With all the hype about the need to grow businesses in the state and the country, you might think that doing so is no big deal. Entrepreneurs have, after all, been pulling themselves up by their bootstraps since Abe Lincoln was knee-high to a grasshopper.
But a lot of pre-knowledge is actually required for a new business to get on its feet quickly. One necessity is a little understanding of what #b#Leon Petelle#/b#, a retired certified public accountant, calls “the language of business,” that is accounting. It is not only the language for planning, he says, but also for dealing with bankers, investors, lenders, and creditors.
This “language” has three building blocks, which underlie business communications: the balance sheet, which is “a snapshot of what is happens in your business at a certain point in time,” the income statement, which is “like a filmstrip or video of what happens in your business over a period of time,” and the cash flow statement, which is an “analysis of how everything happened and how much cash you got out of it — how good you were at making cash in your business,” he says.
Whereas businesspeople do not need to know how to create these statements, they do need to have some understanding of them. “All they have to know is how to speak the language and understand what people are talking to them about,” says Petelle. “The best thing to do is hire someone who knows how to do it and can provide you daily, weekly, or monthly information so you understand what is happening to your businesses.”
Patelle will present “Financial Accounting and Financial Projections” for SCORE Princeton on Monday, February 7, from 6:45 to 8:45 p.m. at the Princeton Public Library. For more information on this free event contact SCORE at 609-393-0505 or firstname.lastname@example.org. Patelle offers potential entrepreneurs some common-sense hints about what entrepreneurs should be doing as they develop their businesses:
#b#Select a business structure to suit your circumstances#/b#. Potential legal formats for businesses range from the simplest, the sole proprietorship, through partnerships, limited partnerships, limited liability corporations, and full corporations. Each form has its pluses and minuses. A sole proprietorship, for example, is quick and easy to form; it is low-cost to operate; and its expenses are deductible on a personal income tax return. However, the sole proprietor is totally liable for any problems. The full corporation, on the other hand, costs a lot to organize and run, but it enables the business to obtain financing from more sources and insulates the business owner from liability.
To select among the different types of business structures requires entrepreneurs to have some sense of their goals. People who want to start a business and leave it to their children, for example, might want to form a sub-S corporation or a regular corporation, because a sole proprietorship disappears when the owner dies.
The mode of taxation also varies among different business structures. Sole proprietorships and partnerships, for example, are taxed directly to their owners, whereas corporations are taxed at the corporate level.
#b#Create a business plan#/b#. The most critical part of a business plan is the business’s cash forecast. “The three most important things about a business are cash, cash, and cash,” says Petelle. “If you are out of cash, you’re out of business. So cash forecasts and a daily understanding of where cash is and what it is doing is the single most important thing your business has.”
#b#Make sure you have the reports you need in a timely way#/b#. A business need not produce reports by itself. Bookkeeping services are available on the Internet, and the New Jersey Society of Certified Public Accountants (www.njscpa.org) can give you a list of accountants by area and type of service. You can usually fax your daily receipts to the bookkeeper, who produces a report. Your job is to read it and see how you are doing.
#b#Review your accounts receivable and payable daily#/b#. The time that you give your customers to pay must be in synch with the terms offered by your own suppliers. “If you keep those in balance, the days in receivables to the days in payables, it means you are getting cash in as fast as you have to pay out to creditors,” says Petelle, “and the only thing you have to worry about is financing your inventory — for which the bank may give you a loan.” Look carefully, because some suppliers may offer terms shorter than 30 days. Because Apple manages its cash very carefully, for example, terms from a vendor who resells iPods may well be 15 days.
#b#File necessary documents with the state and federal governments#/b#. Laws require the registration of New Jersey businesses and any companies that want to do business in the state. A business will need an employer identification number, which identifies the business to the federal government, to procure a loan; open a bank account; or employ someone, even for a day.
Follow the tax laws. Businesses need to know what taxes they need to file and when they are due. If the business has employees, it must pay employee taxes. Income and payroll taxes are due to both the state and federal government, but not necessarily on the same calendar day. Visit the state Department of Revenue at www.state.nj.us/treasury/revenue/busform1.htm and the Internal Revenue Service at www.irs.gov.
#b#Make sure you are pricing goods or services correctly#/b#. Compare your gross margin (amount of money taken in for a good or service minus costs) to your plan, and ask yourself, “Am I doing better or worse?” If the answer is “worse,” the first place to look is pricing. “We frequently find that people underprice their goods, particularly people who sell services,” says Petelle. Despite rising utility costs and higher wages being paid, many businesses have not raised their prices for three or four years. Unless they have gotten much more efficient in the meantime, the time may have come to raise prices again. If you are losing money on a customer, says Petelle, the business will actually be making money if the person leaves when you raise prices.
Once a business is in operation, says Petelle, an entrepreneur has even more questions to answer. What do bankers look for when deciding whether to give you money? How do you lease equipment? How do you change the form of your business? How do you determine who is a reliable investor? How do you know whether the people you are selling to are good risks? How can you sell receivables to get cash quickly?
Petelle grew up in Indiana. His father was a high school English teacher in the Chicago public school system, and his mother was a homemaker who also wrote stories for detective magazines.
After high school Petelle went into the army and then on to Indiana University in Bloomington, where he did a double major in Slavic languages and literature and economics — the Slavic language that he speaks best is Russian. He then worked for the Office of Economic Opportunity’s Midwestern office on antipoverty programs and earned an MBA from the University of Chicago. A year later he qualified as a certified public accountant.
Petelle worked for Price Waterhouse in Syracuse and then signed on with one of his clients, Bristol Myers Squibb, with whom he stayed for 27 years. He worked in finance, administration, and international business in Canada, New York , London, and Lawrenceville.
His most exciting assignment was in London as finance director for the company’s central and eastern European division. “I traveled to Russia and Eastern Europe and some Middle Eastern countries and helped form businesses after Communism fell,” says Petelle. He started and built up about 27 businesses in Eastern Europe. Since retiring at the end of 2007 Petelle spends his time auditing courses in economics and stochastic calculus through Princeton University’s community auditing program and volunteering for the Princeton SCORE chapter.
Petelle urges interested entrepreneurs to keep an eye on the SCORE website. Next month the organization will be offering a five-session course in which attendees will develop plans to start their own businesses.