I recently held a meeting with my two potential business partners, in which we discussed the general idea about our future joint business venture. Two of us are accountants, so we know the inner machinations of getting a business up and running in tip-top shape, but when we started to get in to the financial and fiscal aspects of it all, our non-accountant partner seemed to be quite perplexed by all the terms we started throwing around.
This perplexity inspired me to sit down and write this post. Most people think that starting a business is quite easy when you have the skills of the craft you're undertaking. While you may have the operational side of it covered, there are many legal, financial and fiscal matters to attend to when starting a business, and many people ignore this fact.
This is why today I write to you "as your Queen, and as a grandmother"... No, I'm sorry, "as your accountant and friend". I was channeling the late Queen Elizabeth II in her Diana memorial speech way back in 1997😂
But I digress. As your accountant, I feel the moral need to inform you of what it takes to start a business.
1. You need a business plan, for starters
Yes, you must trust your instincts, but you must also have a structured plan to document all your proceedings. Business plans serve the purpose of setting up the framework for business operations as well as financing and marketing strategies.
Another use of business plans is that they may be presented to investors and creditors, to obtain funds to get it up and running. I will be dedicating a post with my secrets to putting together a successful business plan, stay tuned!👀
2. Understand what you're getting into
As I said, it's not only setting up shop, but understanding the legal implications of the way you choose to do business as: whether as sole proprietor or other types of legal entities (such as general partnerships, corporations, limited liability companies, etc.).
More than understanding how to legally incorporate your business entity or the implications of a sole proprietorship, you must understand what permits, licenses and other documents you require to operate within the legal framework.
Another implication to consider is the matter of taxation. I'm not asking all of you to become expert tax accountants, but you do need to understand the basic principles of taxes and what taxes your business must pay at different government levels (federal, state and local), as well as in what capacity: whether it's your own taxes payable or withholding taxes as an employer, for example.
3. Crunch some numbers
As an ever-growing businessman, I suggest you crunch some numbers. Sit down with your favourite accountant and do the math. Don't be afraid to get friendly with a spreadsheet, you will need this to understand how viable your business venture is and the odds for success.
Some financial indicators you must look out for when planning your business venture are net present value (NPV), internal return rate (IRR), the minimal acceptable rate of return (MARR) and the return on investment (ROI). These will help you understand the financial viability of your business idea.
You must also understand how financial statements work and what each line on the balance sheet and income statement (or Profit and loss statement for those less cultured in financial terms) implies.
Remember also to prepare budgeted financial statements for each month of the first year of operations, and yearly for the first five years of operations. Always keep in mind that the goal is for your business to be an on-going enterprise, in IFRS and Mexican NIF, this means that you can see your business operating for an indefinite period of time.
For those not skilled in accounting jargon: IFRS are the International Financial Reporting Standards. NIF are the "Normas de Información Financiera" (Financial Reporting Standards) applicable for all business and non-profit entities who must report financial information in Mexico.
4. Don't be afraid of the bank
When starting a business, the way one obtains the funds to start it is key to getting it up and running. Sh*t is expensive, and money doesn't grow on trees...
While one's life savings are a good way to start a business, don't put all of your eggs in one basket. It may be easier for you to start a business if you get a group of people who have some cash that's taking up space in their account (or under their mattress👀), as business partners or investors.
Another way of obtaining the funds to start a business is a bank loan. People are usually afraid of getting loans because of high interest rates or the fear of not being able to pay it off. Newsflash: the bank isn't going to authorize a loan if it isn't sure you'll be able to pay it back. Banks will only approve the amount of money you're able to pay based on your budgeted financial statements or on your present income (if you're applying for a personal loan).
Asking the bank for money is a way to keep the business to yourself, whether you're in it alone or with some partners. The bank is not an investor, the bank is a creditor: the funds loaned to you or your business are a liability to it. You pay interest to the bank, not dividends. The bank is a type of silent partner that's not really a partner and that will remain happy with the arrangement so long as you pay on time and keep paying your debt off.
Just to let you know that if you p*ss off the bank, you're f**ked!
5. Having employees is expensive
Human resources are a key performance tool in any business. Without the human element of it all, you're most likely going to flop. You need people to run your business, whether it is yourself, your business partners or third parties hired to do so.
Wages and salaries are quite expensive, because it's not like you're only giving out the money you send the employees home with... You must also understand that you must withhold taxes and also pay taxes for having employees.
I can personally elaborate on payroll taxation in Mexico. For starters, you must withhold taxes with each payday: income taxes and the employee's part of social security tax and retirement fund contribution. Then, you must pay taxes for having employees: again, social security and retirement fund contributions (that is, the employer's part of the bargain), housing fund tax, as well as state payroll tax.
Then it's not just about ordinary payrolls. We also have to consider paid time off, employee profit sharing (PTU), Christmas bonus, overtime, and if you're really cool with your employees: food vouchers, savings fund, and other bonuses you may feel generous enough to throw around...
Have we also mentioned minimum wage and its yearly increments? Don't get me started on that!
Keeping employees happy is key to a healthy business, and so payroll is an expense that will never shrink. It will keep growing as your business grows, and as your business's needs change.
Is there anything else we should know?
Yes, but I'll bill you by the question if I have to write out more stuff for today's post. You know you can always reach out to me on Insta and I'll gladly answer some of your questions. All of them would imply me billing my time🤑
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