So You Want to Run Your Own Business – Part 8

How to Exit Your Business

Ah, the glorious conclusion. It has been quite a ride, hasn’t it? We decided to start a business, we started it, we even made some money! Good times…

For this final installment, I want to bring us back full circle. Let’s talk about why we started this business. It was to escape from cubicle nation, right? But that isn’t the only reason. You did it to make money, right? But how much money? Do you have your number? I hope you do, and I hope that you are close to reaching it.

This is the part of your business life cycle where being responsible, forward-thinking, and organized becomes the MOST critical. More people get screwed in the business exit than anywhere else, particularly with selling a business. People tend to act very dumb when large sums of money are involved. Mostly because no one ever taught us how to handle money properly, so we don’t understand it.

When it comes to exit strategy, there are two types of businesses: a lifestyle business a salable business and.

A Lifestyle Business:

  • is primarily based on your time or the time of others.
  • is not necessarily a sole proprietor, but may not be a scalable business.
  • often has low repeat business or has a low switching cost. Switching cost means the cost to a customer to find a replacement. You might have a lot of repeat business, but if the customer experienced any sort of trouble, they could easily switch and wouldn’t be troubled by it.

A Salable Business:

  • is replicable. This is critical and a MANDATORY part of a salable business. This is why most lifestyle businesses are not salable. No one could recreate what the owner does.
  • has some sort of barrier to entry: a skill set, licensing, capital requirements, patent protection, licensing deal, brand value, etc.
  • usually has a brand (or other intangible asset) and/or systems of production. The less barriers to entry you have, the more you have to rely on branding and systems. You cannot create barriers to entry (usually) but you can create systems and a brand yourself.

Exit Strategies For A Non-Salable Business

This is very easy. Your exit strategy is to stop working. Which means that you have to generate enough profit while the business is operating to cover your living expenses AND provide a substantial amount of profit that you can generate savings. If you have a lifestyle business and you are only producing enough to live on, it is not a viable business.

I’ll say that again, so we are crystal clear:

If you are running a non-salable business and only producing enough profit to live on, it is NOT a viable business.

So it all comes down to saving. If you save $10,000 a year and earn an average of 7% per year, even starting at nothing, you will have close to a million bucks. After 30 years, if you only earn an average of 6%, that end game number drops to about $800k. The point being, you likely need to save a LOT more than $10,000 per year.

This is why I don’t think a ROTH IRA or a Traditional IRA are very effective tools. They are just simply too small to be of much use. I would consider $10,000 your minimum savings goal for a year. Oh, and this assumes you don’t pay any tax on those investment earnings, and you have the $10,000 after you have paid your taxes for the year.

So with that, I made a basic structure to figure out what might be the best retirement plan for you. There are lots of other complexities that will affect this choice, obviously, but I like to use “target savings” as our guideline:

  • Between $5k and $12k use a SIMPLE IRA
  • Between $10k and $20k – $25k use a SEP IRA
  • Between $15k and $50k use a 401(k)
  • Between $75k and $300k use a defined benefit plan

Other complexities will affect this. You need to balance between tax-deferred money (like the accounts above), ROTH money, and taxable money. You could have a ROTH option on your 401(k) for example and in bad years (lower taxable income), put in ROTH contributions and in great years, do traditional contributions. You could fund a SEP IRA and then use life insurance to create a no-income limit, ROTH-like account for yourself outside of the SEP. But these strategies need to be put together with someone who knows you and knows what they are doing.

If you are running a lifestyle business, you need to have a laser-like focus on profitability because profit is the only value your business creates, and it needs to create as much as possible, so you can build your wealth.

Exit Strategies For A Salable Business

A salable business should also generate profit. But you might be building a growth business that doesn’t produce much cash yet, but could be sold for a big pot of money down the road.

A salable business, unlike a lifestyle business, could be generating enterprise value instead of immediate profit. You could be perfecting a system that you will franchise, establishing a brand that someone will want to buy, or even creating a new product that a large company might want to push through their distribution channels. The reality is, most businesses are not 100% salable or not salable. Even with a salable business, you should produce some cash flow that you might shelter using the vehicles above. A lifestyle business might be able to be sold (or at least pieces of it), but not at a high enough price to fully retire on. The wealth your business creates for you will likely come from a combination of savings and exit value.

The number one problem people face when selling their business (at least at the small business level where I live) is no new money. They want to sell to their partner, to their kids, to their friend who works in the business, etc. But the people who are doing the buying don’t have any sort of significant capital to contribute. Business prices are usually based on multiples of profit. So if I sell for 3 times profit, but I only have 1 times profit in cash from the business, how do I pay the purchase price? Maybe I stretch it out over three years, right? Who wants to buy a business that will generate them zero profit for three years? Not many.

If you go this route, you are not truly selling your business, you are likely just retiring with a pension. You will receive a monthly check for many years (usually 10 to 20). This is usually the only way to structure these deals that makes sense. But it carries its own risks: You depend on the continued success of the business for your retirement income.

We could talk forever about the intricacies of a traditional business sale (to an outside or new money buyer) but for our purposes, I just want to cover a few main ideas and some key terms. Businesses are usually priced on multiples or EBITDA (earnings before income tax, depreciation, and amortization) or gross revenue. What that multiple will be is based primarily on what the industry standards are. Most major industries have some typical ranges that businesses sell at. If you are selling a business that is new, or has a non-traditional product, it becomes even easier. It is worth what someone will pay for it. In fact, this is a critical point to understand for ANY sale, so I’ll say it again:

Your business is not worth what you feel it should be worth, or what it was worth sometime in the past, or what it could be worth, or what you need it to do be worth.

Your business is worth what someone will pay for it. Period.

Here are some key terms that you might find in a business purchase:

  • EBITDA: Basically a measure of cash produced by the business operations.
  • Stock Sale: The buyer is buying the actual shares of the company you are selling.
  • Asset Sale: The buyer has agreed to purchase the assets of your company, not the company shares themselves.
  • Gross Revenue: Total income of the business.
  • Multiples: A number that you multiple by the base (usually EBITDA or Gross Revenue) to determine the value of the business.
  • Earn out: A variable payout in the future, generally based on the performance of the company.

The complexity from selling a business comes from having to determine the price at the same time as the deal points. The major deal points that need to be agreed upon are: price, down payment, future payments (earn outs or a note), and any employment contracts if the buyer wants the seller to continue to work. Obviously, as a seller of a business, you want to get as much cash up front, at as high a price as you can. As a buyer, you want to pay as little cash up front as you can and force the seller to participate in the risk of the business by getting paid via earn outs (or variable payments). Somewhere in between these goals, a deal can usually be found.

I hope this outline has been helpful. In another post, I will tackle the problem of deferring taxes on a business sale.


Other articles in the So You Want To Run Your Own Business series:

Debt and Small Business

I can’t say this any better than Seth can, but it is important enough to be said multiple times. Debt should be for assets, if you need to debt to operate, you need to consider why you are operating. My favorite part of this is the last line.

Original post here.

Before you raise money (assets and expenses)

There are more ways to raise money for your business, project or organization than ever before. There are more angel investors, more online sites, more VCs… it’s true that the local bank has largely abandoned this responsibility, but the web keeps reminding us of the opportunities.

Here’s the key thing you have to understand before you ask your mom or your friends or the local VC for an investment:

There’s a huge difference between spending money on expenses and spending money to build an asset.

Ice at a picnic is an expense. Once it melts, it’s gone. Your electric bill, rent–these are costs of doing business, and you should rarely if ever borrow money to pay them.

Assets, on the other hand, are things that sustain or grow in value, that you can use again and again, and that are ultimately worth more than they cost.

A college degree from the right institution is an asset. So is an earned list of 10,000 people who want to hear from you by email once a week. So is a reputation (which some people call a brand).

For entrepreneurs, then, the math is simple: any asset-building opportunity that will generate a long-term profit is worth considering and even worth borrowing money to acquire.

But if your business needs to borrow money to simply pay your expenses, to keep you at a steady state, you’re doomed. Unless those expenses are demonstrably building a bigger asset for tomorrow, you’re going to regret the investment, because it’s not an investment, it’s just a waste.

The second thing to keep in mind is this: you probably have to pay the money back. Don’t borrow money to pay for an asset unless you can see a clear path to paying it back. That might mean selling the asset later (which is what VCs almost always do) or it might mean building a project where the asset is so profitable you can pay people back directly (which is why it’s worth borrowing money to go to Harvard Medical School).

If you sell a percentage of your company (which is what most investors ask for) then you’ve basically started down the path to sell the whole thing in order for the investors to get repaid. Nothing wrong with that, just be sure you’re going in with your eyes open.

When in doubt, raise money from your customers by selling them something they truly need–your product.

Why QuickBooks Will Always Be Subpar

If you follow me on twitter, you will have seen me having a conversation with someone very nice who works for Intuit, the maker of QuickBooks. It started when I tweeted about how much I hate QuickBooks. The conversation went on for many tweets. The sad part is that, despite the good efforts of the person manning the QuickBooks twitter account, their “help” was marginal at best, and completely useless for the most part. I do feel bad for them; I know they are trying their best. But if you look at the QuickBooks profile page for twitter, every single tweet is someone complaining. I didn’t see a single “Gee thanks @quickbooks for making my life easier” not one. That is sad. This tweet from them really exemplifies it all. Really? Your support for why it might be my computer and not the software is that not EVERYONE has a problem with speed? This means that lots of people do!

So why don’t they fix it?

It all comes downs to economics. It always does, by the way. But for those of you that don’t know competitive environments, let me give you a short lesson:

QuickBooks has a de facto monopoly on the small business accounting market. They are by far the most common choice. What does this mean? Monopolies have market power:

Though monopolists are constrained by consumer demand, they are not price takers, but instead either price-setters or quantity setters. This allows the firm to set a price which is higher than that which would be found in a similar but more competitive industry, allowing them economic profit in both the long and short run.

From Wikipedia:

In a competitive environment, if people are not serving customers properly, new entrants will enter the market and draw customers away. In a monopoly, the firm decides what price or quantity to produce at. There is a given level of demand for small business accounting software. Especially in our heavily regulated world, businesses really HAVE to keep books. And using a computer is generally faster. So they have to buy something. Enter QuickBooks. QuickBooks can select a price that allows them to cover their cost (not technically, but this is the remedial version). However many customers buy at the product is fine. And then they increase profits by getting more money from each customer who HAS to buy their software at a given price level. Enter the barrage of merchant services, payroll, credit cards, loans, etc.

So, why does QuickBooks have mediocre software? Because no one can scale up enough to compete with them. When Microsoft decides to stop competing with them, what hope do you think a small startup has? Not much.

But wait Andrew, don’t you recommend QuickBooks to your clients?

Yes, I usually do. Why? Because they are a monopoly which means they set the standard which makes certain things easier. And for most clients keeping it fool proof is more important that increasing speeds of their workflow.

BUT

If you are willing to invest a little time (which can be painful for a business owner) there are LOTS of great software tools out there to switch to. If you are just starting out, you have it even easier. Pick something new and go for it.

I decided to write this post because I wanted people to know my official opinion on accounting software. There are lots of options that you can use and if you can, I would recommend one of those. But they might require some more work (up front) to find and get going the way you want. QuickBooks is the easy choice. And for some people, the easy choice is the best choice.

For people that about technical stuff, keep reading. If you don’t, you can stop now.

Why does QuickBooks suck? Proprietary database. Here is the example: I have 18,402 transactions in the company file for my CPA firm. This goes back 42 months. The total file size is 72.5625 megabytes. That means that each 253.6 transactions take a MB of space.

Why? It’s just numbers and text. No images, sounds, video, nothing. Each transaction has an average of 100 characters. That means that it takes 1 MB of storage to store 25,600 letters and numbers. This is ridiculous. In addition, the page file size is nuts for something like this. In our firm, we had to create a separate server to hold QuickBooks files (we have lots, for all our clients) because the memory leak in the program was paging out the entire server. It will take ALL the performance you throw at it, and use it up.

Why? Because they built their own database decades ago and each “new” version of QuickBooks is simply more crap… ahem… features bolted onto this chassis.

Why invest more in doing a rebuild when I get to pick the price? Why not keep the database proprietary so it makes it even more difficult for customers to leave, maintaining my market dominance and pricing power?

What you end up with is a Twitter feed full of users complaining. We all hate it, but have to use it anyways.

 

Selling a Business

Business owners, particularly small- and micro-business owners rarely think about their exit strategy. They often forget that a business is a means to end. You started a business to make money and you want to make money so you can accomplish some goal. Having a business for any other reason means you are doing it wrong!

Your business has one of two goals:

1. It generates enough profit each year to cover your living expenses and also allow you to accumulate wealth.

2. It is a replicable business with good cash flows that you can sell.

Option 1 is typical for service types businesses where you are selling your time. Option number two is for a business that can be operated by anyone (at least, anyone with the proper training). Typically if you can sell your business you will make more money. This is why I spend so much time yelling at business owners to create systems for the business. You can’t sell your ideas. You CAN sell a business operation that efficiently and profitably delivers a product or service. I was at a meeting the other day and the sponsor of the lunch, a CPA with a great deal of experience in the world of business sales, said this great quote (check out their firm here):

 Businesses above $100MM in gross revenue sell 100% of the time

Businesses between $50MM and $100MM sell 50% of the time

Businesses between $20MM and $50 sell 25% of the time

Business under $10MM in sales are lucky to sell 1 out of 10 times

 If you thought that the reason small businesses don’t sell is because they aren’t “big enough”, you would be dead wrong. This CPA said that the reason they don’t sell is, more often than not, “simply a lack of sophistication”. They aren’t financially prepared for a sale and it blows their deal. If you think that “financially prepared” means profitable, you are wrong again. We assume that all businesses being offered for sale are profitable. Financially prepared means having good books, being able to answer detailed questions about your business, and having internal controls and operational procedures. You have to have financials to be able to negotiate the deal. And the buyer needs to know your accounting is robust enough that the numbers you are giving them are accurate.

And don’t think you can add this stuff at the last minute. Buyers want to look at historical financials. If they don’t look consistent (or don’t exist in any usable form), they will likely walk from the deal.

So if you hope to one day sell your business, you better start getting it ready now.

So You Want to Run Your Own Business – Part 7

Keep Your Business Running

So, you are making some money and you have money flows smoothed out. You are paying yourself a salary each month (based on the value of your work). You are taking distributions or draws of the remaining profit quarterly to fund other ventures or to save for yourself. You are even paying your quarterly taxes on time, like a BOSS! But these are three different things you have to do each month or multiple times a month. All you did was cover paying yourself; you didn’t touch paying staff, vendors, invoicing clients, keeping client work and orders moving forward, etc. etc.

How do you keep this thing running without the wheels falling off?

When you start your business, running it is simple. It might not feel that way, but it is. I promise. You can keep everything you need to do in your head. And, since you typically are the only one doing stuff, it is easy to figure out who dropped the ball when things go wrong. You are going to think that some of the systems I describe are WAY too complicated for you and your small business. And they might be. But when you need them, you won’t have the time to implement them.

And then wheels fall off.

So now that you have a little cash coming in, we are going to start looking at running a business like a big boy (or girl, as the case may be). This is the tough stuff. This is the stuff that doesn’t seem like it is making you money, but it is. I promise.

Personal Productivity

To start with, you need a personal productivity system. If you personally can’t keep track of stuff, then nothing else will happen that needs to happen, and you will ALWAYS be playing catch up. For the rest of your life. Good news though, you will catch up eventually. Bad news, it will be when you die.

So let’s work on a system to get you there before that, shall we? There are lots and lots of productivity blogs, systems, books, and such. I am not going to tell you to use GTD (which I do, sort of) or a pomodoro technique. I’m not going to recommend specific notebooks (cough … field notes … cough …) or even specific software to use. But there are some major concepts that you NEED to have and understand:

  1. Task List – You need to have one list that you work from each day. You don’t want to waste time spinning wheels during the day figuring out what you should do next. Or worse, working reactively by jumping to whatever grabs your attention at any moment. You need to have ONE location that you can go to when you finish a task. It doesn’t matter if you write it down each day, each week, have expensive software, or use free software. Just have a task list.
  2. Projects vs. Tasks – If something requires more than two tasks to complete, then it is a project, not a task, and it can’t go on your task list. Each project needs to have a dedicated spot where you have ALL the tasks that need to be completed to get the project done. Then just put one or two of those tasks on your task list.
  3. Capture – Always have a capture tool handy. Always. When you get an idea or inspiration, or just remember “Crap, I have to call Joe!” throw it in your capture tool and STAY FOCUSED. Get those ideas and thoughts and mental distractions out of your head quickly.

That is all the detail I am going to go into on that. I have written ad nauseam on personal productivity, so if you want more detail, check out my various posts focused on that.

Business Systems

Ok, so now you know what to do personally, but your business is feeling a little wobbly, right? Well, I will make this easy and tell you everything you need to know about business systems in one sentence:

You need them.

You didn’t think I was going to make it easy, right? Of course not. If it was easy, every Tom, Dick and Harry would be a millionaire entrepreneur.

But seriously, you need them and for one major reason: exit strategy. Remember, you didn’t start this business because you needed an excuse to pursue your forbidden love of QuickBooks (if you did, I have a job for you … but really? yuck.) did you? No, you started it to make money. And, if you want to make real money, you either need to sell your business or become very profitable so that you can save significant amounts of cash during your working years. Or Both. Both is good.

And to stack lots of cash, you need to be profitable.

And to sell your business for stacks of cash, it has to be repeatable.

Guess what the only way to accomplish those two things is? Right, you are getting GOOD at this my friend! BUSINESS SYSTEMS.

But what is a business system? It is a way of doing the work of your business in a consistent and cohesive fashion. Consistent, in that you do it the same way every time, which eliminates the extra costs of figuring how to reinvent the wheel every time tax season comes around or you need to quote a client. Cohesive, in that you aren’t jumping from payroll, to client work, to sales tax, to running to the post office in a random order. You accomplish like tasks together to get them done faster.

You should have an operations manual for your business. It doesn’t need to be formal. Maybe you just get a binder and put a calendar and some instruction pages in it. The overhead tasks are easy and I will give them to you as a gimme:

  • Every Friday morning you pay bills and download the week’s activity from your bank account and credit cards into your accounting software.
  • On the 15th of every month you run payroll for yourself and your staff.
  • On the First Friday of each month you reconcile your bank and credit card accounts with your statements (or you get smart and pay someone like me to do it, since I can do it faster and cheaper than you).
  • Every January you review your annual plan and redraft it as necessary.
  • Every Quarter you review your goals and the progress you made on them so far this year.
  • The First Monday of each month you run your financial statements and review your performance (or, again, you get smart and have someone like me do this with you so you can actually understand them).
  • After reviewing performance, you cut a check for 80% of the profit in a Draw or Distribution to yourself and put it into your personal savings account. You also cut a check and mail in your estimated taxes.

Get the point? Each of these items could be calendared a YEAR in advance and should just happen like clockwork. No thinking, no overworking, no getting behind then having to find three days to do bookkeeping. Little pieces, at the right time, done in a consistent manner, will have you running your business like a true BOSS. In fact, if you just did this list you would be MORE efficient (and likely more profitable) than 80% of businesses out there.

When it comes to operations for your business in particular, it gets a little more complicated. I can’t give such specific advice because everyone has a different business. But you should be standardizing your business as much as possible. I tell people to think about your business from “door to door,” which means, what is the first contact with a customer and what is the last contact? Then walk yourself through every single step it takes to get them through it. You might have multiple versions of this (retail customer, wholesale customer, retainer client, hourly client, etc.) but the idea is that you should be able to identify no more than four to six meta-level clients you have.

Once you have identified each step, just document what you need to do at each for them. Make a checklist, an outline, a timeline, whatever it takes. But at the end of this, you should be able to hand the book to another person, and they can walk through serving your customer without your input because everything they need to know is in the book.

Once you have that tool in place, you will be AMAZED at how powerful it is. When you are cranking through work, you don’t stop to think about how it could be done better. But when you take a step back and document steps you will notice all sorts of ways to improve efficiency, cut costs, or increase revenue. (What if we asked the client about their X while we are working on Y for them? Cross sell baby!) This also allows your brain to focus on the actual work, instead of trying to figure out where to go next.

Automate as much as you can and you will make MORE MONEY. I promise.


Other articles in the So You Want To Run Your Own Business series:

The History of the Consumption Economy

Consumption hasn’t been the norm forever. Only since WWI.

We are moving back to a Feudal system.

We need one generation to make the sacrifice or we end up with much larger downfall i.e. Harry Seldon.

People like to forget history. We all know this. So I thought I would take this chance to bring up something that people may have forgotten.

We currently live in a society where the economy is based primarily on consumption. But this has only been the case since the end of World War I, which in historical terms, is not very long. Prior to the turn of the century, most people worked at subsistence levels. Only a very few, very wealthy people had leisure time. The idea that everyone in the word can and should have time to spend several hours or even days every week jsut relaxing is a new one.

World War II created a mental paradigm shift in the country as a whole. This is where the concept of what a middle class is was born. But it took an entire world at war to create this dramatic shift in psyche necessary to start this revolution. Our labor force, for the most part, has not been productive enough to support this dream for decades now. Fortunately (or unfortunately) the world was willing to lend us money to keep this dream alive.

We are now in a situation where the middle class is slowly being eroded. Just like in a feudal system those with the capital earn significant rents and can grow that wealth. Those that have only labor to offer are often at the mercy of the landlords. Right now the world economy is experiencing something very similar. Unemployment is high and capital is tough to come by. This mean, by default, those with wealth can demand higher payments for use of their capital and labor can demand less and less for their time. The rich get richer and the poor get poorer.

We are in the middle of a Seldon Crisis. If you don’t know what that is, look it up and read more Asimov. We have the ability to shorten the slide backwards into more income inequality, but it will require one generation to sacrifice their standard of living and to increase their savings and investment by foregoing consumption. With that additional investment, we could kick start another growth revolution that rivals the industrial revolution. The technology is there: green energy, nano-technology, robotics, 3D printing, genetic engineering, augmented reality and location based technology. Any of these could revolutionize the world, they just need a substantial investment to get started.

I think you could go so far as to say that if you aren’t steadily increasing your net-worth, in a noticeable way, then you could be considered on of the people helping to extend the crisis we are facing.

Will you be the one to make that sacrifice? Or are you going to be one of the people that says it’s “Someone Else’s Problem”?

So You Want to Run Your Own Business – Part 6

Controlling Your Money Flows And Paying Yourself

OK, this post is where we are going to get a little technical. But it’s ok, because this is where the magic really happens with owning your own business.

Today we are going to talk about money flows and how, by making some tweaks, we can change how, and even IF money flows, are taxable. I would like to point that I have not yet suggested, or told you, to get a business entity.

This is me telling you to get a business entity.

There are three major types: C-Corp, S-Corp, and LLC. There are a million places to get an explanation of these, so I won’t go into it here. Suffice it to say that C-Corps pay their own tax, and S-Corps and LLCs “pass through” their taxable income to the owner, so it is only taxed once. We also need to understand a few terms:

  • Gross Revenue or Income is the total amount of money your business brought in.
  • Profit is what your company has after paying expenses.
  • Taxable Income (for our purposes) is the same as profit.
  • Payroll, Wages, W-2 is money paid to people (including the owner) that is deducted from the Gross Revenue, which lowers your Profit. This is taxable income to whomever it is paid to.
  • Dividend is paid from a C-Corporation. It is NOT a deduction for the corporation and is taxable income to the payee (this is the double taxation problem).
  • Distribution is taken from an S-Corp and is tax free. It MUST be taken in proportion to ownership.
  • Draw is taken from an LLC and is tax free. It does not necessarily have to be taken in proportion to ownership.

OK! So here we go:

You want to bring is as much gross revenue as you can. Go make your business bigger and make more money!

Once that income is in your business, our goal is to spend as much of it inside your business entity as possible. This is because everything you spend at the corporate level reduces your profit. There are a lot of things that your company can do for you, its valuable employee, to ensure you keep working hard for it. For example, it can provide you with a company car and a cell phone or provide you with money for meals and entertainment expenses. Many of these are considered non-taxable fringe benefits. That means you can deduct them in the company, but you don’t have to declare them as income personally. Once you have spent all of the money you can in the business entity, you have to figure out how to get the money out of the business entity so you can spend it on personal expenses or save it.

If you have a C-Corporation, then you have to pay yourself a Wage to get money out of the entity so you can use it for personal expenses. Or you can pay tax at the corporate level and then take a dividend (which will be taxed again).

If you have an S-Corporation, you can take a Distribution of any profit in the company to yourself personally. Be aware that you will be taxed on the profit of the company, whether you take it in a distribution or not.

If you have an LLC, you can take a Draw of any profit in the company to yourself personally. Be aware that you will be taxed on the profit of the company, whether you take it in a draw or not.

It can get more complicated from here, with non-cash expenses (like depreciation), non-deductible cash expenditures (like federal taxes), accounts receivable and accounts payable. All of these things can disassociate cash from taxable income. I won’t lie to you: You need a professional to help you with this part.

The other money flow you should learn to control is your savings. When (notice I said WHEN not IF) you start generating more profit than you need to pay your bills, you should consider moving money into a qualified retirement plan like a SEP, SIMPLE, IRA, or 401(k). This will allow you to defer paying taxes on the profit until you need the money (like in retirement). Again, you need a professional to help you figure out what kind of plan is best for you.

And it’s THAT SIMPLE folks. Don’t over complicate it!


Other articles in the So You Want To Run Your Own Business series: