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basic financial planning #1: Financial planning basics for the woodworking pro.

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Blog entry by BigTiny posted 02-28-2011 08:16 AM 1156 reads 5 times favorited 8 comments Add to Favorites Watch
no previous part Part 1 of basic financial planning series Part 2: Do regular "check ups" »

I’ve volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.

First and foremost, you can’t plan where you’re going if you don’t know where you are.

You have to sit down and do a complete list of your financial picture, sort of a “monetary snap shot” of yourself. List every debt you have, from the mortgage to the ten bucks you borrowed from a buddy because you were short at lunch. Make sure it is as complete as you can make it. List all your utilities, insurance premiums and so on. Even the couple of bucks a week to the paperboy. Add to this list the cost of any tools you need but don’t yet have.

Now list all your assets. Any savings? Life insurance cash value? (if you can borrow against it, don’t cash it in). Any other sources of income? Put them all down.

Okay, now you have an idea where you starting from. Now it’s time to do some serious thinking, and be honest. You’ll only be fibbing to yourself if you aren’t. You have to figure out what the minimum is that you need to survive each month. Then figure how long you can hold out at that rate before you go broke. This is your limit, more or less, for becoming self supporting in the business. Can you make it by then? Be honest with yourself. If you can’t, this will be an exercise in frustration and will only be a strain on you and your family. Better to wait until you save up enough to make it safely. (or at least as safely as is possible in business)

Okay, so you’ve gone through the exercise and made the decision to go for broke. What now?

The most important first step is to put everything down in black and white! EVERYTHING! If you don’t keep good, accurate books, the tax man and you are going to become a lot better acquainted than you want. There are many simple, easy systems out there for keeping your own books. Good advice on which to use can be obtained from your bank manager or the local chamber of commerce (or whatever the equivalent is in your country).

Now that you’ve made the leap into the sea of commerce and have a good bookkeeping system in place, what else do you need?

I’d advise a decent insurance policy for disabilities, so an accident or illness won’t put you out of business and your family will have dinner on the table if something lays you out for any extended period. If you think you can’t afford it, ask yourself if you can afford not to have it if you, for example, trip and break your leg?

While we’re talking about insurance, you’ll need it for your business too, so if someone breaks their leg at your shop, the resulting lawsuit won’t result in you living in the poorhouse. Even if you win such a suit, the legal fees and time lost in attending court can be as bad financially as losing.

We all have things we love doing, and things we hate, plus a million and one that fall somewhere in between. At first, you can’t afford to let personal preference influence your choices in what projects you undertake. For now, you have to do whatever you can find that pays. Making that 17th century reproduction of a heavily carved and inlaid armoire can wait until after you’ve made a thousand kitchen cabinets or so. You have got to be realistic and understand that by becoming “self employed” you have traded one boss for many; your customers.

Well, this should give you some food for thought. If anyone has some generalized questions, or has a direction they’d like to see the next installment go, let me know.

Paul

-- The nicer the nice, the higher the price!



8 comments so far

View TopamaxSurvivor's profile (online now)

TopamaxSurvivor

14744 posts in 2329 days


#1 posted 02-28-2011 08:27 AM

When I first started business and had employees, I had a disability policy that I was told would pay $10,000 a month if I was injured/disabled could not work. It has long since been canceled since I don’t need it any more. With what I have learned about insurance since then and especially disability insurance, I seriously doubt if they would have paid much of anything. Remember; be very skeptical of insurance sales people. Their job is to extract money from an unsuspecting public and deny claims for anything that really happens, but everything else is always fully covered. Sorry to sound so negative, but that is just my personal experience with them speaking.

-- "some old things are lovely, warm still with life ... of the forgotten men who made them." - D.H. Lawrence

View wseand's profile

wseand

2248 posts in 1695 days


#2 posted 02-28-2011 08:28 AM

It is late Paul but I put it on my watch list so I will read it in the morn. I appreciate the time you are putting in to this.

-- Bill - "Freedom flies in your heart like an Eagle" Audie Murphy

View BigTiny's profile

BigTiny

1664 posts in 1542 days


#3 posted 02-28-2011 11:50 AM

I’m sorry if you ran into a bad insurance company or agent. I personally know a few people who did collect, one for about five years and another for the rest of his life, about twelve years. The latter died of leukemia, the former had a bad car accident. There were others of my clients who had their claims honored for varying lengths of time.

I have never had a client who was covered under a policy I had recommended fail to collect if they had a claim.

One idea I would offer: deal with a broker wherever possible. He can sell policies from a number of companies where an agents sell for the company that sponsors his license.

No single company has the best policy for everyone. I would send a doctor to one company, a woodworker to another, and a deep sea diver to a third, each depending on his specific needs.

I’ll give you an example. A doctor client of mine (my own doctor at the time) had been on a skiing trip to Switzerland with a friend who “ate a tree” and broke his leg quite badly. He missed a total of 6 months work due to the severity of his injuries.

I was reviewing my doctor’s finances for the first time, and when I came across his disability policy, I informed him that it was a good thing his friend ate that tree and not him, as the policy he had applied only in North America. Other than that, it was every bit as good as the policy I recommended to him except for cost. The agent who sold it to him had gone strictly on which policy had the lowest premium instead of finding out his clients real needs. The difference in premium? Less than $2 a week on a policy that paid close to $3,000 a month on claim.

Another recommendation. If the guy says something like “ignore all the fine print. You don’t need to know what all those ten dollar words mean, just trust me.” RUN! Never buy anything you don’t understand every word of. If it take three days for him to explain it to you, take the time. He’s getting well paid to educate you in his business. Make him earn it.

Are there companies out there that treat you poorly when claom time comes along? Sure there are, the same as there are lousy tool makers whose tools fall apart in a week. Are there agents who will sell you ice cubes in a blizzard? Yes to that too. Same as there are wood workers who will try to pass off veneered MDF as solid wood.

However, there are also honest brokers and decent companies who will treat you as you deserve and provide the protection you’ve paid for.

On a personal note, my own claim started in the mid 90’s and they’ve never missed a payment. I just wish I’d taken out more coverage.

-- The nicer the nice, the higher the price!

View gyrene1's profile

gyrene1

7 posts in 1298 days


#4 posted 02-28-2011 12:31 PM

Thanks Big Tiny, I’m hoping your blog will give me a few pointers, ‘cause I’m thinking of changing my status from amatuer to pro. I’ll be watching (reading).

-- Whoever dies with most toys (tools) wins

View TopamaxSurvivor's profile (online now)

TopamaxSurvivor

14744 posts in 2329 days


#5 posted 02-28-2011 12:49 PM

I am saying be skeptical of every professional you come in contact with unless you have a good reason to trust them. I have always been the opposite, very trusting unless I have reason to not trust them. That has proven to be a very expensive attitude at times. I didn’t have a claim and glad I didn’t. When shopping for disability coverage at a later date, I discovered things about disability policies that made me doubt I was told the truth about the coverage.

I will tell about one of my first CPAs. He took over the business of my former CPA a year after I started. I estimated my gross for the year within to a couple thousand dollars. I asked about any potential liability I might have on April 15th. I was told nothing more than $1,000 at the most.

On April 13th of 1987, he called me up saying I needed to send the IRS a check for $13,000 to cover 1986 and to send $5,000 for my first estimate of 87!! I was not a tax expert, but I knew the tax on 2K was not 13K! I did a little bit of research, found I could file and extension rather than the tax return, but I needed to pay the amount to avoid any penalties. I was very fortunate I had the cash, but it certainly made making payroll a bit nip and tuck for a few months.

I called the previous owner and told him if he had not been cashed out when he sold he had better take care of his previous customers because that clown was going to leave it in shambles in short order.

-- "some old things are lovely, warm still with life ... of the forgotten men who made them." - D.H. Lawrence

View shipwright's profile

shipwright

4966 posts in 1451 days


#6 posted 02-28-2011 05:51 PM

You make very good points, Paul. I spent most of my working life self employed and attribute much of my success to the fact that I was lucky (clever?) enough to marry an accountant. If not for her I would probably have been rich and broke again half a dozen times. With her I was able to retire at 55. I hope that members here contemplating getting into business listen to what you have to say even though they may not like what they’re hearing.

-- Paul M ..............If God wanted us to have fiberglass boats he would have given us fiberglass trees. http://prmdesigns.com/

View Sheila Landry (scrollgirl)'s profile

Sheila Landry (scrollgirl)

7654 posts in 1573 days


#7 posted 03-01-2011 03:51 AM

This is good, basic advice that makes lots of sense. In my early business days, it seemed that I only looked at the parts of the business that I wanted to – not the whole picture. Being realistic and facing figures gives you the knowledge to made adjustments so you can be successful. Glossing things over that you don’t want to face will only set yourself up for failure.

Great blog! :) Sheila

-- Designer/Artist/Teacher. Owner of Sheila Landry Designs (http://www.sheilalandrydesigns.com) Scroll saw, wood working and painting patterns and surfaces. "Knowledge is Power"

View HorstPeter's profile

HorstPeter

117 posts in 1483 days


#8 posted 03-09-2011 06:19 PM

Thanks for this. I’ll be reading the follow-ups soon as well.

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