Financial Q&A – Red Flags and Answers
March 11, 2009Financial Q&A – Red Flags and Answers
Answers to questions I received from students
Q: How to “assume” interest on debt?
A: [Group figured out] Estimating an interest rate and multiplying it by the principal.
Q: Tax payable (what kind of tax, what is it?) and accounts receivables (none in the beginning, right?).
A: Tax – you will have the following types of tax depending on your entity
1. Payroll tax/Self Employment tax (this is usually about 7.5 % paid by employer, and 7.5% taken out of employee check if a W-2 employee. W-2 means they are an employee vs. a contractor. If you have contractors, you do not have to pay benefits or tax and they are a “1099″ tax status. You report to the IRS for everything you pay them at $600 or more dollars per calendar year). If you are self-employed, you pay it all as mentioned in the link below “Self-employment tax is the social security and Medicare tax applied to a sole proprietorship, partnership, or LLC. But here all the income of the entity is subject to the tax. Sole proprietors, partners in a partnership and LLC members don’t take a salary. (There is an exception for limited partners.) The self-employment tax is 15.3% on the first $97,500 (2007 amount) of self-employment income…”
2. Income tax – If you have a sole proprietorship, an LLC, or a Subchapter S your profit from your business will be taxed at your personal tax rate. If you are a C corp you will file a separate tax return and pay taxes at the corporate level.
Other: Pre-tax items – This is more of an FYI. When people talk about pre-tax items it means you deduct it before it gets to the bottom line (profit) on which you’re taxed. So, a SEP or 401K or IRA falls into this category. You can max out a SEP – I’m pretty sure – at about 25% of income. This is a detail that is not expected to be covered in your financial projections.
Here is a good link on this: http://www.smbiz.com/sbfaq012.html
Q: Determining cash versus receivables
A: Receivables, or A/R, is what people OWE you. So, you’re A/R could be $1000. Your cash, however, could be $100 because you are still waiting for $900 in A/R. This is why people talk about “collections” etc. The book can be helpful with this.
Q: Converting subscribers/part time users of a product into full time equivalents
This question doesn’t make sense to me totally. Can you describe a situation? This sounds like reverse pro-rating.
Q: COGS for subscriptions (since there is technically no “sale,” just rental)
A: Unless I am missing something, I feel you’re getting caught up in the term COGS. You are paying money out. That is money out from your bank account. It needs to be listed as an expense whether you call it COGS or not. People pay you money. You want that money to be more than the money you’re paying out. If it is not, and doesn’t look like it will be in the future, you need to figure out a different model. For instance – this is why it is all about advertising for publishers. They try to create as much circulation as possible – even if they are practically giving it away – to be able to show those circulation numbers to advertisers and sell pages.
Q: Revenue sharing models- when do you expense?
A: There is no rule, so, set it up so it benefits your cash position. If they are sharing with you, best case is they pay you at time of sale/rental. Middle = they pay you partial at time of sale. Lower = they pay at end.
Q: Depreciation – how to do it?
A: I typically depreciate equipment / car/ hard-asset over $500. It is either 5 of 7 years depending on equipment (5) or furniture/other (7)
Good links:
http://www.hrblock.com/tax_business_services/resources/article_deprec.html
http://www.irs.gov/publications/p334/ch08.html#en_US_publink100025336
http://www.businesstown.com/accounting/basic-depreciation.asp
Q: Cannot seem to find current info for small, just started non-profits in bad economy. Having a hard time projecting what my “income” (donations) might be.
A: You are going to have to extrapolate on this and you’ll potentially need to implement a couple of strategies. Ideas on strategies:
1. You have a pool of people you’ve surveyed in a specific income bracket/geography/or both. 10% of them say they donate to international education causes. This could be your pool of targets. Assume you could collect $100 each from 1/10 of the 10% of the demographic you are targeting. Let’s say that puts you at $100 (per donor average amount) x 1/10 of the 10% of donors who give to these types of causes (let’s call it 500 people). So, you have $50,000. You just – later in your plan – up your target list numbers to achieve the needed amount of “hits.”
2. You could also add a charity mall or “donate” widget on your site and link it up to paypal. Research this and see who is successful, who is not.
3. Talk to Lindsey about the average estimated revenue on an event. You are applying the $100 per person theory, but, in a different context.
4. Just ask 20 people you know – “Would you give me $500 for this?” If they say yes, you’ve got your start up capital.
5. Look for grants, business plan competitions, etc. AU is having one now and the deadline is Mar 16. GW is in the midst of one. The Rice University one is huge. You could do “Pitch George.”
When you do these projections, you then take into account the economy. This is how I would do it. First, I typed “fundraising in a slow economy” into Google and got a ton of great links.
http://allthingsfundraising.blogspot.com/2007/12/does-slow-economy-hurt-fundraising_14.html *ultimately not useful for a discount percentage on fundraising, but, good dollar estimates on events vs. other types of fundraising.
http://docsinprogress.org/blog/?p=168 *again, not relevant but a good foundation center link in here.
I decided to do a more specific search: “percent reduction in giving economy”
http://pndblog.typepad.com/pndblog/2008/10/past-economic-d.html *bingo – chart and data on charitable giving in times of recession. Big report
http://www.philanthropy.iupui.edu/Research/docs/December2008_BriefingOnTheEconomyAndGiving.pdf
So keep following that line of searching for this question.
Q: Since my first year in business is going to be completely focused on fundraising, should I be doing 2 analyses? One of my first year fundraising and one of my first year implementing the schools?
A: Answered with study group
Q: I want to have some materials for schools donated from companies (ex: solar panels) and utilize volunteer workers- should I project both best case and worst case scenarios for costs which I cannot cover by donations and by volunteers?
A: Answered with study group
Q: I asked a President of a local sports marketing firm if there are any costs associated with liability and he estimated $2 – 3,000 a year. My question is what type of liability applies to a sports marketing firm? Furthermore, what type of insurance coverage would I need for protection?
Q: My next question is where would I get this type of insurance from? My contact says I can get this insurance through professional organizations but I’m not sure which.
A: For both of the above – I am asking a sports agent friend of mine. The easiest thing to do, however, is actually call an insurance agent. Also, look up the associations. If they offer insurance it will be on their site as a member benefit.
