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The Dollars and Sense of Small Business Ownership

Starting a business can be daunting, particularly for attorneys whose strengths tend to lie in legal analysis, not accounting or finance. Researching what it takes, monetarily speaking, to start and run a small business, may read like a foreign language to an attorney. Here are some of the basic financial concepts to understand before embarking on the path of running your own law firm.

Startup Costs

What will it take to get your business off the ground? It is important to have a realistic understanding of what your costs will be. In general, your startup costs will include: rent, improvements, salaries, payroll expenses, office equipment leases, furniture, supplies, advertising, utilities, licenses and permits, insurance, accountant fees, attorney's fee, and any other miscellaneous expenses applicable to your particular business.

Creating a list of all of these costs will be extremely helpful in figuring out how much money you will need to start your business, as well as how much you will need to borrow. Some of the costs will be one-time outlays, and others will be ongoing. A thorough analysis will also assist you in determining how much revenue you need to bring in so that it covers your initial expenditures and ongoing expenses.

Obtaining Financing

There are many different sources of financing: you, your family, friends, the Small Business Administration (SBA), Small Business Investment Centers, banks, venture capital firms, credit cards, trade credit, and leasing companies.

There are two types of financing: debt and equity. Debt financing involves the loan of money that must be repaid with interest. Equity financing involves funding that is obtained in exchange for a share of ownership in the business. However, in the case of attorneys, generally fees cannot be shared with non-attorneys in most jurisdictions, so debt financing will likely be the more prevalent choice.

Preparing Financial Statements

As part of the process of obtaining financing, as well as the ongoing maintenance of the business, business owners need to be able to prepare certain financial statements. The operating budget tracks the ongoing expenses and overhead costs of the business. The balance sheet reflects the financial health of the business by listing out the assets, liabilities and net worth of the business at a given point in time. The profit and loss statement shows what the income and expenses for the business were during a set period of time, and the net profit or loss during that time.

Set Yourself Up for Success

With the basics under your belt, what financial decisions can you make that will set your business up for success? The SBA recommends taking the following six actions:

  • Set aside cash for reserve: Ideally, before you start your business and still have a job with income, try to set aside cash to have as a cushion. Additionally, when you take a cash draw from the company, you need to set aside money for taxes.
  • Consider your debt-income ratio: Try to pay down as much personal debt as possible prior to starting your business. Obtaining a loan will be much easier if your personal financial situation is improved.
  • Don't over-invest in your business: Keep your overhead low and find creative ways to purchase or trade for needed items.
  • Keep personal and business finances separate: Save your sanity and reduce your personal liability by making sure everything stays separate. It will save you the headache of trying to sort it all out, and is a legal requirement if your business is a separate legal entity.
  • Seek the help of an expert: Get the help of an accountant to make sure you are complying with the law and not making any tax mistakes.
  • Pay yourself a salary: This will help keep your personal financial situation in good shape and separate from your business.
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