide credit reports
and credit assistance include:
• Equifax, 1-800-685-1111, www.equifax.com
• Experian, 1-888-397-3742, www.experian.com
• TransUnion, 1-800-888-4213, www.transunion.com
• Consumer Credit Counseling Service,
1-888-577-2227, www.cccs.org
• National Foundation for Credit Counseling
1-800-388-2227, www.nfcc.org
Have your Social Security number, your
date of birth, addresses for the past ?ve years,
and maiden name (if applicable) available when
you contact the companies.
In your report, you will ?nd something
called a FICO® score (FICO stands for
Fair Isaacs & Company, the company
that created the formula). It is a
number that lenders use to help them decide
how likely it is you will pay them back on time.
Your FICO score is like a snapshot in time.
Your score this month may be different from
last month’s. Your FICO score takes into
account your payment history, how much you
still owe to creditors, how long you have been
using credit, the types of credit you use, and
how much of your credit use is new and old. By
comparing your information to the patterns in
thousands of other people’s credit reports, the
score assigns you a level of future credit risk.
FICO scores range from 300 to 850—and the
higher your number, the better your score.
Your score will not drop if you order your
credit report. Also, you can gradually improve
your score by following good credit practices
such as paying bills on time, developing payment
plans and not using too
much credit. This will help
you when you go to a
lender to borrow for
personal or business
purposes.
If you ?nd mistakes on
your credit report, you can
make corrections at no cost,
but the process can be slow
and hard. First, check to see
if the report tells you how
to correct mistakes, and
follow those instructions.
FICO scores
range from
300 to 850—
and the higher
your number,
the better
your score.
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You may be required to submit documents to
support your corrections, such as canceled checks
to show you paid the bills. Send a brief letter
explaining the situation. The credit-reporting
agency has 30 days to respond to your complaint.
If it ?nds you are correct, the agency must
notify the other credit-reporting agencies. If it
?nds you are not correct, you may want to take
your case to the lender directly. If an issue isn’t
resolved, you have the right to include your side
of the story with your credit history. For instance,
if you refused to pay a contractor for a home
repair because it was done badly, that debt may
still show up on your credit report, but so will
your explanation.
Repairing a Credit History
You can repair a poor credit history. It takes
sacri?ce and time, but pays off when you’re
ready to start or expand your business.
Consider the case of Karen Smith.
(Although this is a ?ctional account, it
demonstrates how individuals can work to
repair their credit.) For years, she hoped to start
her own sewing business and leave behind her
minimum-wage retail job. Although she was a
talented designer and skilled seamstress, she
knew she wouldn’t be considered a good credit
risk if she went to seek ?nancing for her
business idea.
About ?ve years previously, Smith learned
she had cancer. The tumor was relatively small
and was easily
removed by a surgeon,
who assured her that
her physical future
looked bright. She
had no health
insurance, however, to
cover sizeable hospital
charges. She paid a
little, but still owed
about $5,000.
Struggling to make
payments to the
hospital, Smith also
couldn’t pay her cell-
phone charges and her
account was closed. Both the hospital bill and
cellphone debt were on her credit report.
Smith saw an ad for a “credit repair”
company that promised to “?x” her poor credit
report for a fee. A friend told her that this was
a scam. Not knowing what else to do, Smith
went to her local microenterprise agency to
beg for the $1,500 she estimated she needed
to launch her sewing business.
There, Smith was reassured to learn she
could repair her credit history herself. Working
with a staff member of the microenterprise
agency, Smith ?gured her income and her cost
of living. She looked for ways to cut her living
expenses and also took an extra shift on the job
each week.
For years, she
hoped to start
her own sewing
business and
leave behind her
minimum-wage
retail job.
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With a little more income and reduced
expenses, Smith had $50 a week to apply to her
debts. The cellphone bill was just $150. She and
her microenterprise adviser decided to erase that
debt ?rst. In three weeks, it was paid.
The hospital bill was harder because it was so
large. Together, she and her adviser met with
hospital accounting personnel to work out a
payment plan. Smith agreed she would pay $50
a week initially and would try to increase the
amount as her income increased from her regular
job and her sewing business. The parties agreed to
meet again in six months to reassess the situation.
The microenterprise agency, after
watching Smith make good-faith efforts on her
payments for several months, agreed
to loan her $500 through a special loan
program that disregards credit history.
This allowed her to buy a commercial
sewing machine and convert a spare
bedroom to a workshop. Smith took
?nancial literacy classes through the
agency, worked one on one with a
mentor, and began to expand her
business, primarily through word of
mouth from satis?ed customers.
As months went by, Smith was
able to scale back her retail job’s hours
for her more lucrative sewing work.
She paid more toward her hospital
debt and also paid off her $500 start-
up loan. The microenterprise agency
then loaned her $1,000, which allowed her to
buy a second sewing
machine and hire another
seamstress part-time to
handle routine sewing.
After nearly two years,
Smith paid off the hospital
debt and celebrated the
?nal payment with a
dinner for family and
friends. Smith felt her
business future was ?nally
on the right track.
With a little
more income
and reduced
expenses,
Smith had $50
a week to apply
to her debts.
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5
WRITING A BUSINESS PLAN
No one knows your business like you
know it, so don’t hire an “expert”
to write your business plan.
pl an
Think of a business plan as your blueprint
to building a successful enterprise. Just as a
carpenter should never start hammering away
on a project without a blueprint, you should
never jump into a business without a plan.
No one knows your business like you
know it, so don’t hire an “expert” to write your
business plan. Doing it yourself also will help
you focus your business idea, ?gure out who
your customers will be, and chart your
operational and ?nancial needs. A good plan
also will show you if your idea can succeed.
Plus, it’s easier to ?x any problems that appear
while they’re still on paper.
Even after you launch your business, a plan
can help guide you from the start-up phase to
stability. A plan also is a must if you’re going to
seek ?nancing. All in all, creating a business plan
is a good idea: Studies show that businesses that
have plans perform better and are more likely
to succeed than those that lack plans.
You can ?nd many books, courses, and
Web sites devoted to writing business plans.
For a small business like yours, you can boil
down your business plan to a few key elements.
Remember: Your local Microenterprise
Development (MED) organization can offer
guidance and training while you’re putting
the plan together.
Writing a business plan may seem like
a daunting task. At your local MED
organization, however, you’re likely to ?nd
courses that will teach you how to write a
business plan. Staff members also will be
available to offer suggestions and help as you
go through the business-planning process.
Take Your First Step
A feasibility analysis is a simple ?rst step to
help you decide if you are on the right track
with your business idea—
before you spend long
hours on a complete
business plan. The
analysis, only a few pages
long, will answer two key
questions: Is there
suf?cient demand for the
product or service and can
the product or service be
provided pro?tably?
To start, write a few
paragraphs that
summarize your business
idea. Then, brie?y outline the market for your
product or service. This includes the growth
potential of the industry as a whole as well as
speci?c demand for your product or service.
Next, explain your product’s or service’s
advantages over competitors’ offerings. The
last section of your analysis will look at basic
?nancial measures: Can you price your product
or service to be competitive in the marketplace
and still cover your expenses? To do this,
Think of a
business plan
as your blueprint
to building a
successful
enterprise.
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n i n g
perform a break-even
analysis, described in detail
in Chapter 6, which shows
the total sales you need to
make to cover your costs.
If you ?nd the number of
units you must sell or your
selling price are impossibly
high, stop here. There is no
need to move ahead on a
full business plan until you ?gure a way to trim
costs or increase sales. If the analysis is positive,
then continue into a full-blown business plan.
Describe Your Business
A business description begins your business plan.
It explains what the business will do or make,
whom it will serve, where it will be located,
when it will operate, and why you’re doing it.
Answer these questions to gather information
to write your business description:
• What product will I make or service will I provide?
• Am I being realistic about my idea? Do I have the
skills, ?nances, and equipment to carry out my idea?
(For instance, starting a full landscaping business
takes a lot of money, but beginning a lawn mowing
and snowplowing business is a lower-cost alternative.)
• Am I starting a new business, taking over or expanding
an existing one, or buying a franchise?
• Will it be my full-time or part-time employment?
• Why am I going into this business?
• Why is there a need now to start this
business in this area?
• Who will be my customers and how
many of them are there?
• How will my business be different
from similar businesses?
• When and where will I do business? How will my
locations and hours bene?t my customers?
Analyze the Market
A market analysis is the part of the business
plan that describes the demand or need for your
proposed business. A successful business offers
a service or product that customers can’t easily
?nd elsewhere, or that is better, cheaper, or
otherwise different from competitors’ offerings.
It also offers a product or service for which
demand is steady or growing. Typewriter repair
doesn’t have much of a future, for instance, but
computer repair does!
Analyzing the market will involve more
than checking listings in the phone book, or
If the analysis
is positive,
then continue
into a full-blown
business plan.
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driving through the neighborhood to count
similar businesses to the one you’d like to start.
You will be able to ?nd some of the information
you need through the public library, the
Internet, or government of?ces. You may also
?nd help through business associations, such as
the Chamber of Commerce. Answer these
questions to gather information to write your
market analysis:
• How much do I know about my competitors and how
they do business? Are their businesses growing? What
are their strengths and weaknesses? How will my
business be different from theirs? How can I compete
with them?
• How much do I know about the customers I want to
attract? How big is my target group of customers?
Is the group growing? Is their need for my product
or service increasing? Where do they live? What are
their incomes? Is this target group big enough to
support my business?
• How much do I know about the economy and its
impact on my business? Is the local economy
growing, steady or weakening? How will its con-
dition affect my business? Are there national or
international economic changes that will have
an impact on my business? How will I deal with
economic changes, local or international, that
might hurt my business?
Reach Out to Customers
A marketing plan is the part of your business
plan that explains how you will attract and keep
customers using pricing, advertising, and
promotion. You may have the best business in
the world, but it will fail if prospective
customers don’t ?nd out about it. The
marketing section also includes sales projections,
which are your best estimates of how many
products or services you expect to sell under a
variety of conditions. Answer these questions to
gather information for your marketing plan:
• What’s the best way to reach the people I want to be
my customers? Can I reach them through television,
radio, or newspaper advertising? Can I mail them
information about my business? Can I join forces with
another business that sells a different product, but
deals with my target customers? For instance, a
child-care provider might market his or her services
with a diaper service or a toy store. What will these
different strategies cost? What option or options
reach the most people for the best price?
• How will I portray my product or services in order
to attract customers?
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• Do I have a catchy, memorable name for
my business?
• What prices will I charge for my services or
products? Why will these prices be attractive to my
target customers? Will these prices cover my costs
and allow me to make a pro?t? How will my prices
compare to my competitors’ prices?
• How many sales do I expect to make in a year?
Typically, you forecast sales for the “best case,”
“most likely case,” and “worst case” scenarios you’ll
encounter, with explanations of what factors would
lead to each case.
Research Marks the Spot
There’s no quick commute for Tee Tanaka. The
former banker opened his Japanese restaurant
Moshi Moshi in Boulder, Colorado, about 35
miles from his Denver home. His marketing
research told him it was the place to be.
“I thought I would ?t into the Boulder
niche,” said Tanaka, a native of Japan who has
lived in the United States for nearly 40 years.
With help from his daughter, who works in
the University of Colorado’s School of
Entrepreneurship, Tanaka researched the
Boulder market. He found that residents of
Boulder, thanks to CU’s presence, are largely
young, active, and health-conscious. Tanaka
visited other successful Boulder restaurants,
including Noodles & Co., a restaurant that sells
international pastas that has expanded to several
states from its Colorado roots.
Tanaka’s ?ndings helped him re?ne his
mother’s traditional recipes for his target
customers: college-age and health-conscious
diners. For instance, he moved to a higher
quality, low-fat beef for his beef and noodle
bowl rather than the traditional fatty beef. He
dropped deep-fried dishes, such as tempura, and
uses only a little sesame oil in food preparation.
Tanaka also put Moshi Moshi—the name is
Japanese slang for “quick”—on what he called a
“strict business approach.” He looked for every
possible way to cut costs, even spending Sundays
going over ?nancials and taking care of details.
“That comes from my business background,”
said Tanaka. His partners in his limited liability
corporation (LLC) are former
colleagues from his 30 years
in banking. They also have
know-how and “great ideas,”
Tanaka added.
The LLC was formed
in 1999, but Moshi Moshi
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didn’t open until February
2001 after 14 months of
intensive work. The
partners met with
restaurant and kitchen
consultants and other
experts to re?ne Tanaka’s
concept. Finding the right
space took the most time.
Tanaka had hoped to
convert existing space for the restaurant, but
nothing he found was quite right. He ?nally
settled on a building under construction on
Boulder’s downtown pedestrian mall.
The location turned out to be a more
expensive choice, but a good one. Tanaka had
considered locating adjacent to the university.
One fact his research had missed: Boulder’s
restaurant business drops off in the summer
when CU has fewer students on campus. The
mall, though, is less affected by student
population changes. “Sometimes, it’s just a matter
of luck,” Tanaka said of his location choice.
Hard work and attention to the bottom line
have gotten Moshi Moshi through dif?cult
economic times. “I probably would not have
existed through those obstacles if I had not
taken the austere business approach I did,”
Tanaka said.
He still hesitates to call Moshi Moshi a
success, although business is good. He’d like to
add other locations in the Boulder-Denver area,
but, at age 62, he wants to ?nd someone who
will take over the day-to-day responsibilities.
Still, he’s happy to realize his dream, even if it
comes with ups and downs.
“It’s a ‘cry one minute, laugh the next’ sort
of business,” Tanaka said.
Projecting Sales: An Example
Imagine you want to start a home computer
repair business. Using census data, you
determine there are 1,000 residences within
?ve miles of your business. Further research
shows 80 percent, or 800 homes, have home
computers. Your research shows that 75 percent
of owners nationally need their computers
repaired or upgraded during a year. That
means 600 (.75×800) homes in your marketing
area might need services each year. You have
found only one competitor in your marketing
“It’s a ‘cry one
minute, laugh
the next’ sort
of business.”
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area. Because you have priced your services
lower than the competitor and plan an
aggressive marketing campaign, you believe
you could attract a third of the potential
market, or 200 computer owners, during the
?rst year—your “most likely case” scenario.
You believe the average customer will require
$100 of your services, so your income before
expenses will be $20,000 a year. Your “best
case” scenario envisions your marketing efforts
being more successful and attracting half the
potential market, or 300 computer owners, for
a gross of $30,000. In your “worst case”
scenario, you estimate what will happen if
people have stronger-than-expected relationships
with your competitor. In that case, you estimate
you will capture only a sixth of the market, or
100 customers, to make $10,000.
Organize the Day-to-Day Operations
The operations and management parts of your
business plan explain who will be involved in
your business and how you will produce the
goods or services to sell. Answer these questions
to gather information for these parts of the plan:
• If you are making a product, what materials and
supplies will you need? What tools, machines,
facilities, or furniture do you need? Where will you
get them? What do they cost? How much inventory
(extra materials) will you need to keep on hand?
• If you are offering a service, how will you provide
the service? What materials or equipment, if any,
do you need to provide the service?
• How will you be certain you are giving customers
quality goods or services? What warranties or
guarantees will you make on your products?
How will you handle customer service, complaints,
repairs, and returns?
• How many people will be involved in your business?
What will each person do? What role will you take?
What special skills or training do you or your
employees have to help the business succeed?
Do you have advisers who are going to help you?
Who will take responsibility for the business?
(This probably will be you.)
Business plans also include ?nancial
analyses and detailed examinations of startup and
expansion costs, including cash-?ow projections
for several years. We will look at these parts of
your business plan in the next chapter.
Set a Course with a Business Plan
Beaulah Williams, who lives in the Maryland
suburbs of Washington, D.C., ?rst learned to
sew at age 8, and made beautiful clothes for
herself and her children for many years. It was
only after she learned business skills, however,
that she was able to turn her sewing know-how
into a thriving business.
In 1984, she and her husband separated
and she began raising their four children alone.
By 1995, she was struggling ?nancially on part-
time work, government bene?ts, and child
support. She happened to read a newspaper
advertisement about the Foundation for
International Community Assistance (FINCA),
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a microenterprise program, in nearby
Washington. There, she learned the skills to
help her develop her business idea. Learning
to write a business plan was her most valuable
lesson, Williams said.
“In doing a business plan, you have to do
research,” she said. “I came to understand you
will not want to do the same business that other
people are doing.” Williams narrowed her
business idea. She decided to concentrate on
making custom clothing for individuals and
dropped her plans to also make wedding dresses
and children’s clothing, which were areas in
which she found she would have the most
competition. “The
business plan makes
you focus,” she said.
Her home-based
business, B.B. Design,
opened in 1995 with a
$500 loan from FINCA
for a new
sewing machine. Williams offered both African-
inspired and American clothing. The business
grew and she was able to take a larger owner’s
draw by 1997. Her success story was told in
major newspapers and on network television,
and she was invited to speak at the United
Nations General Assembly in 2000 about the
bene?ts of microcredit. As she became better
known, her business began selling clothes all
over the country.
A few years later, however, Williams
decided to put her business on the back burner
while she completed a degree in divinity. She
continues to do some alterations and sewing,
but primarily designs and makes unusual
minister’s robes, which she prices at $900 to
$1,000 each. “Each summer, I’ll be sewing for
tuition,” she said.
Williams has shared her hard-earned
business knowledge as well as her sewing skills
with disadvantaged women in homeless shelters.
Several of the women have started
their own sewing businesses.
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Your “best case”
scenario envisions
your marketing
efforts being
more successful
and attracting half
the potential
market…
KEY FINANCIAL SKILLS FOR
MICROENTREPRENEURS
6
dev el
Earlier in this booklet, you learned how to put
your personal ?nances in good order. Keeping
your business ?nances on track is just as
important and uses some of the same skills.
In fact, learning and using key ?nancial
skills may be the best step toward success you
can take as you go into or expand your
business. The Women’s Initiative for Self-
Employment, a microenterprise development
program in San Francisco, discovered that its
most successful clients frequently used basic
?nancial tools, such as record keeping, cash-
?ow management, and break-even analysis, in
day-to-day business activities. These tools also
will help you complete
your business plan.
Your local
Microenterprise
Development (MED)
organization is the
perfect spot to stop
if you’re interested in
learning or improving
your ?nancial skills.
You are likely to ?nd
training classes in
business development,
staff and teachers to
offer technical
assistance, and more.
Managing Your Cash Flow
Cash ?ow is the money coming into and going
out of your business. Your customers pay you
(money in) and you pay your suppliers and
overhead (money out). Cash ?ow is the lifeblood
of your business. Obviously, you want enough
money on hand at any time to cover expenses.
Businesses, especially new ones, typically run
into trouble with cash ?ow because
they: (1) fail to
recognize
seasonal trends
in their business, (2)
take too much cash from
the business for living
expenses, (3) expand the business too fast, or (4)
extend credit to customers.
Managing cash ?ow involves keeping
track of payments you know you’ll receive and
what bills you know will be due. Cash ?ow
projections are included in your business plan.
Still, even after your business is launched,
projections should be done frequently if you
want to spot and head off cash-?ow problems.
When your projections show a problem
developing, you can sometimes “tweak” your
cash ?ow to avoid crises. One way is to
develop relationships with your suppliers so
they’ll be willing to extend your payment time
occasionally. This is called “managing accounts
payable.” Another way is to buy and keep as
little as possible in your inventory of materials.
When your
projections show
a problem
developing, you
can sometimes
“tweak” your
cash ?ow to
avoid crises.
39
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opmen t
A third way is to develop relationships with
your customers that encourage them to pay on
time—or even a little early, in return for a
discount, assuming that offering one doesn’t
hurt your bottom line. Finally, if you have a
lender helping you ?nance your business, keep
him or her informed about how things are
going. If you run into a cash-?ow problem,
your lender may be more willing to help if she
or he understands what you’ve been doing.
There are many computer programs and
printed documents that help you estimate cash
?ow. Below is a simple six-month format you
can use.
Cash in bank: Money in business checking at
?rst of month.
Petty cash: Money on hand in cash register
or petty cash box at ?rst of month.
Cash sales expected: Payments you will receive
for goods or services.
Total receipts: Sum of the ?rst three numbers.
Spending for month: Includes rent, utilities, mate-
rials, salaries, payments on purchases made on credit,
deposits made on expenses such as utilities, etc.
Cash balance: Subtract spending from total
receipts. If it’s a negative number, you have a cash-
?ow problem.
Figuring a Break-Even Point
When you run a business, you want to make
money—but how do you know how much
you’ll need to reach a pro?t? A break-even
analysis gives you the dollar amount you must
take in to cover all your costs of doing business.
Like a cash ?ow projection, a break-even
analysis is both part of your business plan and a
tool to use as your business evolves.
Gathering information for a break-even
analysis is a lot like preparing your personal
spending plan. First, add up all your monthly
business expenses, ?xed and variable, including
the rent or mortgage on your business space,
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January February March April May June
Cash in bank
Petty cash
Cash sales expected
from accounts receivable
TOTAL receipts
Spending for month
CASH balance
utilities, telephone, insurance, employee salaries,
marketing, and taxes. If an expense is an annual
one, such as your business insurance, divide the
annual premium by 12 to get a monthly ?gure.
If expenses vary, such as telephone or supplies
for manufacturing, enter the amount you’re sure
you’ll spend each month. When you have a total,
that is the amount you must take in through
your business to break even.
You should calculate your break-even
point regularly after you start your business—
say every three to six months. Expenses have a
habit of creeping up, and by analyzing your
break-even point frequently, you’ll help avoid
?nancial trouble.
If you ?nd your break-even point is
creeping upward, take steps to cut costs. This is
similar to plugging
spending “leaks” in
your personal
?nances. You may be
able to lower your cost
of doing business by
?nding cheaper
materials or keeping
fewer materials in
inventory. You may be
able to trim expenses,
such as marketing or
insurance. Finally,
consider raising
prices. Unless they’re
in a very competitive market, most small
businesses can raise prices 4 to 5 percent without
much customer reaction.
The goal, of course, is to make enough
money so you can pay yourself or put funds
into improving the business. However, you
?rst have to determine your break-even point.
To ?nd the point, use this formula:
BE=FC÷(P-VC)
BE=Break-even
FC=Fixed Costs
P=Price
VC=Variable Costs Per Unit
An Example of Break-Even Analysis
Suppose you are starting a business to sell
widgets and you want to calculate your break-
even point. The break-even point is the point at
which you’re selling enough widgets to cover
your variable costs plus your ?xed costs.
In your widget business, you plan to sell
each widget for $12, your P in the equation.
Your ?xed costs (FC)—rent, utilities, insurance,
When you run
a business, you
want to make
money—but
how do you
know how much
you’ll need to
reach a pro?t?
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and so on—add up to $50,000. Your variable
costs, primarily labor and materials, equal $2
per widget for your VC. Your break-even point,
then is:
BE=$50,000÷($12-$2)
BE=$50,000÷$10
BE=5,000 units
Therefore, if your research shows you can
sell more than 5,000 units, you’ll make a pro?t.
You’re in business!
The break-even point for a business is the
volume of revenue that must be reached before
all ?xed expenses are covered. The calculation is
typically done on a monthly basis, so the
analysis must take into account the
monthly portion of items that are
paid quarterly or annually. You must also know
the gross pro?t margin, which is gross pro?t
(sales - cost of goods sold) divided by sales.
For example, if your monthly ?xed
expenses are $5,000, and your gross pro?t
margin is 25 percent, your break-even revenue
amount is $20,000 ($5,000 divided by .25).
Therefore, you will not begin to make a pro?t
until your revenue exceeds $20,000 each month.
You can do a break-even analysis before
you even begin your business based on
projections of gross pro?t margin and ?xed
expenses. But your early estimates and your
actual numbers may be very different. After
three to six months in
business, you should
compare
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BE=FE÷GPM (Gross Pro?t Margin)
projections to the real-world results and
reassess, if necessary, what volume is required to
reach break-even levels. As the business grows
and these numbers continue to change, it is a
good idea to re?gure your break-even point
every six to 12 months.
If your revenues are less than expected,
you might want to try to lower your break-
even volume. You can do so either by lowering
your direct costs or raising your prices. Even a
small price increase can have a signi?cant
impact on your bottom line.
In summary, a break-even analysis is critical
for a small business
owner to calculate and
understand. Any new
business must be able to
predict what gross sales
volume level is necessary
before reaching the
break-even point. It’s
important to be able to
assess your early pre-
dictions, determine how
accurate they were, and
check whether you are
actually on track to make
the pro?ts you expected.
Even once your business
has matured, you should
make a point of
reviewing your current
break-even point and try
to ?nd ways to reduce that ?gure in order to
increase pro?ts.
Calculating an Owner’s Draw
The money you take out of your business to
pay your personal household expenses is called
an “owner’s draw.” If you want your business to
be your primary source of income, you will want
to build your business revenue to the point at
which you cover not only all business expenses,
but all personal expenses, too. That may not
happen for months or years after you start your
business. You may have to meet your personal
expenses in the meantime by working another
job or using your savings.
Deciding how much money to take from
your business is more involved than simply
taking anything above your break-even point.
Corporations and owners of sole proprietorships
pay taxes based on the equity built up in the
business. Equity means the net worth of your
company. It is calculated by adding up all your
assets (cash, value of any business property you
own, etc.). Equity increases as you invest money
in your business or make a pro?t. Equity
decreases as you withdraw money or have a loss.
Keeping Records
Tracking business information is a necessary—
if sometimes tedious—part of being the boss.
Good records can easily show you whether
business is improving, what items are selling,
and what changes you might need to make.
Good records
can easily show
you whether
business is
improving,
what items
are selling, and
what changes
you might need
to make.
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Records also will help you prepare pro?t and
loss statements and balance sheets, vital for
your dealings with creditors or lenders.
Records also will make tax preparation less
painful. It’s a good idea to set aside some time
every day to work on your records.
You may need to tailor the kinds of records
you keep to your type of business. Contact your
accountant or tax adviser for more help.
Generally, you’ll need either a paper or com-
puter-based version of:
• A checkbook register to list to whom, for what,
how much, and when you write checks on your
business checking account. Separate business and
personal checking accounts are essential to make
tax preparation and accounting easier. You may
open both accounts at the same bank.
• A cash receipts book to track what payments were
received, from whom, and for how much.
• A sales journal to record business transactions.
• A voucher register to list bills, amount owed, due
date, and payee.
• A general ledger or a revenue and expense journal
to record receipts and expenditures.
Keeping a Balance Sheet
A balance sheet shows the assets, liabilities, and
equity in your business on a given day. Think of
it as a ?nancial snapshot of the business. Like the
break-even analysis and a cash-?ow projection, a
balance sheet will go into your business plan and
also will be useful in the day-to-day running of
your business.
Imagine a page folded in half down the
middle. The left side will list all your business
assets: anything of value that is owned by or
legally owed to the business, including cash,
petty cash, accounts receivable, inventory,
investments, and ?xed assets such as land,
buildings, improvements you’ve made,
equipment, vehicles, and furniture.
The right side will list all your liabilities:
all debts, obligations, and claims payable in the
coming year including accounts payable, taxes,
payroll, and long-term liabilities. This side of the
sheet also includes your equity or net worth in
the company. This includes stock if you have a
corporation, or equity if you have a partnership
or proprietorship, and retained earnings or
withdrawals. On a balance sheet, the total assets
always equal total liabilities plus net worth.
Exit Strategies
When so much of your energy is going into
expanding or launching your business, you may
be surprised to hear you should also think about
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how you should get out. This is what’s called
an “exit strategy.” It’s important to look ahead,
because as one expert said, “What good does
it do to climb the ladder of success only to ?nd
the ladder’s leaning against the wrong wall?”
Exit strategies are required whether you
succeed or fail. Here are several options:
• Sell your business. Many a microentrepreneur
dreams of building a successful business, then
selling it for a tidy pro?t to fund retirement or a
new venture. To accomplish this, you must keep
good records and build a business structure that
someone else could step into with some training.
• Pass a successful business on to your
children when you retire. You must decide
whether your children would buy the business, or if
you would save enough on which to retire so you
could simply give them the business.
• Close the business. Maybe your successful
business isn’t easily sold or transferred. You can opt
to sell equipment, buildings, and other assets, and
use the proceeds for retirement or a new venture.
• Cut your losses. Not every business succeeds, of
course. If you are struggling to stay in business,
you must decide at what point you would say
“enough.” If you reach that point, consider whether
you would liquidate assets or sell the business to
pay loans or other creditors. Think about what
kinds of fallback jobs you could seek. This exit
strategy isn’t pleasant, but it could be necessary.
Do You Need a Computer?
Some entrepreneurs love their computers and
business software. You must decide whether
setting up a computerized system to track your
business ?nances will
be more of a help or a
hindrance. If you’re going
to save time, record
keeping via computer is
great. If you’re going to
spend hours setting up the
system and learning to use
software programs, you
might be better off with
the paper versions of
?nancial records. You can
?nd these documents at
most of?ce supply or
stationary stores.
If you take the
computer route, there
are many choices in
?nancial software:
Quicken, Microsoft Money, Excel, MYOB
AccountEdge, QuickBooks, and Peachtree
Accounting are just a few of the titles you’ll ?nd.
Quicken and Money feature single-entry
bookkeeping, which is the type of bookkeeping
most small businesses use.
Keep in mind, a computer can also help
your marketing, research, and customer service
efforts by opening you to Web-based resources.
Also, if you plan to do business with the
government or major corporations, they will
expect you to have e-mail and a Web site.
You must
decide whether
setting up a
computerized
system to track
your business
?nances will be
more of a help
or a hindrance.
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7
DO I NEED FINANCING?
Most business owners need some
kind of ?nancing, whether they’re
running start-ups or expansions.
bu s i n es s l o
When and where to get ?nancing for your
business is one of the most dif?cult decisions
you’ll make as an entrepreneur. Even if
?nancing is not something you’re considering
now, the issue will probably come up
eventually. Most business owners need some
kind of ?nancing, whether they’re running
start-ups or expansions.
When they think of ?nancing, most
business owners think of bank loans. There are
many other options. In fact, you may be able to
avoid borrowing. Answer these questions:
Do I Truly Need Financing?
Consider whether you can scale down your
business plan or slow the expansion of your
existing business to avoid borrowing money.
Instead of starting, say, a landscaping business,
consider starting with
lawn mowing and snow-
plowing. You’d need less
equipment—and less
money. Then, by setting
aside some savings as you
build your business, you
could later expand into
landscaping.
Are There Other
Resources I Can Use?
If you’re buying someone’s
business, you may be able
to get an “owner
carryback,” which means the seller would let
you pay him or her in installments spread over
months or years. You would use the cash ?ow
from the business to make the payments. If
you’re expanding an existing business, perhaps
your suppliers would extend the time you have
to pay for materials, or your customers would
pay deposits when they place orders.
Can I Use a Credit Card?
If you are making a relatively small business
purchase that you can pay off in a short time,
you may want to put it on a credit card. One
advantage of this approach is that you probably
have a credit card already and could avoid the
loan-application process. Paying back the charge
also would help you establish yourself as a
dependable borrower and help you secure a loan
later. Disadvantages include the high interest rates
credit cards carry and the limits on the total you
can charge.
Most business
owners think
of bank
loans when
they think of
?nancing.
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oan s
Can I Do it Myself?
In Chapter 3, you learned how to create a
household spending plan, and how just a small
amount saved each month can add up. By
plugging more “spending leaks” in your
personal or business ?nances, you may be able
to step up your savings plan and fund your
business expansion or
purchase without
incurring more debt.
Where to Get
Financing
After you’ve answered
these questions, you may
decide you still need
outside ?nancing. Where
can you get the money?
The answer to that
question may depend on
the type of business you
have, and why you want
money. Here are some
options to consider:
Family and Friends:
Borrowing from people
you know well is a popular
way to ?nance small businesses. Always treat such
loans seriously by paying back the money on time
with any agreed-upon interest. You also should
put your loan agreement in writing.
Microenterprise Development (MED)
Organizations: These local, community-based
programs specialize in small loans to ?rst-time
or low-income borrowers who don’t have
access to the usual lending sources. In fact,
MED programs were created in large part to
provide ?nancing to these groups. Most MED
programs operate their own loan funds, which
usually get support from public agencies,
corporations, or foundations. Some MED
programs also partner with traditional ?nancial
institutions to create lending programs. If you
seek a loan from a MED organization, the
staff, the board of directors, or a volunteer loan
committee may review your application and
decide whether to give you funding. Some
programs, however, use what’s called “peer
lending” in which a group of small-business
owners make lending decisions. The size of
loans made by MED programs varies from as
little as $500 to tens of thousands of dollars. You
may ?nd you can apply for a “stepped” loan that
gives you a small amount to get started and
demonstrate an idea is workable, then gives
you additional funding as you develop your
business. Interest rates vary from organization
to organization. To ?nd a MED program, visit
www.microenterpriseworks.org and click
Microenterprise Organizations Near You.
Community or Economic Development
Agencies: These organizations usually are
sponsored by city, county, or state governments.
An “angel” is
an individual
who makes an
investment in a
business and
becomes part
owner of the
business in
return.
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They work to improve the local economy by
lending money to help businesses start or grow,
and frequently support low-income housing or
other improvement projects.
“Angel” Investors: An “angel” is an
individual who makes an investment in a business
and becomes part owner of the business in return.
They can be hard to ?nd. If you want to ?nd an
angel, your best bets are to try people who know
your business and know you, such as clients,
suppliers, and friends. Angels expect a return on
their investment. The amount expected can vary.
They generally take an active role in business
decisions since they are part owners. They also
bring expertise and contacts to a business.
Banks or Savings
and Loans (S&Ls):
Although you may
think of these
institutions ?rst
when you need
?nancing, we’ve put
them at the bottom of
the list on purpose.
Banks and S&Ls
aren’t always
interested in making
small loans to small
businesses. If you
have a good
relationship with a
bank or S&L, it
doesn’t hurt to ask for help. The interest rate on
such loans usually is the prime rate (the interest
rate banks charge their best commercial
customers) plus two percentage points.
Remember that ?nding the right lender for
your needs may not be easy. If one lender turns
you down, ask him or her for ideas on other
sources to try. Keep looking. For ideas of
resources available in your community, go to
the Web site for the SBA’s Microloan program
at www.sba.gov and click Financing and then
Micro-Loans. The SBA funds community-based
intermediaries that, in turn, make loans up to
$35,000 to eligible borrowers.
The Language of Lending
Here are some terms you should know if you’re
going to seek ?nancing:
• Loan: Money you borrow that you must pay back.
• Principal: The amount of money you borrow.
• Interest: What you are charged for borrowing
money. The interest rate is expressed as a
percentage. The higher the rate, the more you’ll
pay. Rates change with the economy.
• Loan fees: What the institution or individual from
which or whom you borrow may charge you in
addition to interest. Fees usually pay for
processing your loan.
• Collateral: An asset, such as a car, house, or
other property, that you agree the lender may take
if you do not meet the terms of your loan.
The SBA funds
community-based
intermediaries
that, in turn,
make loans
up to $35,000
to eligible
borrowers.
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• Default: If you fail to pay back the loan on time, if
you ?le bankruptcy, or if you fail to follow other
terms of your loan, you are considered in default
and could lose your collateral.
• Line of credit: A credit line is like a pot of money you
can dip into when necessary. The credit line has a
limit and carries interest and fees.
The Money Struggle
Charlie Reed knows how hard it can be to ?nd
money to launch or expand a business.
“To me, entrepreneurship is whether you can
?nd the working capital, and then, can you get the
orders to pay off the
working capital,” said
Reed, owner of Cate’s
Candies of Denver,
Colorado.
In 1997, Reed was a
homeless cocaine and
alcohol addict in Florida.
His business evolved
almost by accident after
he entered a residential
program to treat his
addictions.
“I met a really cute
lady and wanted to bake
her a birthday cake,”
Reed recalled. While
buying coloring for
frosting, he bought lollipop sticks on impulse.
With leftover cake ingredients, he made a batch
of ?ower-shaped lollipops that sold out
immediately to his fellow residents. He later
made a box of rose-shaped lollipops for his
daughter Cate, then 9 years old, and stamped
the box Cate’s Candies. With no money, no
business skills, and an 8-quart kettle, Reed
was in business.
A month later, Reed had sold his candy
?owers to 26 shops in south Florida. His
success drew the attention of distributors and
an investor. But success was ?eeting. He landed
a huge order from a national convenience store
chain, but his ?nancial backer couldn’t provide
the capital Reed needed to meet the order. Reed
went out of business.
He moved to Kentucky to live with his
sister, and painted barns so he could earn money
to pay off his former employees and creditors.
“My sister wouldn’t let me give up,” Reed
recalled. She loaned him a few hundred dollars
and urged him to try again.
In 2000, he loaded his candy-making
equipment into his car and drove to Denver,
where his daughter lived. That November,
Cate’s Candies opened anew. Again, Reed found
potential investors, and again, they couldn’t come
up with the extra money he needed when the
orders rolled in. He hired a consultant and
obtained loans through the Denver Mayor’s
Of?ce of Economic Development and Business
Capital of Colorado, which specializes in
innovative loans for small businesses.
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“I’ve had one
goal since the
very beginning:
to let my
daughter know
I’m not a drug
addict or a
scumbag.”
“Just because we had $50,000, we weren’t a
success,” Reed said. The money was soon gone
and Reed was missing loan payments. He drove
to a trade show in Reno, Nevada, selling candy
from the trunk of his car on the way. He came
home with $49,000 in orders.
He scrambled to ?nd new investors through
word of mouth and was able to move into a new
building and buy more equipment. The city also
gave him a bigger loan. As 2003 began, business
was growing and Reed was optimistic.
“I’ve had one goal since the very beginning:
to let my daughter know I’m not a drug addict
or a scumbag. Someday,” he vowed, “my
daughter will ring the bell at the New York
Stock Exchange at a public (stock) offering
for this company.”
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8
INSURANCE AND TAXES
Imagine if you’d built a thriving
business, only to see it wiped out
by a ?re or lost in a lawsuit.
s e
Insuring Your Business
Imagine if you’d built a
thriving business, only to
see it wiped out by a ?re or
lost in a lawsuit. That’s
why you need insurance,
no matter how small your
business.
Different businesses
require different types
and amounts of insurance.
For example, a bar or
restaurant that serves
alcohol would require
liquor liability insurance. If you have employees,
you would need workers compensation
insurance. Call your local microenterprise
agency or an insurance agent for guidance and
advice on types of insurance you may need.
Don’t forget to check your personal insurance
coverage. If your home was destroyed or you
were held liable in a non-work-related auto
crash, the ?nancial impact could also affect your
business if you’re not insured. Review this
checklist before you
speak to an agent:
?I own a building, inventory, a computer system,
or other property for my business.
Ask about property insurance, which protects
you in case of ?re, theft, and wind damage.
Floods, earthquakes, and certain other disasters
often aren’t covered, but you may be able to
buy separate policies if these excluded events
are of concern.
?I could be sued by a customer or someone else
affected by my products or services.
Ask about liability insurance, which covers
you in case you’re sued for property damage
or injury connected with your business.
Businesses often buy “commercial general
liability” policies, which carry limits on the
amount the insurance company will pay.
“Umbrella” liability policies add extra
protection for catastrophes in which a number
of people are injured. There are many other
kinds of liability insurance, some of them
designed for speci?c businesses.
?I drive vans, trucks, or cars—or my
employees use theirs—in my business.
Ask about automobile insurance. It works a lot
like the car insurance you buy for your personal
vehicle, but is written in the name of the person
or business that holds the title on the business
vehicle. If an employee is using a personal car
for business, be sure your policy is written to
cover that use, too. Ask about vehicle damage
and liability coverage.
Different
businesses
require different
types and
amounts of
insurance.
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cu r i t y
?I own a retail store, small of?ce, or an
apartment building.
Ask about a business owner’s policy (BOP). This
combines several essential coverages in a single
policy for owners of “low hazard” businesses.
This policy can be tailored to your business needs.
?I work out of my home.
Ask if you need coverage beyond homeowners’
insurance. If you have customers coming to your
home, you should have liability insurance in case
they injure themselves on your property.
You also may need extra coverage for a
business computer, inventory, or
business vehicles kept at your home.
?I have no health insurance.
You need health insurance!
If you, your spouse, or your
child were to develop a life-
threatening illness or
injury, or require
major surgery, the
mounting
medical bills
could quickly
wipe out
your
?nancial
reserves
and ruin
your business. Many large insurance companies
and professional organizations market policies
designed for small businesses.
? I’m concerned about less-common occurrences.
Depending on your business, you may need
policies that cover you in case of business
interruption, ?oods, earthquakes, pollution,
professional liability, or machinery breakdowns.
Talk to an insurance agent for details.
Cutting Through Red Tape
In addition to getting the right kinds of
insurance, you also must learn what business
permits, licenses, and tax laws apply to your
company. It’s best to
handle this as soon as
possible. Failure to cut
through “red tape” can
hurt the chances that
your business will grow
and succeed.
Business permit
and license requirements
vary from city to city
and state to state. They
also vary by type of
business. For help in
deciding what
regulations apply to
your business, talk
to your local micro-
If you have
customers
coming to your
home, you should
have liability
insurance in
case they injure
themselves on
your property.
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enterprise agency or small business development
center. You also can use the Internet to look at
your city’s and state’s Web pages for licensing
and other regulatory information.
You are already familiar with the need to
pay personal income taxes every year. You may
even prepare your personal state and federal tax
returns yourself. Still, consulting with a trained
tax adviser is the best way to understand your
business tax obligations.
At a minimum, you’ll withhold federal
and state income taxes and Social Security
(FICA) taxes from the wages of any employee
you hire. If you’re working alone, you’ll still
pay self-employment tax for Social Security
and estimated quarterly income tax payments
that are due Jan. 15, April 15, June 15, and
Sept. 15 (or the business day closest to each
date if they fall on
weekends or holidays).
How you handle your
business taxes depends in part on the business
structure you created. If you own a sole
proprietorship, you can take care of your
business taxes by ?ling a Schedule C with your
personal tax return. If you have a partnership,
limited liability corporation, S corporation, or
C corporation, you are required to ?le a
separate business tax return in addition to your
personal return. The Internal Revenue
Service’s Tax Guide for Small Business
(Publication 334) is a good overview of small-
business taxes. The IRS Web site
(www.irs.gov) also lists helpful publications for
partnerships (Publication 541) and
corporations (Publication 542).
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How you
handle your
business taxes
depends
in part on
the business
structure
you have.
9
NETWORKING AND GETTING HELP
There are many organizations,
clubs, education groups, and
government agencies ready to
extend helping hands.
a s
Running your microenterprise may feel lonely at
times. When questions or concerns arise, where
can you turn? There are many organizations,
clubs, education groups, and government
agencies ready to extend helping hands. Their
programs include networking with other
entrepreneurs, basic training for start-ups, and
more sophisticated help for expanding businesses.
Basting a Bright Future
Everyone in Mike McCrea’s family knew
he made delicious barbecue sauce. It was the star
of many a cookout and picnic.
During the 21 years he
worked for a hazardous
waste company, the
Denver man dreamed
about starting his own
company to make and sell
barbecue sauce.
In 1999, McCrea,
known to friends and
customers as Big Mike,
started selling his sauce
from the back of his car. A
year later, he moved the
operation to the Denver
Enterprise Center’s Kitchen Incubator. With its
affordable equipment and working space, the
incubator allowed McCrae to concentrate on
launching Big Mike’s BBQLLC.
He also received a $30,000 loan from the
MicroBusiness Development Corporation, with
which he bought equipment and improved
product packaging. Next, he expanded his
business to include catering and additional
products including chili. His revenues have
grown from $30,000 the ?rst year to more than
$100,000 in 2002. He recently sealed contracts
with a grocery store chain and stadium in the
Denver metro area.
“The loans and counseling I received from
microenterprise organizations have been the key
to my growth,” McCrae said. “I am optimistic
about the future.”
One of the ?rst places to look for help
is your local Microenterprise Development
(MED) agency. These programs offer a vast array
of services all keyed to microentrepreneurs such
as you. While each MED organization is set up a
little differently, they are likely to be places where
you can improve your ?nancial literacy through
classes, brochures, booklets, and counseling or get
training in business development topics. Their
staffs can offer technical assistance on business
matters, or help you reach new markets with
your business. Many of them also can help you
build assets through matched savings programs.
More information on ?nding help is in the
“Recommended Resources” section on page 61.
Review this checklist to gauge your needs:
Everyone in
Mike McCrea’s
family knew he
made delicious
barbecue
sauce.
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s i s t an ce
?I’ve never started a business before.
If you’re new to the business world, you may
need some basic ?nancial education and
counseling. Contact your local microenterprise
agency. It will offer classes, group meetings, or
other organized sessions to teach you how to
write a business plan, keep ?nancial records and
learn other business basics. It also will be able to
refer you to organizations or clubs that help new
entrepreneurs. Small Business Development
Centers, funded by the SBA, also provide
management and technical assistance to small-
business owners and aspiring entrepreneurs.
? I want to know more about business incubators.
Incubators nurture young companies and help
them survive the critical start-up period. They
usually offer hands-on management help,
?nancing sources, and business support services.
Incubator companies generally share of?ce space
and services under one roof. After a few years,
companies graduate from incubators and go out
on their own. Sometimes incubators help a
variety of companies and sometimes they
concentrate on a particular industry.
?I’d like to meet other business owners in
my community.
Your local Chamber of Commerce is a good place
to start. This organization is made up of business
owners dedicated to improving the local economy.
If you’re in a big city, your chamber may have
separate meetings for people in certain industries
or certain geographical parts of the metro area.
Service organizations, such as Lions Club
International or Rotary International, also offer
chances to network with other business owners.
?I’m growing my business and need more
sophisticated help.
First, contact your local microenterprise agency.
Some of its offerings may be right for you.
Community colleges, universities, and for-pro?t
business schools also provide more advanced
business courses.
? I’m going to start a home-based business.
Many organizations offer support for at-home
entrepreneurs. The American Association of
Home-Based Businesses offers newsletters and
tip sheets on running
businesses at home.
Membership is free. The
National Association for
the Self-Employed, which
charges a membership fee,
provides information on
business development and
access to services.
?I need tax help.
The IRS sponsors the
Volunteer Income Tax
Assistance (VITA)
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Incubators
nurture young
companies
and help them
survive the
critical start-up
period.
program, which offers free tax help for people
with low to moderate incomes. VITA sites are
staffed by IRS employees or trained volunteers.
Many of the sites offer electronic tax return
?ling, which gets refunds to taxpayers in about
half the time of paper ?ling. To learn more,
visit the IRS Web site (www.irs.gov), type
VITA in the search box, and click the
document Tax Tip 2003-53: Volunteer Income
Tax Assistance. You may also call the IRS for
information at 1-800-829-1040. The AARP
also provides assistance for older persons
through its Tax-Aide Program. For
information, call 1-888-227-7669 or visit the
organization’s Web site, www.aarp.org. Also,
check the SBA Web site, www.sba.gov, pull
down the Hot Items menu, click Business
Advisor, and then click Taxes.
? I need one-on-one help from an
experienced business owner.
You may need a “mentor.” A mentor
volunteers his or her time to guide you through
starting or growing your business. Mentors are
experienced in small business or in your ?eld.
Mentoring is a long-term commitment that
lasts months or years. Your local microenterprise
agency may be able to match you with a
mentor. You may be able to ?nd a mentor
yourself through meetings of local business
or service organizations. Another resource
is SCORE, or Service Corps of Retired
Executives, a national, nonpro?t organization
of current and former executives and business
owners who counsel and mentor free of charge.
Smoothing a Path to Success
Without her mentor, Diane MacFarlane says
she might never have launched her business,
a recycling center called Dyna’ Mac’s
Redemption House.
MacFarlane, a single mother of two living in
Bowdoin, Maine, was referred in 1992 to Project
Soar, a self-employment program for welfare
recipients. MacFarlane wanted to start a
recycling business, but another woman in her
class failed in an attempt to open a can and
bottle-recycling center in a nearby town. That
made MacFarlane’s road even harder.
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Project Soar’s staff and her fellow students
urged MacFarlane to stick with her plan. In
addition to business training and access to
capital, Project Soar gave MacFarlane a
mentor—an experienced businesswoman—
for one-on-one advice and guidance.
“She was awesome,” MacFarlane said.
“I could call on her whenever I had a question.
We met every two weeks to a month.”
MacFarlane’s mentor helped her pursue
a deal on a building for the recycling center.
The owners wanted more rent than MacFarlane
could pay. MacFarlane’s mentor checked out the
building and realized MacFarlane could take
advantage of the fact it had
been vacant for years. She
urged MacFarlane to give the
owners a “take it or leave it”
offer within MacFarlane’s
budget—and they took it! Dyna’ Mac’s
opened in 1993 in Auburn, Maine.
Today, Dyna’ Mac’s Redemption House
continues to prosper. MacFarlane employs
two to three part-time employees. In 1995,
she began renting extra space in her building
to crafts vendors, a “fun” sideline that booms
at Christmas. She’s considering adding a
convenience store to her location. In 1998,
MacFarlane was named Maine’s Welfare-
to-Work Entrepreneur of the Year.
MacFarlane still sees her mentor
occasionally, but they rarely talk business.
“She’s more a friend now,” MacFarlane said.
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MacFarlane’s
mentor helped
her pursue a deal
on a building for
the recycling
center.
Conclusion
We’ve covered a wide range of skills in this
booklet. You’ve learned personal skills such
as setting ?nancial goals, creating a spending
plan, building your ?nancial reserves, and
controlling debt. You’ve also learned business
skills such as developing a business plan,
tracking your business ?nances, considering
?nancing, and ?nding support. Together,
these business and personal skills will help
put you on secure ?nancial footing. It’s up
to you now to begin putting these skills to
work in your home and business.
As your business grows, you may want
to look into other resources for expanding
your knowledge and sharpening your skills.
Look at the list of Web sites in the
“Recommended Resources” section below
for additional resources.
The path of a microentrepreneur
may not always be easy, but it’s always
exciting. Good luck as you take charge
of your ?nances and pursue
your dream.
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Recommended Resources
The Internet provides more information about
organizations and programs that provide help
to microentrepreneurs and small-business
owners, including information about
investments. Sites to visit include:
• www.abilitiesfund.org: The Abilities Fund is a
national organization that helps entrepreneurs
with disabilities.
• www.asbdc-us.org: The Association of
Small Business Development Centers offers
management and technical assistance to
entrepreneurs. The Web site can locate a
nearby center for you.
• www.brill.com: Brill’s Mutual Funds
Interactive is a source of investment
information.
• www.cldavis.com: This privately maintained
site provides links to Web sites of Small
Business Investment Companies (SBICs) that
are licensed and regulated by the SBA.
• www.entreworld.org: EntreWorld is a public
service of the Ewing Marion Kauffman
Foundation. The site includes a special search
engine for Internet entrepreneur offerings.
• www.irs.gov: The Internal Revenue Service
Web site lets you download tax forms and
booklets on business and personal tax matters.
Find information about its Volunteer Income
Tax Assistance program by typing VITA in the
search box and clicking the document Tax
Tip 2003-53. You may also call the IRS for
information at 1-800-829-1040.
• www.jbsba.com: The American Association
of Home-Based Businesses is hosted on this
site, providing free information to those who
sign up.
• www.mfea.com: The Mutual Fund Education
Alliance will help you research different types
of mutual funds.
• www.microenterpriseworks.org: The
Association for Enterprise Opportunity (AEO)
can link you to microenterprise organizations
in your community.
• www.nase.org: The National Association
for the Self-Employed focuses on
microentrepreneurs and self-employed
people, providing them with support and
bene?ts.
• www.nbia.org: The National Business
Incubation Association (NBIA) will link you
to NBIA-member incubators near you.
• www.sba.gov: The U.S. Small Business
Administration offers a wealth of information
on starting and growing a business. The
Other Resources button links you to dozens
of organizations dedicated to helping small
businesses. For information on loans, click
Financing, and then click Micro-Loans. This
page will provide you with sources in your
community that offer loans up to $35,000
to eligible borrowers.
• www.score.org: The Service Corps of Retired
Executives (SCORE) has 10,500 volunteer
members and 389 chapters in the United
States. The Web site can guide you to the
chapter nearest you. SCORE’s toll-free
telephone number is 1-800-634-0245.
• www.uschamber.org: The U.S. Chamber
of Commerce can link you to a chamber
in your community.
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Acknowledgments
Financial Planning for Your Microenterprise was
prepared speci?cally for the Association for
Enterprise Opportunity as a public service by the
Denver-based National Endowment for Financial
Education
®
; William L. Anthes, Ph.D, President;
Brent A. Neiser, CFP, Director of Collaborative
Programs; and Jeannette Herreria, Project Manager
of Collaborative Programs.
The National Endowment for Financial
Education (NEFE) is a nonpro?t foundation
committed to educating Americans about
personal ?nance and empowering them to
make positive and sound decisions to reach
?nancial goals. The National Endowment for
Financial Education, NEFE, and the NEFE
logo are federally registered service marks of
the National Endowment for Financial
Education. For more information about the
National Endowment for Financial
Education, visit its Web site at
www.nefe.org.
The Association for Enterprise
Opportunity (AEO) is a national
association of organizations and
individuals committed to
microenterprise
development.
It provides members
with a forum,
information, and a voice to promote enterprise
opportunity for people and communities with
limited access to economic resources. AEO also
represents the U.S. microenterprise agenda in
the growing international community.
Membership in AEO is open to practitioners,
individuals, public agencies, funds, and others
who share in AEO’s mission. For more
information about AEO, visit
www.microenterpriseworks.org
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Special thanks to all volunteer models and to those
who provided photos—Linda Torres-Winters
“Lindita” of Linditas Inc.; David Tenenbaum of
Rocky Mountain Spice Co.; Diane Fresquez of For
Heaven’s Sake; Travis Collins, Crystal L.
O’Donnell, and Charles Reed of Cates Candies;
David Amman of Business Capital of Colorado Inc.;
Tina Garcia of Mobile T’s Manicures; Jill Hennen;
Fanjarivo Rakotonirina of Tropical Items
Madagascar; Ding-Wen Hsu of Paci?c Western
Technology, Ltd.; Ching Chih Lei of Little
Shanghai Café; Chery L. Casting of Lin du Bois;
Kathy Zimmer of Southside Jazzercize Center;
Aaron Nahale of Setpoint Systems Corp.; Mike
McCrea of Big Mike’s BBQ; Melissa M. Rogers of
Euken Safaris Inc.; Dennis Wilson of Pangaea
Designs; Dave and Janie Shirley of Rattlebrain
Theater Co.; Cecilia Prinster of the Colorado
Enterprise Fund; Eugene R. and Brenda Koke,
Jamie Cathcart of Autoworks International; Synia
Gant-Jordan of the Hairnet; Beaulah Williams of
B.B. Design; Diane MacFarlane of Dyna’ Mac’s
Redemption House; Brett Long of Geeks on Call;
Nebojsa (Shon) Vukomanovic of The Sweet Life
Coffee Hause; Shar Bjerke of Absolutely Stitches.
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