Going Pro: Financial Tools

By Douglas Bittinger
Smoky Mountain Woodworks 


I do not consider myself qualified to advise anyone on the management of their finances; where and how to invest your money, so I will leave that to some one who is. For my part I will share with you what I have learned about the tools used to handle the financial side of a small business.

Just as having the proper tools makes our woodworking easier and more accurate, having the right financial tools helps us produce and track our money. Do you need a full blown accounting system to run a business? No. I know a couple who conduct business with just a cash box. When they want to know how much money they've made, they open the box and count it. Simple as that. But they are "underground" woodworkers; no business license, they claim none of it as income, and they may take no business deductions on their personal tax return.  To run a "real" business you will need at least basic accounting tools to track your money.

There are enough advantages to being legitimate to be worth the trouble. As a legitimate business you need to know where the money comes from and where it goes. That takes some reasonably accurate bookkeeping, if for no other reason then to satisfy the revenuers should they take an interest in your activities.

First, choose a name for your business and make sure no one else is already using it. Internet searches using the major search engines will help find out if anyone is using the name on-line, but to check non web based businesses you need to check with your state's business registration bureau. If you should get into a dispute with someone else over the name and they have not registered it (and you have) you will win.

The Small Business Administration (http://www.sba.gov/) and S.C.O.R.E. (http://www.score.org) [Service Corps of Retired Excutives] can be invaluable resources for the next few steps. Both offer in-person assistance, as well as a wealth of on-line information and courses aimed at those starting up a small business. Even if you don't feel a need to visit them now find out where your local offices are and how to contact them, tuck that information away for quick reference.

Get an EIN (Employer Identification Number) from the Federal government (www.irs.gov/businesses/small/article/0,,id=102767,00.html) to use as your business tax ID number. If you plan to incorporate or hire employees – ever – you will be needing this anyway.  But even if you have no such plans it allows you to keep your Social Security Number private by not having to use it as your business ID. Some of the vendors you will do business with will want an official business ID number in order to set up an account with them. Use your EIN and reserve your SSN for the purpose it was intended.

Choose your preferred business entity; by this I mean Sole Proprietor, Partnership, LLC, Corporation, etc.  If you will be working alone for a while, Sole Proprietor is the easiest to work with. If two or more woodworkers will be banding together, consider the Partnership. Any form of corporation will allow you to legally separate the company from you personally so that if it should get sued for any reason your personal assets are protected. Help with deciding which will serve you best is available on the IRS web site as well as from S.C.O.R.E. or the S.B.A.

Get a local business license, and register with the state. Application and annual renewal fees for the local business license vary from community to community, but mostly they are quite reasonable.  Mine runs about $20 per year. I would tell you how to do this but that varies from place to place. Check with your County Courthouse or the aforementioned resources.

Get a business checking account set up at a local bank. Do not use your personal account for business; it is just too difficult to keep business assets separated from personal assets and if the IRS ever audits you a multi-purpose checking account like this pops red flags all over the place with them. That's a bad thing.

Shop around, banks offer varying fees and benefits; get your best deal. I've found that the huge conglomerate banks tend to charge the highest fees, offer the least service, and are the hardest to deal with when something goes wrong. I much prefer a smaller "home town" bank, preferably one that holds its mortgages and loans in-house so it controls all its' own money. These banks will generally avoid the big bank tactics of holding you to a high minimum balance, charging per-item fees for processing checks and deposits, and leveling all manner of fees for anything you might want to do through their bank. By owning their own loans they are able to lend to someone they feel to be a good risk even if you don't pass the cookbook formula banks use when planning to sell the loan to another bank or investment firm as soon as you walk out the door.

Set up a savings account with the same bank for use in managing your "Capital Assets" money. More about that later. If you have lots of money to invest, ask your bank about CDs, and money markets for most of it, but get the savings account for your short term capital.

I find the ability to manage my bank accounts on-line a tremendous time saver, so a bank that offers efficient and secure on-line banking has a serious edge over those who will make you stand in line at their lobby to get anything done. Just a few standard on-line features most offer include viewing current transactions, transferring funds between accounts, electronic bill payments, and a variety of investment tools to help you track  your portfolio (if you have one).

If you plan to accept credit cards, and these days you almost have to, you will also need a merchant account. Rarely do the small, local banks give you reasonable rates on these. Shop around, but be careful; there are so many internet based companies out there that turn out to be just a flash in the pan. You could end up loosing the money they are supposed to be collecting for you when they fold up their tent and skulk away into the night. Ask other small businessmen (and women) you know or do business with who they process cards through and if they are happy with them.

Consider joining the local Chamber of Commerce. Their meetings will afford you great opportunities to pick the brains of successful businesspersons as well as a venue to promote your new business.

(NOTE: the following paragraphs reference the benefits of using a computer – yet you are probably using a computer to read this and are wondering why I'm taking this route.   I get quite a few phone calls from people who tell me that a friend or relative printed out one or more of our web pages for them to look at because they have no computer or no internet connection. There is also the vague possibility that this series of articles will one day become my second published book.)

Bookkeeping can be done with a ledger book, a calculator and a pencil – if you enjoy spending your time crunching numbers. If you'd rather spend your time making saw dust, get a computer and some bookkeeping software. There are two main players in the business bookkeeping software field; Peachtree and QuickBooks from Intuit. Programs like Quicken and Microsoft Money are great for organizing your personal finances and tracking your stock portfolio, but they are not suited to running a business. Of the two, I prefer QuickBooks – it's much easier for the non-accountant to set-up and use.  Intuit offers several versions of QuickBooks to suit a variety of needs from a one-man shop to a Fortune 500 corporation. The more powerful versions contain a lot of features you probably won't ever need, but they also offer some subscription features that can make life much easier; like integrated credit card processing and payroll services. It can even be married to a web site to automate the entire sales and money transfer process. But look into this carefully before you build a web site if you're interested, only certain hosting companies (most of them seem to be owned by Intuit) offer this level of integration, and my tests of one of these systems (again in 2008) left much to be desired in the "user friendly" and "cost effective" categories.

For a basic accounting system, you can use a spreadsheet program like Excel to computerize a paper ledger.  You will need to learn how to enter formulae into the cells, but this is not difficult. Once it is set up make a copy of the original file (which is reserved as a template) for each accounting year – or quarter if you prefer.  You can also use a spreadsheet to make invoices that total up the amounts and calculate tax and for estimating a new job. Just set up the templates and copy them out for each use.

If you know nothing at all about bookkeeping and accounting, hire an accountant to help you set up your chart of accounts or spreadsheet and explain how to use it. This is money well spent, and is tax deductible as Professional Development. You may also want to retain this accountant to periodically check your books and file your taxes, but that's up to you. If you have a fair understanding of bookkeeping, QuickBooks will coach you through most situations as you set up your accounts – just keep it simple to start with, you can always add frills later.

There are several tax preparation software companies whose product will fill out a Schedule C, the business income/expense form for your 1040 personal tax return as a sole-proprietor.  Just two of these that I have tested and approved are TurboTax (from Intuit) and TaxAct. Both work well. TaxAct is perhaps a little less comprehensive, but is easier to use and somewhat less expensive.  If you are planning to set up a partnership or incorporating your business the tax paperwork is more involved.  Last time I checked, TurboTax would handle it, TaxAct would not.

That takes care of the easy part...


Business Plan

A business plan is quite simply you putting down on paper where you expect your income to come from and how you will spend that income. You will need to support all sources of income and detail your expenses including the draw you will make for personal household expenses. If you expect to apply for business financing, a business plan is essential. The banks will use it to decide if you know what you're doing and have done the required research to actually obtain the projected income. This is one area you really need the help of S.C.O.R.E. or the S.B.A. so that you do a good, thorough job of it. They will not do it for you, but will nurse you through the process.


Budget

Once you know what your expected income and expenses are, develop a budget to keep you on track. I know, I know; "budget" is a four letter word but to efficiently run a business you absolutely have to know where the money you've made is going.  Bookkeeping software makes creating a budget easy and doing annual adjustments a snap.  It will also automatically generate the budget reports that tell you how you're doing, what's working and what needs tweaking. But this can be done with a spreadsheet or on paper if that is your preference by using a properly set up ledger. It just take a little more effort spent analyzing the numbers. Again, if you lack the knowledge to set this up yourself, hire an accountant.


Computer

Another scary word to some is Computer. If you've never used one, they seem terribly mysterious and technical. But modern computer software is built to be user friendly -- well, most of it is --  and can yield a tremendous savings in time and effort in many of your business needs. If you are not familiar with computers, most communities offer classes for little or no cost to acquaint you with the machines, the basic software and its use. Take a class. Once you've broken the ice you will be less timid about the things and can decide if you'd care to actually have one. If so, entry level machines can be purchased for less than you'd spend on a good router, or you can lease one as a trial from Rent-A-Center or similar.

Both my wife and my mother were among the avid non-techie set until I showed them how easy it is to learn and how useful they can be. Now computers are as much a part of their homes as are toasters or microwave ovens.

Some people hear the horror stories about the ugly and profane things that are readily available on the Internet and damn the whole system as vile because of it. But these aspects can be filtered and locked out of your experience so that you do not encounter them unless you go looking for them.

In addition to simplifying your bookkeeping and letter writing a computer with Internet access or at least telephone access can also act as a credit card processor, giving you easy access to the most popular payment method in use today thus expand your income potential. And the Internet is without question the easiest to use and most powerful research tool ever devised by mankind. Anything you want to know about is a few key presses away. It beats the living daylights out of spending many long hours in the local library with a card catalog and magazine index file.


Credit Card Processing

To process credit cards you need 3 things: a terminal of some sort, a merchant account which acts as a clearinghouse for your transactions and a business checking account into which the money will be deposited after processing. There are also some alternatives to traditional credit card processing that make sense for the start-up business owner. We will look at some of these.

Terminals

There are several hardware options available for taking credit card payments.

The most common is a desk-top terminal with card scanner and printer built in. This plugs into your existing telephone system and dials out to get authorization for your sales. Telephone and internet sales can be handled by keying the card number in with the numeric keypad on the terminal.  These terminals are usually simple to operate and reasonably durable.  There are even wireless versions that will use a cellular telephone account to allow "in the field" use if you do a lot of shows and festivals. Cost for the terminals range from free (with some new merchant accounts) to several hundred dollars for really fancy ones.

If you use a computer for bookkeeping, that can also take the place of a terminal and process your credit cards either through a dial-up connection (like a terminal) or over the internet.  If you use QuickBooks for bookkeeping, you can use that software to process the credit cards and import the data right into your accounting package.

Credit card imprinting machines are pretty much obsolete except for during emergencies such as when the power goes out in a store. Even if you could find a bank that would let you use one, you would be limited to direct sales (where the customer is physically present). They are of no use for phone or internet sales, and of course you would not know if the card given is any good until you get the slips to the bank and they process them for you, opening yourself up to credit card fraud.

Merchant Accounts

What is a merchant account?  This is the "clearing house" that will allow your terminal to talk to a customers bank and be sure that the credit card you want to run is valid, that they have credit available in the amount you need, and then will transfer the money through the Federal Reserve to your bank account. For processing sales on-line from a web site, you will also need an internet Gateway provider, which simply hooks your web site to the merchant account processor.  www.Authorize.net is a very good gateway provider.

Finding a good merchant account is where things can get kind of sticky. There are a bazillion credit card processing companies advertising themselves as having the "absolute lowest prices". For some of them, it may be true. But some of them are shysters hoping to hook you into a bad deal.  Be careful! Read any contract carefully before signing it: what are the fees? Make sure you get ALL of the fees, some will hide statement and minimum fees from you unless you ask about them. How many years are you contracting for? What happens if you cancel early?  How long will they hold your money before sending it to your bank?

I find there are two sources that will help you find a reliable Merchant Account provider. One is your bank, the other is other local businesses.

Most smaller banks do not actually provide credit card processing services, they are contracting that out to a major provider. These accounts tend to be more expensive than going directly to a provider because anything that is sold, and resold, and sold again gets marked up every time someone else touches it. Some banks like to charge hefty fees for "helping" you. Talk to your bank representative and get their terms and rates for comparison.

Other businesses in your area – especially those who have been up and running for 5 years or more – will have already done some looking around and will be able to point you away from the bad ones and toward a good one. Ask around at any business that takes credit cards, especially small businesses where the owner likely does the bookkeeping as well, or at least is familiar with it. Again, the local Chamber of Commerce meetings can provide a wealth of useful advice.

Alternatives to Merchant Accounts

Traditional merchant accounts will charge you monthly statement fees and minimum service fees, as well as processing fees on each transaction. These monthly fees can be a burden on a start-up business. But there are alternatives.

PayPal   (http://www.PayPal.com) is Internet based and mainly targets those who want to take credit card sales through their web site. PayPal imposes no contract and charges no set-up fees or monthly fees, only a percentage of the purchase processed. They also offer a number of additional services including a simple shopping cart system for your website. They also offer a credit/debit card that will allow you to use the money you have on deposit with them for purchases, and of course you can transfer money between your PayPal account and your checking account at will.

Similar services that have been recommended to me by trusted on-line merchants are:

Alert Pay   (https://www.alertpay.com/info/BusinessAccounts.aspx)

Revolution Money Exchange   (https://www.revolutionmoneyexchange.com/)

Google Checkout   (http://checkout.google.com/) appears to be similar as well. I haven't tried it out myself yet, but it looks promising.  If you advertise with Google AdWords they will waive all credit card processing fees.

Authorize.net   (http://www.authorize.net) also offers a Simple Check-Out utility using a button maker that initiates a transfer to their secure server to take customer order information. This option does not require the customer (your buyer) to open an account as PayPal and Google do. If you are skilled at web site development, these folks also offer more sophisticated merchant tools in developing a shopping cart / check-out process.  I've done business with Authorize.net for many years and have always found them to be reliable.

Adding any or all of these services to your web site is easy, just use the button builder utility on their web site to create a "Buy" button and copy the HTML code it generates into your web page code using copy and paste. When an order is placed the service e-mails you with the order info but without any sensitive financial information, keeping you in compliance with credit card security regulations. Naturally, all of these services require YOU to open an account with them before you may use their buy buttons or more sophisticated features.  These features can include recurrent billing, multiple payments, and expedited check-out for returning customers.


Shopping Cart

Some of the above services offer a full blown shopping cart program for a more professional appearance.  Putting a Buy button on each product is simple and straightforward, but can limit your customer to purchasing one item at a time, and looks amateurish. There are many, many shopping cart programs available to you. If you Google "Shopping Cart Software" you will be presented with a listing of over 42 million hits. I wouldn't try to look at them all if I were you, but you will be able to check out and compare the major players by perusing the first few pages. For the most part, they will come in two flavors; those that can be mounted to your existing web site, and those that are hosted on the providers site.

On-Site

Carts that mount to your web site usually incur a one time fee to purchase the script or software, and will require some skill to implement and configure. The lower the fee, the higher the skill level required.  An example of this is ZenCart (http://www.ZenCart.com) which is offered by the Open Source Forge as freeware, which means that they don't force you to pay for it first, but depend on your donations to keep the project going. ZenCart's technical support is pretty thin however, so it is not suitable for the non-programmer. I use ZenCart to power www.SmokyMountainWoodworks.com and have found it to be powerful and fully customizable, but I have had to hire people skilled in PHP scripting to help me make it jump through the hoops I demand of it. If you take this route, go to the ZenCart support site, seek out the Commercial message forum and post a help wanted add there. Hiring the people who built the thing to help you modify it makes much more sense to me than hiring someone with no experience because the ZenCart script is vastly complex and can take considerable time for a newbie programmer to develop enough understanding of the system to re-work it without breaking it.

Other on-site carts that offer better support and even set-up services can cost over $1,000 to purchase and have installed on the server hosting your web site. If you are looking for a turnkey solution, and need the ability to customize, this can be money well spent and can be deducted as advertising expense.

Hosted

An example of a popular hosted shopping cart is ShopSite (http://shopsite.com/), which offers several versions from a basic, startup version for $9.00 a month to a full-blown Pro version currently selling for $125 a month.  To use this form of shopping cart, you must either link your existing web site to your shopping cart through a "go to my store" type of link, or use their shopping cart service as your web site.

The software vendor will provide you with a list of companies that are licensed to host their software for you. Compare the specifications before you buy.

Linking an existing "informational" web site to the shopping cart site can be done seamlessly by developing a template for the shopping cart that replicates the layout of your current web site design. As long as your current site is not done in Flash. But this will mean maintaining two web sites that are conjoined, like Siamese twins; both separate individuals, but connected together into a sort of unit identity.

Using the cart as your web site limits the amount of information you can present about your company beyond the basic product pages.  Generally they'll give you a few standard pages for things like return policy and contact information.  This is of little consequence if your only purpose in setting up a web site is to sell your product.

The Smoky Mountain Woodworks web site offers hundreds of pages of information about us, and about wood, woodworking, caring for things made of wood, pictorial tutorials done as we built some of our pieces, and articles about other woodworkers, so I need the flexibility of adding pages at will to the web site. If you don't, using a hosted cart will be your easiest start-up and lowest initial cost option. We will look more closely at using a web site in the Marketing Your Work episode of this series.


The Nitty-Gritty

My final offering on this topic is a collection of little things I have found useful in managing things financial.  I offer them because they work for me. Use them, modify them or ignore them as you wish to suit your circumstances.

Watch the Costs: No more than 25% of an item's retail price should go to materials. There are some exceptions, but as a general rule of thumb this works well. We will talk more about this in the Pricing Your Work chapter next month.

Pay yourself first. By this I mean that in each accounting period, take 5% to 10% of the company's gross profits (that's Income minus Cost Of Goods Sold) and tuck it away in your Capital Assets savings account, then proceed with the bill paying. This would not seem to make any sense at all when money is tight, but you will be amazed how well it works. We do this on a weekly basis so the "bite" taken out of cash on hand is smaller and easier to absorb than it would be on a monthly or quarterly basis.

Pigeon Holing: I have a terrible memory, I admit that. So I tend to be overly organized to compensate. One way I do this is to create sub-accounts for our cash management account in my bookkeeping to track specific funds. For example, our savings account is divided into sub-accounts for Payroll Liabilities (withholdings), Property Taxes, Equipment Capitol (funds for buying new equipment), Building Improvements and Web Site Improvements. By pigeon holing these funds, I know at a glance how much I have available in each. These pigeon holes are not visible to my bank, it is done only in my bookkeeping software, and the total of all sub-accounts matches my bank balance.

Cash or Credit? I am often berated for my opinions on this topic – I was once accused of being un-American because I dispute the notion that we should pursue immediate gratification by indulging every whim at the expense of snowballing credit card debt. But I won't climb up on that soap box right now. I will simply urge restraint in the use of credit in operating your business. Credit can be handy for buying the materials needed to produce a job, but we prefer to collect a deposit from our customer to cover materials cost. If you're not working on a commission, but building a spec piece or preparing for a production run, you may need credit to secure the materials, but be sure to pay those costs off with the first profits from selling your work.  If you don't, interest costs will eat into your profits or force you to increase the selling price to recover the added expense. I advocate living (and working) within your means.

Treat Yourself Well: If you were employed by someone who expected you to work ridiculously long hours, was inconsistent with the paychecks and provided no paid time off or benefits, would you be eager to keep working for them? If not, then treating yourself this way will quickly tarnish the gleam of finally being self employed. Limit your work day. Establish a means of providing yourself with some paid time off so you can get away once in a while. In the beginning, in order to get the business going and profitable, you *will* be working some long hours for low pay, but reign in this trend as soon as you can so you don't burn out.

Health Insurance is a great benefit to have but awfully expensive as an individual account. Groups such as the National Association for the Self Employed www.NASE.com) offer reduced rate insurance to their members through a large group policy, but in my experience they then toss in so many other "benefits" that drive the cost of membership up to where it becomes over priced because I have no need of the extras. Sometimes you can join a local craftsman's guild or woodworking club and get in on a group insurance policy at a more sensible cost. These groups can pool materials purchasing to leverage a better overall price as well. Look around to see what groups are in your area and check them out.  If your spouse works and has insurance through their employer, he or she may be able to put you on their policy for a reasonable additional premium.

Don't Procrastinate: Even if you hate bookkeeping, plan to take a little time each day to tend to the daily chores such as time sheets and entering bills.  Schedule an hour or more each week for keeping the books current. Pay bills once a week, keep an eye on their due dates so you don't incur late payment fees, and allow for transit time on your payments. Having a bill postmarked by the due date does nothing for you, they have to have the payment in their grubby little hands to count it as a "timely" payment. Run a P&L (Profit & Loss statement), balance sheet and budget report monthly and study them to see where problem may be developing. Putting off the bookkeeping for some future time when you have more time or are more in the mood, will only cause lots of confusion, oversights, and errors that will snowball on you. Keep it current and it will consume far less of your time and happiness.

Track your P&L per job. As you work on a large job, you need to keep track of your expenses against promised income. Anthony Noel, who has written a Management Strategies column for Custom Woodworking Business magazine for the past 15 years has produced a series of articles that describe in detail how to create a small spreadsheet that will greatly help you track your income and expense per job so you know where you stand with that job and can avoid nasty surprises when the final numbers are tallied up.

That series begins here: http://www.iswonline.com/ArticleLanding/tabid/67/Default.aspx?tid=2&heading=Management%20Strategies&modid=521&ContentID=12701

I could not have done a better job of it than he did, so I'll just refer you there. I have garnered much excellent advice from Anthony's column.

Keep Current: While on that the topic of magazine columns, I highly recommend that you take a little of your "off duty" time to read. Even if you feel you know everything there is to know about woodworking, everyone needs a little polishing on the business management side of things, if for no other reason than the fact that things change.  New regulations are always being introduced, The IRS seems to delight in tossing the basket every few years, and as the economy around us changes it affects the way we do things. Knowing what has changed and what is expected to change will help you plan effectively for the future.  In past episodes of this series I included lists and links to resources I've found useful. If you missed them I have posted a supplement list for this series here: http://www.smokymountainwoodworks.com/Library/GoingPro/intro.php

You will also find links to each of these articles Highland Woodworking has published in case you missed any. These lists will be updated with each new publication.

In the next few episodes we will discuss pricing your work, marketing your work and the hiring and management of employees. Please join us again for those, and "May the sawdust be with you!"



Douglas Bittinger has been building custom fine furniture for over 25 years, and has been lead repair tech for a major furnishings retail store chain. Along with his wife, Marie, he currently operates Smoky Mountain Woodworks in Edwina, TN.

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