The one simple mistake that can sink your new business from the start

This is the first in a series of articles themed around the recession-preneur. Tight budgets leave little room for error for the recession-preneur so this series is designed to help you avoid some of the more common pitfalls when starting a new business.

So for one reason or another, you’ve decided to start your own business. Congratulations! You’ve taken a big step. Whether you’ve been laid off, starting something while still working full time or planning a big new venture this one mistake can sink your business faster than most any other mistake. I have helped hundreds of businesses get started and this mistake consistently gets new business owners in more trouble than any other. And when I tell you what it is you’re likely to say, “well, duh”. But I said it was simple, but you would be amazed at how difficult it can become.

When you start your business you’ve made a big decision and a very exciting decision. And most people get very wrapped up in that emotion and excitement, so what is the first thing they start going…spending money. And they end up spending too much money too soon, often before they have even made their first dollar. Combine this with an aggressive sales projection in your cash flow plan (you do have a cash flow projection in your business plan, right?!?) and you can see how easy it is to get sunk real quick.

But I see it time and time again and no amount of advice will dissuade some people’s misdirected enthusiasm. I have a friend (not a client) who had a tremendous idea for a web 2.0 business. And it is a good idea and could still be a profitable one. But, my friend sunk $80,000 into development before testing the waters in more affordable ways. Now he has an $80,000 dysfunctional website and never a dollar of revenue. The best way to avoid the trap is to have a solid business plan and let someone review who isn’t afraid to criticize it, then listen to their feedback. Now the worst part of being an entrepreneur is the discouragement from others, but don’t be so blind that you turn away good advice, preferably from someone who has been down this road before you.

Also, remember that you are excited! Your sales forecast is probably optimistic and your expense forecast not conservative enough. Keep thinking it over until you can figure out how to do more with less. Keep thinking of creative ways to test the waters before sinking cash into the idea. It doesn’t matter if you are starting your business with $200 or $2,000,000. This principle is consistent. Only spend what you need to generate revenue. As long as you are in startup phase, it is not negotiable. Once you are stable as a business, the other perks can come, but till then, only spend what you need to generate revenue and apply that test to every dollar you spend.

Finally, there’s a real tax consideration behind all this too. Technically, the IRS requires that any costs you incur prior to the first dollar of revenue you earn are considered start up costs. Start up costs must be amortized over five years! So now 4/5ths of everything you spend before earning any revenue has flipped and become taxable income in a sense. Some forethought and planning can avoid this predicament in a lot of cases. Sometimes it’s just unavoidable because of your business model, but wouldn’t you like to have the option at the start? Me too.

As always, if you have questions or would like help with your business or taxes, feel free to e-mail me at James(at)RainwaterCPA.com.

First Time Homebuyers Tax Credit

There are just over two months left to take advantage of the first time home buyers tax credit signed into law earlier this year. The credit is worth $8,000 to home buyers buying a house before the November 30, 2009 deadline. It is important to note that the IRS requires a closing prior to November 30 to be eligible for the credit. So, while the deadline is two months away, if you are not already in the process of buying a house, you may already be running out of time.

The definition of a home can include a house, townhouse, condo, RV, etc. It just has to be a primary residence. Second homes, investment property or vacation homes do not qualify. "First time buyer" is a bit of a misnomer as the only requirement for qualifying as a first time buyer is that you have not owned a primary residence in the last three years. So, if you have owned a house in the past, but have been renting an apartment for the last three years, you would still qualify as a first time buyer.

There are several ways to claim the credit. The law allows you to claim the credit in 2008 if you want, which means you can ammend your 2008 return claiming the credit and receiving a refund immediately (well, as immediately as the IRS processes your return and refund), you can claim the credit on your 2009 return, or, if you have FHA financing you can take the credit directly against closing costs at closing.

Hope that helps make the credit a little more understandable. If you have questions or I can help you claim the credit, feel free to e-mail me at James(at)RainwaterCPA.com