In 1997, Lenward Terry smith’s company, Lifesaver Training Institute, took in more than $250,000 in revenue. But by 1998, income had plummeted. The once-lucrative company that designed medical response systems for corporations, schools and hospitals saw its year-end figures drop to less than $100,000.
“I became overly dependent on a $250,000 contract I had with a private hospital,” says Smith of his six-year-old, Brooklyn, New York-based business. “On top of that, I reinvested the money in capital expenses, which I used for expansion. If I had put that money into an account, I would have had a buffer. I virtually expanded my company out of business.”
When the hospital opted out of a contract renewal, Smith, 49, was forced to reduce his staff by 60% and give up a coveted office location because he failed to adequately plan his company’s cash flow. Today, Smith works from home and generates $60,000 in revenues. He also plans to turn over nonprofit aspects of his business, such as EMT training, to a nonprofit volunteer ambulance corporation.
Smith is one of an estimated 500,000 black self-employed business owners who grapple every day with financial issues ranging from cash flow to insurance to payroll to taxes.
In the first installment of our four-part Business Management series, we explored how you make the transition from being an employee to becoming self-employed. In this, the second article of the series, we provide strategies for managing financial matters, avoiding financial pitfalls and dealing with tax issues.
FORMULATE FINANCIAL PROJECTIONS
Topping the list of pitfalls that affect small business owners such as Smith is undercapitalization.
“Oftentimes, small business owners think a year ahead: annual payroll, annual expenses and projected profits,” says Allen Lipsky, first senior vice president at Valley National Bank, a leading SBA lender in North Plainfield, New Jersey. “But in actuality their cash outlay has not been planned well enough, and whatever cushion is planned gets used up.”
To minimize the drain on working capital, Lipsky recommends identifying all the basic start-up costs associated with operating your business: inventory, equipment, office supplies and furniture, lease payments, transportation, payroll, utilities and phone, business insurance, advertising, business licenses or permits and legal or consulting fees.
If you’re just starting out, you’ll be better able to identify operating expenses, accurately estimate the cost of start-up necessities and seek outside capital if you research your market and write a business plan first (see “Flying Solo,” January 2000).
Working capital (the amount of money needed to operate your business from day to day) should be projected for the first 90 days to protect against any unplanned events, such as slow sales or unexpected expenses, to keep your venture from stopping before it gets started. To assess your operating costs, you should put together a budget based on start-up expenses; project your sales for the first 90 days (factor in competitors’ pricing, your marketing strategies and geographic location); and review the financial statements and projections in your business plan.
After working at IBM for 20 years, during which time she advanced from technical