Tag: Business

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Business Finance – Small Business Tax Myths

This week we are going to go over some myths regarding taxes for small businesses. I get a newsletter from our CPA each month that covers tax-related topics. The articles are written by other people and I am assuming his website subscribes to these articles from a service.

I found the topic of this one interesting, so I searched for the title on the web and found the original author. Here is the original article, by Juanita Farmer, CPA, of Germantown, Maryland.

There are a lot of myths & misconceptions around what you can and can’t benefit from with regards to taxes in the US. Below we are going to cover seven of the most common ones.

***DISCLAIMER – I am not a CPA and DO NOT Offer tax advice over the internet or otherwise. Please consult with your CPA for tax advice. This article is for informational purposes only***

Click on this link to get your own free copy of the Rental Property Tax Guide by Stessa.

Start-Up Costs are Deductible Immediately

Business start-up costs are the costs incurred prior to the business actually beginning operation. They range from advertising and travel to surveys and training. Organizational costs such as these fall under capital expenditures.

Just like you can amortize depreciation of equipment, when you start a business, you can amortize some business start-up costs.

You can deduct up to $5000 of business start-up costs and up to $5000 of organizational costs. For start-up or organizational costs that exceed $50,000, the $5000 deduction is reduced. The remaining balance must be amortized.

Overpaying Taxes Makes You Audit-Proof

From a business perspective, the IRS is only worried about if your documentation matches your deductions and that your deductions are legal and legitimate. Properly document expenses and follow the advice of a good tax accountant to “Audit-Proof” your business.

You Can Take More Deductions for an Incorporated Business

You don’t need an Incorporated Business to deduct business expenses. Plus, depending on the corporate entity, you may have more tax and tax filing burden.

Home Offices are an Audit Flag

Home offices used to be a common audit flag, but with so many people now utilizing home offices, the IRS issued a a simplified home office deduction that is easy to claim, with proper recordkeeping.

No Business Expenses are Deductible If You Don’t Take a Home Office Deduction

All business expenses such as travel, business supplies, equipment depreciation, etc. Are deductible, regardless of if you take a home office deduction or not.

Filing an Extension Delays Your Tax Payment Due Date By 6 Months

Regardless of whether you file for an extension or not, if you owe any taxes, payment is due on the original due date, typically around April 15. All an extension does is allow you a six  month extension to this deadline to turn in all of your paperwork/documentation.

Part-Time Business Owners Can’t Have Self-Employed Pension Plans

Even if you are working a full-time job with 401k benefits and you start a  small business, you can still set up a SEP-IRA for that small business


Source Attribution: Juanita Farmer, Managing Partner of J.D. Farmer & Associates, LLC

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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REI – Acquisition of Rental #3

This post is just a short update on REI. We had a deal drop in our lap.

122.Sagewood.FrontElev

The Deal

We were not specifically looking to buy another property immediately. As detailed in a previous post, we were working on a deal earlier in the year, but it did not work out.

 

A member of the local REIA, who is also a realtor, has been looking out for properties I might be interested in. I had given her the specifics: three-bedroom, two-bath home on a slab foundation, preferably brick façade, in Thibodaux, in a decent neighborhood.

She had showed a couple of homes that were close, but not quite right for us, in addition to a mobile home park that was just too much for us to take on. (This was just prior to my surgery)

She contacted us with a property that fit our description exactly and told us the listing price, $144,500, and to make an offer. She indicated that the sellers were motivated. I looked it over and saw that we would be looking at a similar ROI to the property we bought last year with an offer of approximately $111,300. I did not think that the owners would accept that and they didn’t. They countered with $125,000 and we countered back with $112,451 cash sale with an end of month closing as a best offer. This would give us a ROI of just under 7%, based on a conservative analysis.

We fully expected things to end there. The sellers asked for the weekend to think about the offer, so we agreed.

On Monday, they accepted the offer (to our surprise) and we began the inspection period.

We set the closing date for the first Friday in December, as this was the soonest that the real estate attorney could complete the paperwork.

 

During the due diligence period, we determined that the only things needed were to change the locks, change an over-sized circuit breaker, and some minor cosmetic work.

 

Updated: We now have it listed for rent and are taking applications. The property was rented for January.

122.Sagewood.RentalFlyer2

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

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Business – Optimizing A Process – Order of Operations Related to Surgery:

This week I am touching on the topic of process optimization. This is another topic that came a conversation between Kevin@deliberateconsulting.com and myself when comparing thyroidectomy procedure results and side effects. He was diagnosed with thyroid cancer and had surgery a couple of months prior to my diagnosis.

Process-Optimization

We compared notes on what was similar and what was different between the two.

(Caveat: There may be some factors that we are not aware of, specific to each of us as individuals, that could have influenced decisions made.)

 

We both had thyroidectomies. Surgery, an overnight stay. A vacuum bulb to drain the incision area. Released the next morning. Then wait to determine if further treatment is necessary to ensure the eradication of cancer. In Kevin’s case, he needed further treatment, in my case, it is too soon to tell.

The doctors started Kevin on hormone replacement therapy almost immediately after surgery, then had to wait for levels to drop to begin the secondary treatment. I am still not on any replacement hormones until they determine if I need the radioactive iodine ablation, thus shortening the cycle time to start. Since the hormones appear to last about 6 weeks, I am good for a while with no replacements and won’t have to wait for levels to deplete if I do need the RAI.

The way my surgeon planned things seems to be the more efficient way to do things. This got me thinking about how an optimized process for business is cheaper and more efficient than just randomly doing things in a haphazard manner.

 

I do this in my real estate investing. When rehabbing a property, I evaluate what needs to be done & plan the order of operations so that there won’t have to be re-work because something had to be undone to do something else.

 

You can look at your business processes and optimize them for efficiency by ensuring the order of operations for each step does not additionally delay some other step.

 

You can think of it like the sandwich-making analogy I used here…if your current process calls for you to put the peanut butter on the plate, then add the bread, then the jelly or jam, you can optimize it by changing the order of operations to bread, peanut butter, jelly, then another slice of bread.

 

What inefficient processes have you identified in your business or workplace? How did you change them?

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

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Business – Revisiting the E-Myth Revisited

Welcome back! I was talking with Kevin@DeliberateConsulting.com about things we should do differently in our business (disclaimer: Kevin & I are partners/investors, along with others, in a high-end door manufacturing business). One of the things he brought up was that all of the partners should have read Michael Gerber’s “The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It” [http://a.co/d/5JhEnwk] before we decided to invest in a business. Kevin also suggested I write a blog post about it and how it can help you in business.

 

The E-Myth Revisited

 

emyth

 

The E-Myth Revisited is a wonderful book that provides guidance for individuals having an “Entrepreneurial Seizure” as the book’s author, Michael Gerber, puts it. It provides a mix of case history, told as an on-going narrative of a client, and guidelines for successfully organizing an entrepreneurial idea into a business operation manual. It tells how you should work ON your business before you work IN your business. AND, your goal should NOT be an employee of your business, doing things yourself.

 

I’ve mentioned the E-Myth before:

BUSINESS – WE DON’T NEED NO STINKING PROCESSES!…OR DO WE?

MY RESPONSES TO TIM FERRISS’ “TRIBE OF MENTORS” QUESTIONS

 

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Business Buying, Two Years Post-E. Seizure

 

I did not read the E-Myth until after we had already purchased the business and were off to the races. I shared it with the other investors, indicating how important it was that we follow its recommendations. Kevin read it and as indicated by the prompt for this post, he feels the same.

 

Looking back, I have to agree with Kevin. We should all have read the book before deciding to buy a business together. We did not understand how to operate the business. What little “processes” we received from the previous owner were a jumbled bag WTF? and Huh? And, on top of that, the partner directly involved in the business adopted everything wholesale, becoming too mired in the day-to-day to view anything strategically.

 

This is exactly what the book is designed to avoid. If we had spent more time understanding how the business operated and put in systems & processes to optimize its operation prior to purchase, we would be a lot further ahead.

 

We are slowly getting things on track and working to bring efficiency to the operation. Only time will tell if we will be successful.

 

Lessons Learned

 

Kevin and I are starting to collect lessons learned so we can apply that to future business endeavors, investment advice, and consulting efforts.

 

Below are some, in no particular order:

  • Read the E-Myth Revisited
  • Put together your operating manual
  • Understand you costs
  • Create an operating agreement defining who will do what
  • Stick to your operating agreement
  • Understand Cash Flow

 

Please email me, comment below, contact me on LinkedIn, Twitter, or my Facebook page to share your Lessons Learned in operating a business.

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Personal Finance – What Can I invest In?

This week we are talking about different types of investments that you can utilize to better your personal finances. I’ll briefly touch on traditional investments (stocks, bonds, etc.), investing directly into a business, and various forms of real estate investing.

Additionally, I would like to give a shout-out to @DeliberateKevin for the guest post last week. Go check out Deliberate Consulting.

FinChart1

“Traditional” Investments

Traditional investments are what most people usually think of when they think of “Investing”. This can be stocks, bonds, Exchange Traded Funds (ETF), etc.

There are three main approaches you can use:

  • Investment Advisor
  • Robo Advisor
  • DIY

TraditionalInvestingRiskChart

Investment advisors usually handle clients’ money for a fee. In most cases, that fee is a percentage of the total portfolio balance. Additionally, unless the advisor has a fiduciary duty to you, the investor, they may push you towards investments where they get better or additional commissions, as opposed to investments with less fees and/or commissions involved. Also, you need a sizable balance to start your account, say, in excess of $500,000.

 

Robo Advisors are basically algorithms that select the best investments based for you based on many criteria. They usually invest in ETFs and can automatically do things like rebalance portfolios, automate tax loss harvesting, etc.  They tend to operate on a fractional percentage commission, meaning that they are usually cheaper than a full-blown human investment advisor. Robo Advisors will also allow you to start an account with a much lower balance than a traditional financial advisor, with some allowing you to open an account with no money, though you will need to put money in to invest.

 

DIY or Do It Yourself is another approach you can take. It costs you no fees other than trade fees and you don’t need a large balance to start. But, you will have to spend a lot of time researching your investments and deciding where to put your money. You can start with as little as the price of a single share of stock and the trade fee.

 

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Direct Business Investment

 

You can invest into a business outside of stock. This can be in the form of buying a franchise, buying a share of an existing business, or even taking your non-retirement account money and opening a business. A word of caution: Be sure to perform thorough due diligence into any business you invest in like this and if investing with partner(s), ensure you have a sound operating agreement in place and that everyone abides by it.

See more on starting a business with partners: BUSINESS STARTUP: 9 TIPS FOR STARTING A SMALL BUSINESS WITH PARTNERS

 

If you only have retirement account funds available, either from a 401k from an previous job or an IRA (Individual Retirement Account), you have the option to buy or start a business using those funds through a Rollover Business Startup (ROBS) transaction, also known as Business Owner Retirement Savings Account (BORSA). This allows you to utilize the money you have saved to start a business without incurring taxes or penalty. There are specific restrictions that go along with it and it has to be administered by a qualified group. Companies like DRDA and MySolo401k can help you deal with this type of thing.

FinChart2

 

Real Estate

 

The last type of investing option I am going to talk about is real estate. As I have talked about before, I like investing in real estate, in addition to other types of investing. Real Estate has options that range from very hands-on and intensive involvement to very passive hands-off approaches.

 

Direct Investment – Real Estate

If you have money sitting around, or you decide you want to follow the Tim Ferriss approach and dreamline a muse to support real estate investing, you have lots of options.

You can wholesale, which is finding people with a need or desire to sell a property that doesn’t qualify for traditional financing or need the funds in a short time period (need a quick closing).

You can Fix and Flip. This involves buying a distressed property at 30% or more below market value (where market value is considered the after-repair value or ARV) and rehabilitating the property, then selling it at or near market value.

You can also buy and hold, the term for investors that buy property with the intention of renting it out over the long term. Generally, these investors like to acquire their properties in a similar state to the Fix and Flip investors, but do not sell the properties.

A less well-known approach is to invest in Notes. These are mortgages that the banks sell off at a discount to get their capital back & re-deploy it in another loan. There are note funds in addition to you being able to buy notes directly.

Most note funds require that you be a sophisticated investor. No, that does not mean that you have to drink your tea with your pinky out and wear a three-piece suit every day. It is a category defined by the government as having an income of $200,000/year if single, $300,000 if married, OR $1,000,000 in net worth, not including your primary residence.

 

Self-Directed IRA – Real Estate

Like the ROBS/BORSA methodologies mentioned above for direct business investments, there is a self-directed IRA (SDIRA) that can be used to invest in real estate. They can be used to buy investment properties or, in some cases, to actually BE a “bank” of sorts.

Some caveats with using an SDIRA to buy investment property: You cannot take advantage of depreciation on the property, so you lose out on some tax benefits; You cannot receive any immediate benefit from the investment. All returns from the investment belong to the SDIRA.

 

Another option is to become a private lender. Basically, you are becoming the bank, lending money on a short-term basis, to a real estate investor. They benefit from quicker and usually cheaper closings and you as the lender benefit from the interest earned by lending the money, which usually is more than you will make in the bank or other investments.

 

Hopefully giving you this overview of different types of investing will help further your knowledge and be a starting point for your own investigation into how best to invest your money.

 

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Personal Finance – How NOT To Spend Your Money

Welcome back!

This week I am going to go over how NOT to spend your money. There are lots of good things to spend money on, but I continually observe people spending money so they can feel like they are keeping up with the Joneses or because they “deserve” it. And avoid misunderstanding, I am not advocating frugality, just better decision-making when spending money.

 

Everyday Observations

 

Bad spending habits observed recently:

Withdraw money from an old 401k account to go on vacation

Spending money to set up a business, but with no initial business activity

 

Early 401k Withdrawal

If you have money in an old 401k, use it for the intended purpose: Savings for retirement! It is understandable if you have a hardship and need the money to help deal with that, but just pulling the money out to go on vacation is a bit ridiculous. In addition to diminishing the amount of money to be available at retirement, you also have to pay a penalty on the money you withdraw, in addition to taxes at your current rate.

 

401kEarlyWithdrawal
Amount needed to withdraw from old 401k to get $8000 for a vacation.

 

As an example, assuming a 24% tax bracket, if you want to use $8000 to go on vacation, you will need to pull out almost $13,000 to cover the $1,290 penalty and approximately $3,097 of taxes to end up with $8000 to go on vacation.

Not only do you lose 34% off of the top of your money, you also loose any additional earnings by not having that total amount of money still invested.

 

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Setting Up a Business Entity with no Business Activity

I understand the desire to get out of the rat race, to start your own business, and not have to work for someone else. I am right there with you! But take a practical approach. Take a practical approach. I see people starting up LLC entities, putting up websites, and paying for business infrastructure before they have any business activity. That is definitely putting the cart before the horse. If you spend that money, but do nothing in the way of generating business, then that is a wasted expense.

You would do better spending money on actual business-generating activities than paying for infrastructure before you need it.

 

Suggestions

 

Vacations

Plan your vacation as inexpensively as possible. Don’t skimp, just don’t pay $1200 a night for a room when you can rent a whole condominium or home for $110 per night in the same area.

Carry snacks and drinks with you so you don’t have to pay $4-$5 a person for snacks and $3-$4 per person for drinks. No need to carry enough for the whole day, but if you can save $28-$36 for one round of snacks & drinks a day, that cuts your total expense.

Save money until you have enough to go on vacation.

 

Businesses

Start your business on minimal infrastructure. Start conducting business now, then add infrastructure as you really need it.

Have a detailed realistic business plan. Plan out costs, expenses, margin, target audience, etc. Know these things before starting your business, much less spending money on infrastructure.

Hopefully these suggestions helped you out. Please comment here with any questions or suggestions regarding tips, tricks, and ideas for judicious spending.

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

 

 

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Personal Improvement – Books That Have Influenced Me Recently

BookList
Books That Influenced Me

 

I would like to know more about my readers. If you could spare about 2 minutes of your time,  please take a survey to tell me what you like about the blog. Just click here to take the survey.

 

Welcome back to another installment of Things I Think About! This week I am going to go over a few books that I have read recently that have had an impact. While some of them cover a mix of topics, to me, they mostly fall into one topic. Because of this, I will break them out by topic and detail the crossover topics, and why I feel that way, for each book I also have them listed separately on my Recommended Books page, HERE.

 

Business

The E Myth Revisited by Michael Gerber

This book speaks to my soul! I “read” the Audible version, (as I do most books due to my 3-hour plus daily commute), recorded by Michael Gerber himself. This book details why a lot of “Entrepreneurs” find themselves overworked, underpaid, and without the ability to grow. It is an interleaved mix of example stories with lessons explaining about each story. The main focus of the book is to explain why developing processes and systems for operating your business will allow you to employ other people to work IN the business so you can work ON the business.

 

The 4-Hour Workweek by Tim Ferriss

A young Tim Ferriss relates how he figured out how to not be locked into common misconception of the American Dream…go to school, get a good job, work like a slave for 20-30-40 years, then retire at an age where there is a good chance that you will have trouble enjoying life. In the 4-Hour Workweek, he details the concepts of mini-retirements, becoming effective and efficient in whatever you do for work, and ideas for small businesses that require little to no maintenance to support you on an ongoing basis.

Granted, as even pointed out in the book, the goal is not to be able to lay on the beach drinking mai tais, it is to free you up to do the things you want to do, including world travel, learning languages, and/or working with non-profit organizations.

This book also qualifies as a personal Improvement book, because a lot of the recommendations for efficiency and effectiveness while working have helped me to reduce a lot of stress at my main job.

 

Rich Dad’s Cash Flow Quadrant by Robert Kyosaki

This book breaks out the different classifications of people earning money. ESBI stands for Employees, someone who works for someone else to make money, Self-Employed, a person working for themselves to make money, Business Owners, owning a business & employing other people, and Investors, those who employ their capital to buy assets. It promotes the idea to be either a business owner or, ultimately, an investor, as this usually provides the best returns on time & money.

 

Personal Improvement

The Obstacle is the Way by Ryan Holiday

Ryan Holiday is a devoted Stoic. He has multiple books and a website dedicated to Stoicism. This book is kind of a manual for achievement. I really enjoy it because it basically lays out my philosophy on life. The short version is “Do what you can to change the things you don’t like in your life…Ignore the things you can’t change.” The Obstacle is the Way takes it a step further in that it guides you to figure out how to change either the situation or your thinking about the “things you can’t change”.

 

Rich Dad, Poor Dad by Robert Kyosaki

Robert Kyosaki tells the story of how he grew up a poor kid, but due to the tutelage of a friend’s father, learned to become a businessman. The book is a simple read but puts forth important concepts…assets are only assets if they will make you money, don’t spend foolishly, and educate yourself to grow. There is also a good bit of advice on real estate investment as a vehicle to become wealthy.

 

Principles by Ray Dalio

Ray Dalio is one of the richest men in the world and got that way by building one of the top hedge fund management companies, Bridgewater Associates. In Principles, he relates his lis life and how he got to where he is, developing his principles for business and personal life as an operating system along the way. This is another Audible entry where the author reads the book to you. It works.

 

Real Estate Investing

Long Distance Real Estate Investing by David Greene

While I don’t invest in real estate outside of my back yard, (for now), this book is incredibly useful as a guide of how to do things. The methodologies and techniques laid out here will work even in a local market. It’s a mix of strategies, tools, and tips to be successful.

 

The Book on Rental Property Investing by Brandon Turner

This book is a thorough primer for anyone wanting to get into rental properties as an investment. It covers everything from finding properties to rehab tips and beyond.

 

The Book on Managing Rental Properties by Brandon Turner and Heather Turner

Hmmm…the title sounds a bit familiar…YES! This is the follow-up book to The Book on Rental Property Investing. It picks up where the previous book left off and takes a deeper dive into what you need to do to manage properties successfully.

 

Loopholes of Real Estate Investing by Garrett Sutton, Rich Dad Advisor

Another Audible author read, Loopholes covers the benefits of and hazards to watch out for when investing in real estate. I have probably listened to this book at least 6 times…right up there with the 4-Hour Workweek and The E Myth revisited. Lots of great advice.

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

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Business – We Don’t Need No Stinking Processes!…or Do We?

CreatingBusinessProcesses
Example of documenting a Business Process.

 

This week we are back to business basics. I am going to go over Business Processes, specifically, and why they are important to people running small businesses, better known as entrepreneurs.

 

Growing up, I yearned to run my own business. I was exposed to lots of people running their own businesses and it was seductive…do your own thing, be your own boss, make as much money as you wanted to (I was a poor kid and idolized the idea). But as I grew older, I would observe these various entrepreneurs’ businesses fail and disappear. Some of it was from bad financial practices, (as covered in this story: My History with Money, Pt. I), some of it was from just bad business ideas, but as I have come to realize, all of them were due to not having documented processes & systems in place to operate their business.

 

BusProcDef

 

What is a Business Process?

 

A Business Process is a map of the steps needed to be taken to achieve a goal or result. This can be the process for generating a price quotation or making a Big Mac. It is the set of step-by-step instructions to complete that task.

 

It can be as simple as the process detailed below:

 

PB&J

 

  1. Lay out 2 slices of bread
  2. Spread PB on one slice
  3. Spread Jelly of the other
  4. Put the 2 slices together to complete the PB&J Sandwich

 

Or it can be extremely detailed, for quality control and efficiency:

 

Peanut Butter and Jelly Royale

 

  1. Lay out 2 slices of bread that conform to the QC shape on the QC chart on the wall next to your station
  2. Evenly spread 1 oz. of premium natural peanut butter on the right slice of bread
  3. Evenly spread 1 oz of locally-sourced hand-made strawberry jelly on the left slice of bread
  4. Align the peanut buttered slice of bread over the jelly spread on the other slice of bread and lower it to complete the sandwich

 

But What About Systems?

 

Some mistakenly refer to the processes and systems interchangeably. In reality, processes are part of a system. A collection of similar processes make up the system. Let’s you are running a fast food restaurant and you want to ensure that the food presented to the customer is the same, every time. You would document a set of processes for each item on the menu, similar to the PB & J examples above. This collection of processes would be your Food Prep System. You would have a separate system for taking orders and another for inventory, and so on.

 

Another point about systems is that a system does not have to involve technology. There have been lots of technology systems designed to ease and automate manual systems. An easy one to bring to mind is for accounting. You have many options available for electronic accounting systems, but it is still something that could be done by hand. Not that I am advocating to accomplish your accounting by hand. In most cases, using an electronic accounting system is much more cost-effective than doing your accounting by hand. In our real estate rental business, the accounting is handled using a Google Docs spreadsheet, because the complexity of what we are doing and the time it takes to do it does not yet justify actually paying for an electronic system.

 

Why do I Need Business Processes?

 

You may ask yourself “Why do I need business processes?” Well, if you are a sole proprietor, who plans to never expand, hire personnel, step back from working in the business, or sell the business, then you probably don’t need to worry about business processes. Even though you are most likely following business processes already, if the above description fits you, you can probably get away with not documenting your business processes.

 

If you don’t fit the description above, these are the main reason to document your processes:

 

Precision and Consistency – You want to ensure that things are being done the same way every time. Borrowing from the Peanut Butter and Jelly Royale example above, if you don’t specify how much of each material to use, then you are left with each order resulting in varying quality AND cost to you as the business owner or operator. While using more peanut butter on a sandwich sometimes seems like a small thing that can be overlooked, it affects your Cost Of Goods Sold (COGS) for that sandwich, and throws off your inventory, which could result in your running out of peanut butter before your next order. This could affect your sales of the Peanut Butter and Jelly Royale until you get more product in.

 

Even if you are able to go out and source a spot supply of peanut butter, it will most likely further impact your cost.

**For the purposes of this example, the peanut butter sandwich and it’s ingredients are a metaphor for whatever you happen to sell in your business**

 

Redundancy – It is a good idea to document business processes as a kind of back-up. The reasoning behind this relies on the “Hit By A Bus” theory…If the business process is not documented, how would someone else be able to accomplish the task if the person(s) who know how to do it should get hit by a bus?

 

Efficiency – By having the detailed steps laid out in a business process, there is less chance of deviation of how to accomplish the task, allowing it to be completed faster. The caveat to this is that the process must already be efficient. One way to ensure efficiency is to review processes periodically to make sure they are the optimal way to achieve the task.

 

Scalability – Another reason you need to have documented Business Processes is to achieve scalability. Let’s say your company builds a widget and you have an opportunity to lock down a sales contract to deliver 25 widgets a month. Your business historically has only delivered a maximum of 10 widgets a month. How do you scale up your business to be able to produce 150% more product? By bringing in more employees. How do you train the new employees to be able to accomplish those tasks? By having detailed Business Processes for you Widget Production System so that employees can get up to speed faster on how to do their job and allow you to produce that increase in widgets almost immediately.

 

I hope I have been able to make a compelling case for why you need to have documented Business Processes and helped you to understand how it can help your business.

 

Here is some recommended reading on Business Processes:

 

4 Simple Steps to Developing Business Systems

https://www.growthink.com/content/4-simple-steps-developing-business-systems

 

The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It

https://smile.amazon.com/dp/B000RO9VJK/ref=cm_sw_r_tw_dp_U_x_15roBbX10PDC6

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

If you like my posts, please share them with others and subscribe to this blog.

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REI: Getting Out of a REI Deal

Escape-Contract-Reject
Contract Contingencies or “loopholes” can help you get out of a bad deal.

 

This week I am going to go over how you can be protected by contingency clauses in your purchase agreement contract, specifically from an investment perspective.

Purchase Agreement Loopholes

When you sign a standard real estate purchase agreement, you have the option to include contingencies, to protect you and allow you to get out of the agreement. You can include a financing contingency, (if you need to get approved for financing), a title contingency, (in the event the title is not “clear”, in merchantable condition, and the seller cannot remedy it), sale of another property, appraisal price being equal to or greater than the sale price, no issues found during an inspection period, or pretty much any other contingency you would like to include.

The key thing to remember is that the seller has to accept these contingencies. The specific ones listed above are standard contingencies and sellers are used to seeing them. As a real estate investor, you should know that the number of contingencies could possibly affect the seller’s decision to accept your offer if there is a similar offer for the property with less contingencies.

The main contingencies to include are the inspection period and clear title.
You should have your financing in place already, to make the deal go smoothly. This can be personal cash, private money, hard money, or being pre-qualified for a loan from a traditional lending institution.
In selecting your properties, you should have a pretty good idea of the market value of the property and in pursuing the target property, have negotiated a sale price that is discounted from market price, allowing you to cover expenses and cash flow.

Utilizing a Contingency

A couple of weeks ago, I posted about making an offer on an REO property. I was excited for the opportunity to acquire this property because it was in the same neighborhood as the last property we acquired and had a couple of more amenities.

We were at the point of waiting for the asset manager to respond with the final signed contract so we could start the inspection period. We waited and waited…but did not hear anything for a whole week.
We were told to expect up to a seven day wait for a response, but when we finally did get a response on the ninth day after we submitted contract signatures, the asset manager had signed the contract two days after we submitted it. This left us with approximately two and a half days for inspections, title search, etc., and late on a Friday morning. There was no way we would have been able to get the title search completed at that point.

We exercised the contingency and canceled the contract.

Because of issues like this, I am glad I had the option to exit the deal. Some investors may not worry about the title, but I do. I have run into title issues in the past that made it hard for me to sell a property, so I wanted to be sure that the title was clear. Especially with the property being an REO property.

With it having been through a Sheriff’s Sale, the title “should” be cleared of all liens, but if a lienholder was not notified that the property was going up for Sheriff’s Sale, then their lien is still in effect.

I could have run the title search before getting confirmation that we had a contract in place but did not want to spend $500 and not be able to get the property under contract.

So, on with the property search!

Oh, if you are in the Houma/Thibodaux area and have property you need to sell, get in touch with me.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Business Finance – Understanding Cash Flow

An infographic representation of Cash Flow.

 

Today I want to go over Cash Flow and why it is critical to business finance.
There are four basic reporting metrics for business finance:
  • Balance Sheet – Statement of financial position, reporting a company’s assets, liabilities, and owners’ equity at a given point in time.
  • Income Statement – Statement of revenue and expense or profit & loss.
  • Equity Statement – Statement of changes in equity or retained earnings.
  • Cash Flow Statement – Statement of a company’s cash inflows and outflows during a given period of time.

 

I will cover the first three in more detail with later posts because I want to talk about Cash Flow and the Cash Flow statement.

 

Cash Flow
Cash Flow is the total amount of money coming into a business (revenue, income, investments, loans, etc.) and the total amount of money going out of a business (bills, expenses, wages, capital purchases, etc.) over a given period of time. It can be a year, a quarter, a month, or any time period you want to look at. For my purposes, monthly reporting is preferred, as it coincides with other regular monthly financial reports.
Doesn’t the profit & loss report show you the same information?
While reporting similar information, Cash Flow & Profit & Loss Reports serve different purposes. The Cash Flow report gives you an understanding of how you are bringing money into your business and how you are spending it while the P & L report shows you revenue earned and expenses paid.
OK, that still sounds similar, you say.
It may be easier to understand if you look at it from the perspective of different accounting methods. Businesses use either the Cash Basis or the Accrual Basis methods.

“Cash basis – Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.

 

Accrual basis – Revenue is recorded when earned and expenses are recorded when consumed.”

If you are operating on the Cash Basis method, your revenue and expenses are recorded into your accounting system when they occur. In this case, your P & L and Cash Flow Reports should show almost the same information for a given period, with minor differences like loan principle repayments not showing up on a P & L.
In the case of the Accrual Method, you might earn revenue in a given month, but you won’t see the money from it until the invoice gets paid, which may be a month down the line. As for expenses, you may be paying for supplies immediately, but can’t show them on the P & L until the revenue is earned. So, you are potentially paying for supplies in one month, showing revenue in the next month, and not actually getting paid until the third month.  In this scenario, the P & L would show the expense & revenue in the second month, but the Cash Flow would show the outflow of the expense in the first month, no activity (with respect to the subject order) in the second month, and would show the revenue inflow (invoice being paid) in the third month.
Because of this, you should be looking at both reports to better understand what is going on in the business.
Why is Cash Flow important?
 
To be a successful business, you want to have positive cash flow…that means that you have more money coming in every month than you are paying out in expenses, wages, and bills. This seems like a “DUH!!!” statement, but without looking at both your P & L AND Cash Flow reports, it would be hard to make sure you are able to bring in more cash than pay out in expenses.
Without regularly reviewing the Cash Flow statement, you might think you are breaking even or close to it, until you realize that your bank account has steadily been dropping and you really were not even close to breaking even.
And, as always, let me know what you think in the comments. Ask questions, tell your story.
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