cash

Which Type of Business is the Best One to Own?

Which type of business is the best one to own? The short answer is one that makes money, but the long answer is that it should have all or some of the following characteristics:

Simple product or service: The more complex the product or service you are offering, the harder it is to operate your business. For example, it is much more difficult to train someone to be a management consultant than a server at a restaurant, although some restaurateurs might think otherwise.

Recurring and/or predictable revenue: Subscription-based services receive recurring payments on a monthly, quarterly, or annual basis, which tend to be highly predictable. A project-based business performs a service, gets paid, and has to find another customer, whereas, a subscription-based business may have no known end date or automatic renewals. A perfect example is a software company, but another example is a landscaper. A landscaper may not be thought of as a subscription-based business, but it actually is.

Cash in before cash out: Selling a product or service and then waiting to get paid can drain your cash resources, especially if you are growing. Ideally, you want to operate a business that receives cash up front and then pays expenses.

Low capital investment: If you need to invest large amounts of cash upfront for improvements and equipment then it creates a hurdle to overcome. This is especially true if you do not have a lot of cash and are using debt because the debt payments act as a handicap to your success. On the other hand, if you just need to rent a small office to start your therapy practice, then the risk is much lower.

Economic profits: Did you know that many small businesses do not produce much of an economic profit? For example, if you start your own medical practice and then make as much as you did as an employee then there is no economic profit. Although, you do have to give it a few years to determine this.

Easily scalable: This means that you can easily duplicate your success by either opening more locations or growing your operations easily without relying on the owner exclusively. A perfect example is a franchise, which has a blueprint to run the business smoothly. A bad example is a niche-consultant who works one on one with clients.

The interesting fact to note is that almost any business can modify its strategy to have the desirable traits above. The complex can simplify their offerings, services or products can be made recurring, and profits can be grown to more desirable levels.

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How to Prepare for & Prosper from the Next Recession

We are currently in one of the longest economic recoveries ever recorded. That is excellent news, but on the flip side, we are due for a recession. Who knows when that will happen, but there are steps to take to prepare yourself and possibly take advantage of any future downturns:

Don’t Live on the Edge: Before making a major purchase or change in your life, calculate the costs and risks of your actions. For example, before you assume that you will purchase a fixer upper, make massive improvements, then resell it for a large profit, you should calculate different scenarios. Instead of just looking at the best case scenario, calculate a likely outcome and then also a worse case scenario. If you won’t be able to handle the worse case scenario, then may be you should pass up the opportunity. Don’t take my word for it, but try to remember what happened during the last recession.

Build Up Cash: Sometimes cash makes people anxious  as they feel that it is just sitting there practically earning nothing ,and they are missing out on appreciation from the stock market or some other investment. Be patient and know that if your income gets cut in half or you lose your job and collect the paltry amount of unemployment benefits, then you will have a cushion. On a positive note, when there are downturns in the economy it tends to present itself with opportunities to purchase real estate at a discount, buy a business,  or to invest in the stock market at depressed prices, which all increase your returns.

Pay Down Debts: The lower your debts, the lower your risk, and the more cash flow you have available. You’d be surprised by how much less income you need to live if you eliminated some debts.

Line of Credit: If you don’t have a large cash cushion or don’t see one in the near future, then a line of credit can be a good second option. The caveat though is to make sure that you use it wisely and don’t overspend just because you know that you have access to funds.

Market Your Business and Yourself: Employees should be prepared by having their resumes updated and keeping in contact with their network. Business owners should continue to market their business for two reasons: First, if they increase profits then they will be able to weather the downturn better both before and during. Second, many businesses reduce marketing when there is a downturn, but if you increase marketing then you will stick out and increase your chances of prospering during the downturn.

All of these tips can help you to survive a recession, and they can also be applied even if there isn’t a recession. Don’t be afraid.

You’re Not Too Sophisticated for Cash

It seems as though nobody uses cash anymore, but why should you? Smart people use credit cards and pay the bill at the end of the month so they can earn points, build credit, and have additional time to pay for their purchases, also known as “float.” But is it really that smart to use a credit card or check card to make all of your purchases, such as groceries, gas, dining, etc.?

What exactly are the benefits of using old-fashioned cash? I’ll give you a few:

  1. Easier Budgeting: No one likes to budget, which is why almost no one does this. But with cash, you can easily set aside a certain amount that you need each week for variable expenses, such as groceries. Once you start using cash you will become more aware of how you spend your money as it’s more tangible than swiping a card.
  2. You Will Spend Less: It’s easy to whip out your card a make purchases without even realizing how much you are spending. I’ve heard statistics that say that you tend to spend between 10% to 50% more on purchases when using a credit card or check card versus using cash. If your variable expenses are $50,000, then a 10% savings would equal $5,000, which is greater than any credit card rewards or possible float.

Watching your spending is one of the ways of becoming wealthy or at least financially stronger. I have witnessed this habit over the years, although it would be considered a small sample size and not an actual study, but there is a great book that espouses frugality called “The Millionaire Next Door” by Thomas J. Stanley.

As a caveat, I do not recommend using cash for business expenses as it creates an accounting nightmare.

The Envelope Method Revisited

A while back I wrote about using the envelope method to help manage expenses and cash flow. Because I believe in simplicity, there may be a simpler way to use this powerful method.

First, a background on the envelope method: I started using this method when I was a teenager through the guidance of my father, and later read about it in one of Dave Ramsey’s books. Basically, the envelope method requires that you set aside a portion of your income in cash between multiple envelopes for your expenses. This helps you to budget for your expenses, decrease wasteful spending and debt, and even out the ups and downs of your cash flow. Do not scoff at this method, as it applies regardless of your income.

Although you can set aside cash for all of your expenses, the most practical way is to set aside cash for your variable expenses that you can easily pay cash for. This includes expenses such as groceries, gas, clothing, dining, and spending/miscellaneous expenses. Other items can be automatically deducted from your paycheck or checking account, such as saving for Christmas gifts and vacations, and automatically be deposited into a separate savings account.

Also, to make the envelope method easier to follow, you should try to keep the number of envelopes to around five. I actually recommend writing the date, amount contributed or spent, and the balance on each envelope. For a sample envelope, you can email me and I will send you a sample as a Word document.