In the financial services industry, one of the most coveted careers is that of the financial analyst.
Financial analysts can work in both junior and senior capacities within
a firm and it is a niche that often leads to other career
opportunities. The financial services industry is competitive, and it
can be tough to break into the analyst field, but there are some
preparations you can make to position yourself for this career. If
you're interested in a career as a financial analyst, read on to find
out what you can do to groom yourself for the job.
What Is a Financial Analyst?A financial analyst researches macroeconomic and microeconomic
conditions along with company fundamentals to make business, sector and
industry recommendations. They also often recommend a course of action,
such as to buy or sell a company's stock based upon its overall current
and predicted strength. An analyst must be aware of current
developments in the field in which he or she specializes as well as in
preparing financial models to predict future economic conditions for any
number of variables.
Background of Financial AnalystsIf
you are still an undergraduate student who is considering a career as a
financial analyst, it is best to take courses in business, economics,
accounting and math. Other majors that are looked upon favorably include
computer sciences, biology, physics and even engineering. Many of the
junior analysts hired by firms have these backgrounds, while MBA
graduates are often hired as senior analysts right out of business
school.
If you are not an MBA graduate student or an economics major as an undergraduate, you may want to consider studying for the Series 7 and Series 63 exams or participating in the Chartered Financial Analyst (CFA®) Program. Keep in mind that participating in these exams will require sponsorship from a FINRA member firm or a self-regulatory organization.
While
the CFA exam is highly technical, the Series 7 and 63 exams are other
ways to demonstrate a basic familiarity with investment terms and
accounting practices. If you look at a sample CFA exam and it seems
overwhelming, start with practicing for the Series 7 and 63 exams and
then work your way up to the CFA exam or begin to interview for junior
analyst positions after passing those Series exams or one of the other exams
that are highly regarded by the financial services industry. Many
institutions also have training programs for those candidates who show
promise in the field.
Types of Analyst PositionsFinancial analysts tend to specialize based on the type of institution they work for. Analysts are hired by banks, buy- and sell-side investment firms, insurance companies and investment banks. Of these specialties, three major categories
of analysts are those that work for 'sell-side' investment firms, those
that work for 'buy-side' investment firms and those that work for investment banks.
Within
the investment industry, most analysts tend to work either for buy-side
investment firms, where they research stocks for an in-house fund, or
sell-side firms that write research reports for buy-side firms. Buy-side
firms are investment houses that manage their own funds. In these
companies, analysts research companies as they look for stocks to add to
an investment fund. They also track the stocks that are in a fund's
portfolio in order to determine when or if the fund's position in that
stock should be sold.
At a sell-side firm, analysts evaluate and
compare the quality of securities in a given sector or industry. Based
on this analysis, the analysts then make reports with certain
recommendations such as: buy, sell, strong buy, strong sell or hold.
These recommendations carry a great deal of weight in the investment
industry including analysts working within buy-side firms.
Even within these specialties, there are subspecialties
such as analysts who specialize in equities and those that specialize in
analyzing fixed-income instruments. Many analysts also specialize even
further within a specific sector or industry. An analyst may specialize
in energy or technology, for example.
Analysts in investment
banking firms, however, differ from analysts in buy- and sell-side firms
as they often play a role in determining whether or not certain deals
are feasible based on the fundamentals of the companies involved in a
deal. This type of analysis can include IPOs or mergers and acquisitions.
Analysts assess current financial conditions as well as rely heavily on
modeling and forecasting to make recommendations to senior partners as
to whether or not a certain merger is appropriate for that investment
bank's client or whether another client of the investment bank should
invest venture capital in a particular company.
What to Expect on the JobFinancial
analysts need to remain vigilant about gathering information on the
macroeconomy as well as information about specific companies and the
fundamental microeconomics of their balance sheets.
In order to stay on top of financial news, analysts will need to do a
lot of reading on their own time. Analysts tend to read publications
such as The Wall Street Journal, The Financial Times and The Economist as well as financial websites.
Being
an analyst also often tends to involve a significant amount of travel.
Some analysts travel to companies to get a first-hand look at company
operations on the ground level. Analysts also frequently attend
conferences with colleagues who share the same specialty as they do.
When
in the office, analysts learn to be proficient with spreadsheets,
relational databases and statistical and graphics packages in order to
develop recommendations for senior management and to develop detailed
presentations and financial reports that include forecasting,
cost benefit analysis, trending and results analysis. Analysts also
interpret financial transactions and must verify documents for their
compliance with government regulations.
Opportunities for AdvancementAs interoffice protocol goes, analysts interact with each other as colleagues while they tend to report to a portfolio manager
or other senior in management. A junior analyst may work his or her way
up to a senior analyst in a period of three to five years. For
senior analysts who continue to look for career advancement, there is
the potential to become a portfolio manager, a partner in an investment
bank or senior management in a retail bank or an insurance company. Some analysts go on to become investment advisors or financial consultants.
Tips for SuccessThe
most successful junior analysts are ones that develop proficiency in
the use of spreadsheets, databases, PowerPoint presentations and learn
other software applications. Most successful senior analysts, however,
are those who not only put in long hours, but also develop interpersonal
relationships with superiors and mentor other junior analysts. Analysts
that are promoted also learn to develop communication and people skills
by crafting written and oral presentations that impress senior
management.
The Bottom LineWhile
a career as a financial analyst requires preparation and hard work, it
also has the potential to deliver not just financial rewards but the
genuine satisfaction that comes from being an integral part of the
business landscape.
Saturday, September 28, 2013
Starting A Small Business
Introduction
Why do people start a small business? Some want to spend more time with
family, and starting a business allows them to do that. Some find it
exhausting to be outside the house all day, dealing with traffic,
co-workers, meetings and interruptions. Some people hate answering to a
boss all the time- needing permission to schedule a dentist appointment
or take the day off when they're sick. Some people are unmotivated by
the security of a regular paycheck and prefer the challenge of the
direct rewards or losses that entrepreneurs see from their efforts.
Maybe you want to build an empire and become famous, or create a
wealth-generation machine that you can pass on to your children. Or
perhaps you can't convince anyone to recognize your unique vision and
you've decided that it will never come to fruition unless you strike out
on your own. Or maybe you're thinking of self-employment because you've
been unemployed for so long that you feel that you've exhausted all the
other options.
Becoming a small business owner has unique
challenges and rewards that aren't right for everyone. You must be
driven, disciplined and able to identify a product or service that
people need - one that they will pay enough for to allow you to live
comfortably. You have to develop marketing skills and be able to find
your own work, because it won't fall into your lap until after you're
well established. Business owners need to understand how to budget, keep
records and handle small business taxes. They must familiarize
themselves with employment laws if they want to hire staff. They also
need a plan for protecting their business and everything that's tied to
it if something goes wrong. (For more, see Are You An Entrepreneur?)
In this tutorial on starting a small business, we'll address all these issues and more.
1. Choosing Your Business
One of the most difficult decisions in starting a small business can be
what line of work to pursue. You might not be sure what talents you have
that will allow you to succeed without an established company's name
behind you. Or you might excel in so many areas that you're not sure
which one or two to hone in on. Whatever your situation, you should
consider the following factors before you settle on a business concept.
Play to Your Strengths and Interests
If
you thrive on interaction with others, working alone from your desk as a
manuscript editor will make you restless. If you'd rather have the flu
than pick up the phone and call a stranger, don't start selling
insurance. You're going to be spending a lot of time on your business -
probably more than the 40 hours a week you're giving to your current
employer. Ideally, you should wake up every morning feeling energetic
and passionate about the work that lies ahead of you. At the very least,
your small business idea should be something that you're interested in
and that plays to your strengths.
The process of figuring out
what line of business to go into is not that different from figuring out
what you want when you're looking for any other new job. It seems
daunting because the possibilities are wide open, but that's also the
main attraction of working for yourself. You don't have to limit
yourself to what your resume says you're good at. What gets you excited?
Don't be afraid to consider every possibility. Even the ones that don't
initially seem to have any money-making potential - like dining in
restaurants, vacationing in Jamaica, or playing with your dogs - can
work if you are motivated enough. There are, after all, plenty of
successful food critics, travel writers and pet sitters. (To learn more,
see In Small Business, Success Is Spelled With 5 "C"s.)
Potential Demand
Is there market demand for
the product or service you want to offer? Before you quit your day job,
you need to do some research to see if your idea has the potential to
succeed. If you want to work independently as a financial planner,
see if you can attract clients based on your existing credentials and
experience. If you want to offer a product, then you will want to start
doing market research, product testing and surveys. It can be hard to
find the time to pursue your own business while you're still working for
someone else, but it's the most secure way to test your idea without
taking a big financial risk. And if you're not motivated enough to find
the time for it, maybe you're not really that interested in becoming a
small business owner.
Potential Earnings
How
much do you need to earn? We'll talk more about developing a business
budget in a later section, but for now it's enough to say that you need
to weigh the earning potential of any business you want to start against
your monthly expenses. If you have to make a $2,500 mortgage payment
every month, sign private school tuition checks and pay off your Lexus,
it might be a bad idea to open a brick-and-mortar bookstore unless someone else in your household can comfortably cover all the expenses with their paycheck.
How
much do you want to earn? Some of us want to be rich. Others find
comfort in getting by on as little as possible. When choosing your line
of business, consider what kind of earning potential it offers not just
in the first couple of years, but down the road. Does your idea offer
possibilities for expansion, growth and career advancement? Do you know
what those possibilities are and how you can exploit them? (Learn more
in 10 Breakout Ideas For Small Business.)
Customer Interaction
Do
you like to interact with others? Some small business occupations lend
themselves to solitude, while others require you to be out in the world,
constantly schmoozing and selling yourself to people. If you just want
to be left alone, don't open up shop as a publicist. If you feel
compelled to call your mom for a chat anytime you're alone for more than
15 minutes, don't start a tax preparation business.
Lifestyle
What
hours and days do you want to work? If you don't like working from nine
to five, you don't have to when you're self-employed. You can choose a
line of work that suits whatever hours you prefer. That said, many
businesses require that you work according to your clients' schedules.
This means arranging your life to fit your customers' needs.
How
many hours a week do you want to work? Some small businesses lend
themselves to longer hours than others. If you decide to open a
restaurant, you might as well make space for a twin bed in your office -
if you have any hope of ever sleeping again. A sales-based business
that involves large commissions, on the other hand, could leave you with more free time if you're skilled enough.
How
much time are you willing to spend away from home? For some people, the
ability to stay home all day is a major draw of becoming a small
business owner, but not all small businesses are home businesses.
Becoming a consultant might require you to attend lots of meetings and
travel frequently. Open a boutique and you'll spend most of your waking
hours at your store, at least initially. (For more, read Start Your Own Small Business.)
Once you figure out want you want to do for a business, it's time to figure out how you will afford it.
2. Financing Your Business
No matter what line of business you go into, you will need startup capital to get your business going. Some typical startup costs facing new business owners include:
- Electronic equipment: computer, printer, scanner, fax machine, photocopier, etc.
- Vehicle
- Furniture and fixtures: desk, lamps, bookshelves
- Office supplies
- Reference books
- Supplies/inventory
- Manufacturing machinery and equipment
- Advertising: domain name, domain hosting, mailers, website design, etc.
- Operating Space
- Licenses
- Permits
- Corporation fees
- Legal fees
- Security deposit for renting a business location
You should also consider operating costs that you'll pay regularly in the course of running your business. Some of these may be required before you set up shop and on an ongoing basis thereafter, like insurance, membership fees and dues, loan payments and employee wages.
Sources of Startup Capital
How much money you can afford to risk on your business from your personal savings and how much money you need to open for business will determine whether you need to look elsewhere to raise startup capital. Let's consider the pros and cons of each potential money source.
Personal Savings
Personal savings are commonly used by business owners to help pay for startup costs. You won't incur any interest expense when you use your own money to finance your business. You also won't have any creditors to pay back, and no one will come after you for money if your business fails or isn't successful right away. On the other hand, most people have already earmarked their personal savings for other uses, like retirement and a rainy day fund. Unless you already have plenty of extra money lying around, you might want to start setting aside some of your savings each month to put toward your business. You might also be able to tap your home equity, but it's a big risk to tie the success of your business up with having a place to live.
Business Loans
Banks provide business loans to finance vehicles, equipment, real estate and other expenses. These loans are generally for a short term, such as six to seven years, but the duration can often vary based on the type of financing required. Some type of collateral generally must be used to secure the loan - usually the vehicle, equipment or real estate being purchased with the loan, or a blanket lien on other assets. Expect to pay a loan origination fee and, of course, interest. Business loans can offer the security of a fixed monthly payment and a fixed interest rate, although variable rate loans may also be available. (Not sure what sort of loan you should get? Read Which is better, a fixed or variable rate loan?)
Some banks may only offer loans on large amounts; if you need to borrow less than the minimum requirement, seek other financial institutions to provide a more accommodating loan or dip into your personal finances. You might also want to finance your equipment and vehicle needs with a line of credit or a conditional sales agreement.
If you plan to seek a loan from a bank, be prepared to provide a detailed explanation of how much money you need and for what purposes, as well as a detailed explanation of how you will be able to repay the loan. The bank may want to see recent personal income tax returns, bank statements, credit history and other personal financial information.
Small Business Administration Loans
Small Business Administration (SBA) loans are an option if you don't qualify for a regular business loan. Your business must be owner-operated, for profit, organized as a sole proprietorship, corporation or professional partnership, and fall within the size guidelines set by the SBA. Because these loans are guaranteed by the government, they can be easier to qualify for than conventional business loans. They also allow you to make lower payments over a longer period of time. Although SBA loans are provided through regular banks, the government simply acts as the guarantor. Special SBA loans are available for veterans, active duty military, reservists, National Guard members and the spouses of people in these groups.
Credit Cards
You can always use a business and/or personal credit card to pay your business startup costs, assuming you already have or can qualify for a credit card. However, unless you have a card with the required limit and a low interest rate that you will be able to make regular payments on, credit card financing can quickly get you in trouble. You don't want to borrow money for your business at a 20% interest rate because the balance will grow each month and it can become very difficult to pay off the debt. Sometimes it is possible to get a card with an introductory interest rate as low as 0%. If you take advantage of an offer like this, make sure you have a plan for paying off the money you borrow before the card's interest rate goes up. (To learn more, see The Pros And Cons Of Small Business Credit Cards.)
Business Line of Credit
A business line of credit should have less rigorous qualification requirements than a business loan. It is similar to a business credit card in that it is an unsecured loan and you can use it as you need rather than borrowing a lump sum all at once. It can be used to refinance debt as well as to finance working capital, payroll and all the same types of expenses as a credit card financing. It is typically designed to be a short-term loan and may have a variable interest rate and an annual fee. Some banks may only offer large business lines of credit, such as $25,000 and up, so this may not be the right option for you if you only need access to a small amount of credit.
Family and Friends
Are you willing to risk your personal relationships by mingling them with money? Only you know the nature of your relationships with friends and family, and whether any of these people are a viable source of financing. But if your business goes under, would you rather have to explain to a stranger or to your best friend that you're not sure when you'll be able to pay them back? Mixing friends and family with finances adds yet another risk to your business endeavor - the risk that you'll ruin a close relationship. (For more on mixing your personal and business relationships, see 8 Ways To Help Family Members In Financial Trouble.)
Nothing can strain a relationship like money. Merely asking for it can be enough to introduce awkwardness into an otherwise sound relationship. If your dad won't lend you startup capital, you might find yourself thinking, "How can my own father not believe that I have what it takes to succeed?" It's much easier to be rejected for a loan by someone who doesn't know you because you'll know it's purely a business decision, not a personal one.
Venture Capital
Pursuing venture capital means bringing someone else, generally a stranger, into your business as a partial owner. If retaining control of your business is important, you shouldn't consider this financing option. Usually, you will not receive any profit yourself until your investors have profited from your business. Additionally, this type of financing limits the entrepreneur's upside potential since venture capitalists will often require majority ownership of the business. On the other hand, the majority of the downside risks are also assumed by the lending party. (For more insight, read When Your Business Needs Money: Angel Investors.)
How Much Capital Do You Need?
There is no one-size-fits-all method for determining startup capital needs because each business has unique requirements. Basically, you need to make a list of the startup items specific to your business and research each one to determine its cost. It's important to actually do the research, and not just guess - especially if you are doing this for the first time. If you rely on hunches, you may grossly under- or overestimate your expenses. Also, if you're seeking financing, the lender will be hesitant and may not take you seriously if your numbers aren't realistic and well-researched.
When you're starting a business, there are a couple of ways to get carried away with spending money. First, you may be overemphasizing about the tax deductibility of business expenses. While tax breaks will reduce your costs, they won't make your purchases free. You'll still be paying for the bulk of everything yourself, so you shouldn't buy it if it isn't necessary. Second, you may be so excited about starting a business that you have trouble differentiating necessary expenses from optional ones. Do you really need a brand-new, solid wood desk, or will that card table in the garage get the job done just as well?
Remember, initially the most important thing is keeping your business afloat so you can earn a profit. Every purchase you make should be directly related to this goal. Minimizing what you need to buy and how much each item costs will help you meet this goal. You want to get by on as little startup capital as possible. (Don't overlook the details when starting up a business. It's the small expenses that have the potential to make or break a great idea. For more information, refer to Business Startup Costs: It's In The Details.)
3. Business Structures
When you start your business, you have several options for structuring it that will affect your income tax situation and your potential liability if something goes wrong.
Sole Proprietorship
The default option is to be a sole proprietor.
There are fewer forms to file to become a sole proprietor. The business
is structured in such a manner that legal documents are not required
determine how profit-sharing from business operations will be
determined.
This structure is acceptable if you are the
business's sole owner and you don't need to distinguish the business
from yourself. Being a sole proprietor does not preclude you from using a
business name that is different from your own name, however. In a sole
proprietorship, all profits, losses, assets and liabilities are the
direct and sole responsibility of the owner. Also, the sole proprietor
will pay self-employment tax on his or her income.
Sole
proprietorships are not ideal for high-risk businesses because they put
your personal assets at risk. If you are taking on significant amounts
of debt to start your business, if you've gotten into trouble with
personal debt in the past or if your business involves an activity for
which you might potentially be sued, then you should choose a legal
structure that will better protect your personal assets. Nolo, a company
whose educational books make legal information accessible to the
average person, gives several examples of risky businesses, including
businesses that involve child care, animal care, manufacturing or
selling edible goods, repairing items of value, and providing alcohol.
These are just a few examples. There are many other activities that can
make your business high-risk.
If the risks in your line of work
are not very high, a good business insurance policy can provide
protection and peace of mind while allowing you to remain a sole
proprietor. One of the biggest advantages of a sole proprietorship is
the ease with which business decisions are made.
LLC
An LLC is a limited liability company.
This business structure protects the owner's personal assets from
financial liability and provides some protection against personal
liability. There are situations where an LLC owner can still be held
personally responsible, such as if he intentionally does something
fraudulent, reckless or illegal, or if she fails to adequately separate
the activities of the LLC from her personal affairs.
This
structure is established under state law, so the rules governing LLCs
vary depending on where your business is located. According to the IRS, most states do not allow banks, insurance companies or nonprofits to be LLCs.
Because
an LLC is a state structure, there are no special federal tax forms for
LLCs. An LLC must elect to be taxed as an individual, partnership
or corporation. You will need to file paperwork with the state if you
want to adopt this business structure and pay fees that usually range
from $100 to $800. In some states, there is an annual fee for being an
LLC.
You will also need to name your LLC and file some simple
documents, called articles of organization, with your state. Depending
on your state's laws and your business's needs, you may also need to
create an LLC operating agreement that spells out each owner's
percentage interest in the business, responsibilities and voting power,
as well as how profits and losses will be shared and what happens if an
owner wants to sell her interest in the business. You may also have to
publish a notice in your local newspaper stating that you are forming an
LLC.
Corporation
Like the LLC, the corporate
structure distinguishes the business entity from its owner and can
reduce liability. However, it is considered more complicated to run a corporation
because of tax, accounting, record keeping and paperwork requirements.
Unless you want to have shareholders or your potential clients will only
do business with a corporation, it may not be logical to establish your
business as a corporation from the start - an LLC may be a better
choice.
The steps for establishing a corporation are very similar
to the steps for establishing an LLC. You will need to choose a
business name, appoint directors, file paperwork (articles of incorporation),
pay filing fees and follow any other specific state/national
requirements. (Find out how becoming a corporation can protect and
further your finances. See Should You Incorporate Your Business?)
There are two types of corporations: C corporations and S corporations.
C corporations are considered separate taxpaying entities. They file
their own income tax returns, and income earned remains in the
corporation until it is paid as a salary or wages to the corporation's
officers and employees. Corporate income is often taxed at lower rates
than personal income, so you can save money on taxes by leaving money in
the corporation.
If you're only making enough to get by, however, this won't help you
because you'll need to pay almost all of the corporation's earnings to
yourself. If the corporation has shareholders, corporate earnings become
subject to double taxation
in the sense that income earned by the corporation is taxed, and
dividends distributed to shareholders are also taxed. However, if you
are a one-person corporation, you don't have to worry about double
taxation.
S corporations are pass-through entities, meaning that
their income, losses, deductions and credit pass through the company and
become the direct responsibility of the company's shareholders. The
shareholders report these items on their personal income tax returns. S
corps thus avoid the double taxation on income that is associated with C
corps.
All shareholders must sign IRS form 2553 to make the
business an S corp for tax purposes. The IRS also requires S corps to
meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders, including individuals, certain trusts and estates
- Not include partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have one class of stock
- Not be an ineligible corporation (i.e., certain financial institutions, insurance companies and domestic international sales corporations)
A partnership is a structure you can use if you are not going to be the sole owner of your new business.
In a general partnership, all partners are personally liable for business debts, any partner can be held totally responsible for the business and any partner can make decisions that affect the whole business.
In a limited partnership, one partner is responsible for decision-making and can be held personally liable for business debts. The other partner merely invests in the business. Although the general structure of limited partnerships can vary, each individual is liable only to the extent of their invested capital.
LLPs are most commonly used by professionals such as doctors and lawyers. The LLP structure protects each partner's personal assets and also protects each partner from debts or liability incurred by the other partners. Different states have varying regulations regarding these establishments that business owners must take note of.
Partnerships must file information returns with the IRS, but they do not file separate tax returns. For tax purposes, the partnership's profits or losses pass through to its owners, so a partnership's income is taxed at the individual level. LPs and LLPs are also state entities and must file paperwork and pay fees similar to those involved in establishing an LLC.
You don't have to choose a business structure right now if you're operating alone. If you're unsure, you can remain a sole proprietor and see if it makes sense to incorporate or become an LLC later. If your business will have more than one owner from the start, then it can't be a sole proprietorship. In this case you will have to choose another structure before you start doing business. Regardless of your structure, business liability insurance is probably a good idea.
Business Liability Insurance
You shouldn't rely entirely on the legal structure of your business to protect you. Business insurance offers a second and often essential layer of protection. It shields you from legal fees and judgments if your business is sued. Here are some of the basic policies and their purpose:
- General liability insurance protects you from injury claims, property damage claims and advertising claims.
- Professionals such as doctors, lawyers and consultants need professional liability insurance to protect them from errors and omissions, including malpractice and negligence.
- If you are going to manufacture or sell products, you will want product liability insurance in case someone is injured by your product.
- If you will have a business location that customers or clients will be visiting, you will certainly want to make sure you are covered for claims of personal injury on your property.
- If your business has employees, you can purchase employment practices liability insurance to protect yourself against claims of harassment, discrimination and wrongful termination. You will also want insurance that protects your business from any liability your employees may incur.
Next, we'll discuss how to transition from your current job to self-employment.
4. Making The Leap
5. Location And Licenses
6. Hiring Employees & Taxes
7. Record Keeping
8. Conclusion
Starting a small business is complex, time-consuming and life-altering.
There are many more things that go into running it than just providing
the product(s) or service(s) that your business offers, however. You'll
also be responsible for your business's finances, protecting your
business and personal assets, keeping your business legal, paying taxes,
keeping records, managing employees and more.
If you understand what you're doing and know how to minimize the risks
and challenges, the independence, personal satisfaction and financial
rewards you can achieve as an entrepreneur can make starting a small
business the best decision you'll ever make. (Make your dream a reality.
Find out what you can do to reach this financial goal, see 9 Tips For Growing A Successful Business, and How To Make A Million In Your Small Business.)
Record Keeping
Creating and maintaining thorough business records is essential. These
records will help you analyze your business's profitability, stay out of
trouble with tax authorities, maintain positive relationships with
clients and vendors, protect your business from lawsuits and win
lawsuits if you are harmed. For the most part, you can choose any record
keeping system that works for you. However, laws and best practices
require/suggest specific methods of record keeping and lengths of time
to keep different types of records. Which specific regulations and
practices apply to you will depend on your line of business. Certain
records are key to all businesses, however, and we'll discuss a few of
the most important ones here.
Client FilesYou should have paper files and/or electronic files for every client and every project. It's important to keep a record of the work you've done and the business agreements you've made in case you or the other party has a question about it after the fact. Also, sometimes you can use your past assignments and agreements to inform your future ones, saving you time. Client files are also a good place to store notes about a client's preferences or anything else unique to that client that you want to remember. Set aside some time once a day, once a week or once a month to keep your files organized. The same goes for backing up your electronic files. (For more tips, see Keeping Clients Through Good And Bad.)
Contracts
If your business provides a service, you should sign a contract with your client every time you begin doing business with a new person or company. If you provide a product, you may have contracts with suppliers, distributors and the like. And if you have employees, you'll definitely want to draw up employment contracts.
If you're working with an established business, it will often have an existing contract for you to sign. Of course, it may be beneficial if you're the one who writes the contract, as it may give you bargaining power over the terms of the business relationship that way.
As for smaller businesses and individuals, you'll usually need to bring your own contract to the table. Before you open for business, you should create a standard contract that lays out the basic areas you want to cover in every business agreement, such as time frame, pay, and what the job entails. Your contract may also cover issues such as confidentiality, records, liability and ownership of work product. You will want to tailor the contract to each business agreement you create, but that process will be faster if you have a starting point. Working from a form contract can also ensure that you don't leave anything important out.
Contracts serve the obvious purpose of making it easier for you to file a lawsuit if you don't get paid or if your client commits any other harmful breach of contract. But contracts also serve a few less obvious functions. They spell out the details of the work to be performed, providing both you and your client with an opportunity to make changes or clarifications before the work begins, when it is cheaper and easier to do so. Contracts also help weed out people who have no intention of paying you and show your clients that even though your business may be small and new, you are a professional and you take your work seriously.
Both you and your client should keep a copy of the signed contract for your records.
Accounting and Tax Records
If your business has complicated financial records or if you want to be able to prepare financial statements with the click of a button, business accounting software like QuickBooks can be a big help. Be warned, though, that to use business accounting software accurately and effectively requires some accounting knowledge. If you don't know what debits, credits and journal entries are, this software may just cause you headaches. You can always keep records by hand or by spreadsheet. In many cases, spreadsheet software can serve all of your accounting needs - at least while your business is small. You can even get free spreadsheet software by downloading Open Office, an open-source software suite similar to Microsoft Office. (For more, see Business Startup Costs: It's In The Details.)
The types of records you need to keep for accounting and tax purposes include the following:
While this is not an exhaustive list and the types of records you will need to keep depend on your line of work, other records you should hold onto generally include the following:
Client FilesYou should have paper files and/or electronic files for every client and every project. It's important to keep a record of the work you've done and the business agreements you've made in case you or the other party has a question about it after the fact. Also, sometimes you can use your past assignments and agreements to inform your future ones, saving you time. Client files are also a good place to store notes about a client's preferences or anything else unique to that client that you want to remember. Set aside some time once a day, once a week or once a month to keep your files organized. The same goes for backing up your electronic files. (For more tips, see Keeping Clients Through Good And Bad.)
Contracts
If your business provides a service, you should sign a contract with your client every time you begin doing business with a new person or company. If you provide a product, you may have contracts with suppliers, distributors and the like. And if you have employees, you'll definitely want to draw up employment contracts.
If you're working with an established business, it will often have an existing contract for you to sign. Of course, it may be beneficial if you're the one who writes the contract, as it may give you bargaining power over the terms of the business relationship that way.
As for smaller businesses and individuals, you'll usually need to bring your own contract to the table. Before you open for business, you should create a standard contract that lays out the basic areas you want to cover in every business agreement, such as time frame, pay, and what the job entails. Your contract may also cover issues such as confidentiality, records, liability and ownership of work product. You will want to tailor the contract to each business agreement you create, but that process will be faster if you have a starting point. Working from a form contract can also ensure that you don't leave anything important out.
Contracts serve the obvious purpose of making it easier for you to file a lawsuit if you don't get paid or if your client commits any other harmful breach of contract. But contracts also serve a few less obvious functions. They spell out the details of the work to be performed, providing both you and your client with an opportunity to make changes or clarifications before the work begins, when it is cheaper and easier to do so. Contracts also help weed out people who have no intention of paying you and show your clients that even though your business may be small and new, you are a professional and you take your work seriously.
Both you and your client should keep a copy of the signed contract for your records.
Accounting and Tax Records
If your business has complicated financial records or if you want to be able to prepare financial statements with the click of a button, business accounting software like QuickBooks can be a big help. Be warned, though, that to use business accounting software accurately and effectively requires some accounting knowledge. If you don't know what debits, credits and journal entries are, this software may just cause you headaches. You can always keep records by hand or by spreadsheet. In many cases, spreadsheet software can serve all of your accounting needs - at least while your business is small. You can even get free spreadsheet software by downloading Open Office, an open-source software suite similar to Microsoft Office. (For more, see Business Startup Costs: It's In The Details.)
The types of records you need to keep for accounting and tax purposes include the following:
- Business expenses
- Credit card statements
- Bank statements
- Annual tax returns
- Quarterly tax filings
- Payroll
- Inventory
- Sales
- Income
- Petty cash
- Vehicle use log
- Travel log
- Cash register tapes
- Credit card sales receipts
- Invoices
- Canceled checks
- Check stubs
While this is not an exhaustive list and the types of records you will need to keep depend on your line of work, other records you should hold onto generally include the following:
- Purchase orders
- Employment applications
- Emails and other business communications
- Inventory logs
- Personnel records
- Accident reports
- Articles of incorporation
- Permits
- Licenses
- Trademark registrations and patents
Hiring Employees & Taxes
Hiring Employees
For some businesses, employees are a necessity right off the bat - it's impossible to run a popular restaurant or even a small coffee shop single-handedly. For other businesses, employees are more of a luxury - as much as you love the idea of a secretary answering your phone and picking up lunch for you, it may not be in your best interest to hire one right off the bat. Still other lines of business, like freelance writing, are well-suited to being one-person operations. (Freelance work is a way to escape the daily grind - but don't ignore the added responsibility that comes with freedom. For more insight, read Freelance Careers: Look Before You Leap.)
Here are the main issues you should consider if you're thinking about hiring employees.
Do You Want Help?
This might sound like a no-brainer, but employees aren't for everyone. If you like to work alone, there's no reason you shouldn't - it's your business, after all. You can finally escape gossiping co-workers and office politics. And if you're the type who thinks that a job won't get done right unless you do it yourself, that's another reason not to hire employees - at least not in your business's fragile startup stage.
While hiring someone can bring benefits to your business by increasing your efficiency and freeing you up to do the tasks you're best suited for, it also introduces more complexity and risk to your business. If you hire someone you know, you have to think about how a business relationship would affect your personal relationship and vice versa. And when someone else works for you, suddenly the success of your business affects not just you and your family, but also a your employee and his or her family. Also, having even one employee dramatically increases the number of government regulations you'll have to comply with, which takes away time and money from the core operations of your business. And, of course, you'll have to pay your employee. (Learn more in Identifying And Managing Business Risks.)
Can You Afford Help?
Employees are expensive. They need their own place to work, their own supplies and wages or a salary. Then there are the payroll taxes, unemployment insurance, workers compensation and possibly health insurance and other potential benefits you'll have to provide. In other words, if you hire someone to help you for $10 an hour, their actual cost to you will be a lot higher than $10 an hour. If that employee really costs you $20 an hour, will he or she bring enough value to your business? For many startups, the answer is no. (Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations. See Small Business Tax Obligations: Payroll Taxes.)
However, some businesses can't afford not to hire help. If you want to run a restaurant, you can't expect to stay in business very long if you try to design the dining room, market the restaurant, buy the food, keep the books, do the prep work, cook, wait tables and wash dishes all by yourself.
If you have a strong social network, you may be able to convince friends and family members to donate some time to your new business. Think about what you can offer them in return to create a mutually beneficial relationship.
Differences Between Employees and Independent Contractors
If you're not ready to make a financial or emotional commitment to an employee but you'd like to see how you do with help, consider hiring temporary help, virtual help or an independent contractor/freelancer.
In the case of virtual help, depending on your line of business, this person could be a virtual assistant, writer, researcher, website designer - anything you need that can be done remotely. If you want to, you can conduct all of your interactions with this person online and through a third-party company. You can hire someone to fill a temporary need, or you can hire them on a trial basis to see how you like having assistance.
Using Temp Agencies
If you prefer to work with a real, live person, you can seek out independent contractors and freelancers in your area. Temp agencies are another source of temporary or even permanent help. Just keep in mind that they can be more expensive, as you'll have to pay the temp agency a fee for finding and screening the employee on top of the employee's wages. The nice thing is that the temp agency will be responsible for handling the employee's payroll taxes and benefits. That alone can make the temp agency fee worthwhile.
A major benefit of hiring any independent contractor, freelancer, virtual assistant or temporary worker is that you won't be directly responsible for their payroll taxes, unemployment insurance, workers compensation and so on. Either the agency they work for will provide these things or the worker will be personally responsible for them. You do have to be careful not to violate IRS rules regarding independent contractors. If the IRS determines that you're treating someone as an independent contractor for tax purposes when their function is really that of an employee, you'll be responsible for back taxes and fines.
Speaking of taxes, that's up next.
Taxes
When you become a small business owner, you acquire a responsibility for making tax payments that you didn't have as an employee. Although you probably didn't realize it, your employer was transmitting those taxes withheld from your paycheck to the government. The company was also matching your Medicare and Social Security taxes and filing information returns with the IRS. In this section, we'll explain what tax requirements you'll become responsible for as a small business owner.
Estimated Tax Payments
As a small business owner, you will need to set aside the money from the payments you receive from clients instead of having an employer withhold federal taxes from your paycheck. Unless you are subject to backup withholding (most people aren't, unless they've gotten into trouble with the IRS), your clients will not take any taxes out of their checks to you. You must make estimated tax payments if you expect to owe at least $1,000 in tax for the year after subtracting any tax credits. The amount you need to pay in estimated tax payments for the whole year is equal to 100% of what you owed in the previous tax year or 90% of what you expect to owe in the current tax year.
If your earnings for the year before you opened your business are less than or similar to what you expect to earn your first year in business, paying 100% of your previous year's tax amount for your current year's estimated tax payments is the way to go. This is the simplest method. However, if you think your earnings as an employee were substantially higher than your first year of small business earnings will be, it will probably be a burden for you to pay 100% of your previous year's tax liability and it will result in you making a large, interest-free loan to Uncle Sam that won't be returned until sometime after April 15 of the following year. If this situation applies to you, there's another method to calculate your estimated tax payments.
You'll need to pay at least 90% of how much you'll end up owing for all of the current year. But how do you predict what you'll earn for the year when you've never been in business before? It's difficult, and the IRS doesn't expect you to do it. The Estimated Tax Worksheet on page 5 of IRS form 1040 ES, Estimated Tax for Individuals, provides a formula for calculating how much tax liability you're likely to incur for the year based on your quarterly income. Each quarter, you'll need to run through this worksheet to calculate how much to send in. If you're good at doing your own taxes, you can complete this form yourself. If not, hand the work off to your accountant.
You'll need to submit your estimated federal tax payments along with a corresponding IRS voucher four times a year. You can also sign up for the Electronic Federal Tax Payment System (EFTPS) if you want to make your payments electronically. Memorize these payment due dates or write them down, because they aren't spread evenly through the year: January 15, April 15, June 15, and September 15. One problem with these dates is that if you use the 90% method, you may have a higher tax burden in January, when four months have elapsed since your last quarterly payment. The other problem is that if you owe taxes for the previous year in April, you'll have to make that payment at the same time you make your current year estimated tax payment for April. It's easy to end up sending a huge amount of money to the government in April when you're self-employed, so make sure to calculate what you'll owe as far in advance as possible and keep a large cushion in your business bank account in case the bill is higher than you expected.
If your state has an income tax, you'll need to go through a similar procedure to pay state taxes.
Self-Employment Tax
There isn't really a separate tax on the self-employed. Self-employment tax refers to Medicare and Social Security payments. As an employee, 6.2% of your paycheck is withheld for Social Security and 1.65% is withheld for Medicare. Your employer is required to match those amounts. When you are self-employed, you are the employer, so you are required to match those amounts. This matching portion is what is known as self-employment tax. In total, you will pay 15.3% in Social Security and Medicare taxes on 92.35% of your net earnings (unless your net earnings are less than $400). The employer matching portion is tax deductible, but the deduction only cushions the blow by a couple of percent.
Self-employment tax is not paid quarterly but is submitted as a lump sum with your annual tax return using IRS schedule SE, Self-Employment Tax. The need to pay self-employment tax in April is yet another reason why it's important to keep a large cushion in your small business's bank account. It is easy to be caught off guard by just how much you will have to pay in taxes, especially in your first year.
Business Tax Deductions
One perk of being a small business owner is that you get to deduct business expenses from your taxable income. In general, these deductions soften the blow of having to acquire things that an employer normally provides, like a computer and office supplies and even health insurance and retirement benefits. (You might also want to check out 10 Most Overlooked Tax Deductions.)
Let's say your marginal tax bracket is 25%, meaning that any income you earn above the minimum income limit set by the IRS ($33,950 in 2009 if your filing status is single) is taxed at 25%. If you purchase a computer for business use that costs $1,000, the tax deduction will make its actual cost to you only $750.
It's important not to get carried away with purchasing things for your business just because they're tax deductible. You'll still be paying for the bulk of the expense out of your own pocket. Tax deductions absolutely do not make your business purchases free. But for those things that you really do need for your business, the tax deduction helps.
Some important tax deductions you should be aware of include home office costs, health insurance premiums, meals, entertainment, internet, phone, loan interest, business travel, vehicle use, education costs and self-employed retirement plan contributions.
Payroll Taxes
If you hire even one employee for your small business, or if you structure your business as a C corporation (which makes you an employee), your tax situation becomes much more complicated. You'll have to withhold federal and state income taxes and FICA (Social Security and Medicare) taxes on behalf of all employees. You'll also have to pay the matching portion of Social Security and Medicare for each employee, and you'll have to fill out additional paperwork and possibly make more frequent tax payments using IRS form 941, Employer's Quarterly Federal Tax Return, as well as the equivalent state form. If your tax liability is high enough, you will have to make payments monthly or semiweekly instead of quarterly. The details of this system are beyond the scope of this tutorial; see IRS Publication 15 (Circular E), Employer's Tax Guide, for more details.
If you have employees, you may also be required to pay state unemployment insurance, and your state may require you to pay into a worker's compensation fund.
Hiring an Accountant
Does this tax stuff have you totally confused? Most people are mystified by their own personal tax returns, let alone the more complex returns required of businesses. If you're not confident in your ability to understand the requirements and correctly prepare returns and calculate payments, it's worth the expense and the trouble to hire an accountant. The time this will save you in dealing with tax issues will free you up to focus on your business. An accountant's expertise will also help you avoid tax penalties, so the expense of hiring this professional can end up paying for itself. (For more see Crunch Numbers To Find The Ideal Accountant and 10 Tax Benefits For The Self-Employed.)
If you don't want to be dependent on an accountant or have to pay their bills forever, you can transition to doing your own taxes by taking some tax preparation classes and/or seeking instruction from your accountant.
Even if you hire an accountant, you'll still need to keep meticulous records. In the next section, we'll discuss creating and maintaining business records.
For some businesses, employees are a necessity right off the bat - it's impossible to run a popular restaurant or even a small coffee shop single-handedly. For other businesses, employees are more of a luxury - as much as you love the idea of a secretary answering your phone and picking up lunch for you, it may not be in your best interest to hire one right off the bat. Still other lines of business, like freelance writing, are well-suited to being one-person operations. (Freelance work is a way to escape the daily grind - but don't ignore the added responsibility that comes with freedom. For more insight, read Freelance Careers: Look Before You Leap.)
Here are the main issues you should consider if you're thinking about hiring employees.
Do You Want Help?
This might sound like a no-brainer, but employees aren't for everyone. If you like to work alone, there's no reason you shouldn't - it's your business, after all. You can finally escape gossiping co-workers and office politics. And if you're the type who thinks that a job won't get done right unless you do it yourself, that's another reason not to hire employees - at least not in your business's fragile startup stage.
While hiring someone can bring benefits to your business by increasing your efficiency and freeing you up to do the tasks you're best suited for, it also introduces more complexity and risk to your business. If you hire someone you know, you have to think about how a business relationship would affect your personal relationship and vice versa. And when someone else works for you, suddenly the success of your business affects not just you and your family, but also a your employee and his or her family. Also, having even one employee dramatically increases the number of government regulations you'll have to comply with, which takes away time and money from the core operations of your business. And, of course, you'll have to pay your employee. (Learn more in Identifying And Managing Business Risks.)
Can You Afford Help?
Employees are expensive. They need their own place to work, their own supplies and wages or a salary. Then there are the payroll taxes, unemployment insurance, workers compensation and possibly health insurance and other potential benefits you'll have to provide. In other words, if you hire someone to help you for $10 an hour, their actual cost to you will be a lot higher than $10 an hour. If that employee really costs you $20 an hour, will he or she bring enough value to your business? For many startups, the answer is no. (Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations. See Small Business Tax Obligations: Payroll Taxes.)
However, some businesses can't afford not to hire help. If you want to run a restaurant, you can't expect to stay in business very long if you try to design the dining room, market the restaurant, buy the food, keep the books, do the prep work, cook, wait tables and wash dishes all by yourself.
If you have a strong social network, you may be able to convince friends and family members to donate some time to your new business. Think about what you can offer them in return to create a mutually beneficial relationship.
Differences Between Employees and Independent Contractors
If you're not ready to make a financial or emotional commitment to an employee but you'd like to see how you do with help, consider hiring temporary help, virtual help or an independent contractor/freelancer.
In the case of virtual help, depending on your line of business, this person could be a virtual assistant, writer, researcher, website designer - anything you need that can be done remotely. If you want to, you can conduct all of your interactions with this person online and through a third-party company. You can hire someone to fill a temporary need, or you can hire them on a trial basis to see how you like having assistance.
Using Temp Agencies
If you prefer to work with a real, live person, you can seek out independent contractors and freelancers in your area. Temp agencies are another source of temporary or even permanent help. Just keep in mind that they can be more expensive, as you'll have to pay the temp agency a fee for finding and screening the employee on top of the employee's wages. The nice thing is that the temp agency will be responsible for handling the employee's payroll taxes and benefits. That alone can make the temp agency fee worthwhile.
A major benefit of hiring any independent contractor, freelancer, virtual assistant or temporary worker is that you won't be directly responsible for their payroll taxes, unemployment insurance, workers compensation and so on. Either the agency they work for will provide these things or the worker will be personally responsible for them. You do have to be careful not to violate IRS rules regarding independent contractors. If the IRS determines that you're treating someone as an independent contractor for tax purposes when their function is really that of an employee, you'll be responsible for back taxes and fines.
Speaking of taxes, that's up next.
Taxes
When you become a small business owner, you acquire a responsibility for making tax payments that you didn't have as an employee. Although you probably didn't realize it, your employer was transmitting those taxes withheld from your paycheck to the government. The company was also matching your Medicare and Social Security taxes and filing information returns with the IRS. In this section, we'll explain what tax requirements you'll become responsible for as a small business owner.
Estimated Tax Payments
As a small business owner, you will need to set aside the money from the payments you receive from clients instead of having an employer withhold federal taxes from your paycheck. Unless you are subject to backup withholding (most people aren't, unless they've gotten into trouble with the IRS), your clients will not take any taxes out of their checks to you. You must make estimated tax payments if you expect to owe at least $1,000 in tax for the year after subtracting any tax credits. The amount you need to pay in estimated tax payments for the whole year is equal to 100% of what you owed in the previous tax year or 90% of what you expect to owe in the current tax year.
If your earnings for the year before you opened your business are less than or similar to what you expect to earn your first year in business, paying 100% of your previous year's tax amount for your current year's estimated tax payments is the way to go. This is the simplest method. However, if you think your earnings as an employee were substantially higher than your first year of small business earnings will be, it will probably be a burden for you to pay 100% of your previous year's tax liability and it will result in you making a large, interest-free loan to Uncle Sam that won't be returned until sometime after April 15 of the following year. If this situation applies to you, there's another method to calculate your estimated tax payments.
You'll need to pay at least 90% of how much you'll end up owing for all of the current year. But how do you predict what you'll earn for the year when you've never been in business before? It's difficult, and the IRS doesn't expect you to do it. The Estimated Tax Worksheet on page 5 of IRS form 1040 ES, Estimated Tax for Individuals, provides a formula for calculating how much tax liability you're likely to incur for the year based on your quarterly income. Each quarter, you'll need to run through this worksheet to calculate how much to send in. If you're good at doing your own taxes, you can complete this form yourself. If not, hand the work off to your accountant.
You'll need to submit your estimated federal tax payments along with a corresponding IRS voucher four times a year. You can also sign up for the Electronic Federal Tax Payment System (EFTPS) if you want to make your payments electronically. Memorize these payment due dates or write them down, because they aren't spread evenly through the year: January 15, April 15, June 15, and September 15. One problem with these dates is that if you use the 90% method, you may have a higher tax burden in January, when four months have elapsed since your last quarterly payment. The other problem is that if you owe taxes for the previous year in April, you'll have to make that payment at the same time you make your current year estimated tax payment for April. It's easy to end up sending a huge amount of money to the government in April when you're self-employed, so make sure to calculate what you'll owe as far in advance as possible and keep a large cushion in your business bank account in case the bill is higher than you expected.
If your state has an income tax, you'll need to go through a similar procedure to pay state taxes.
Self-Employment Tax
There isn't really a separate tax on the self-employed. Self-employment tax refers to Medicare and Social Security payments. As an employee, 6.2% of your paycheck is withheld for Social Security and 1.65% is withheld for Medicare. Your employer is required to match those amounts. When you are self-employed, you are the employer, so you are required to match those amounts. This matching portion is what is known as self-employment tax. In total, you will pay 15.3% in Social Security and Medicare taxes on 92.35% of your net earnings (unless your net earnings are less than $400). The employer matching portion is tax deductible, but the deduction only cushions the blow by a couple of percent.
Self-employment tax is not paid quarterly but is submitted as a lump sum with your annual tax return using IRS schedule SE, Self-Employment Tax. The need to pay self-employment tax in April is yet another reason why it's important to keep a large cushion in your small business's bank account. It is easy to be caught off guard by just how much you will have to pay in taxes, especially in your first year.
Business Tax Deductions
One perk of being a small business owner is that you get to deduct business expenses from your taxable income. In general, these deductions soften the blow of having to acquire things that an employer normally provides, like a computer and office supplies and even health insurance and retirement benefits. (You might also want to check out 10 Most Overlooked Tax Deductions.)
Let's say your marginal tax bracket is 25%, meaning that any income you earn above the minimum income limit set by the IRS ($33,950 in 2009 if your filing status is single) is taxed at 25%. If you purchase a computer for business use that costs $1,000, the tax deduction will make its actual cost to you only $750.
It's important not to get carried away with purchasing things for your business just because they're tax deductible. You'll still be paying for the bulk of the expense out of your own pocket. Tax deductions absolutely do not make your business purchases free. But for those things that you really do need for your business, the tax deduction helps.
Some important tax deductions you should be aware of include home office costs, health insurance premiums, meals, entertainment, internet, phone, loan interest, business travel, vehicle use, education costs and self-employed retirement plan contributions.
Payroll Taxes
If you hire even one employee for your small business, or if you structure your business as a C corporation (which makes you an employee), your tax situation becomes much more complicated. You'll have to withhold federal and state income taxes and FICA (Social Security and Medicare) taxes on behalf of all employees. You'll also have to pay the matching portion of Social Security and Medicare for each employee, and you'll have to fill out additional paperwork and possibly make more frequent tax payments using IRS form 941, Employer's Quarterly Federal Tax Return, as well as the equivalent state form. If your tax liability is high enough, you will have to make payments monthly or semiweekly instead of quarterly. The details of this system are beyond the scope of this tutorial; see IRS Publication 15 (Circular E), Employer's Tax Guide, for more details.
If you have employees, you may also be required to pay state unemployment insurance, and your state may require you to pay into a worker's compensation fund.
Hiring an Accountant
Does this tax stuff have you totally confused? Most people are mystified by their own personal tax returns, let alone the more complex returns required of businesses. If you're not confident in your ability to understand the requirements and correctly prepare returns and calculate payments, it's worth the expense and the trouble to hire an accountant. The time this will save you in dealing with tax issues will free you up to focus on your business. An accountant's expertise will also help you avoid tax penalties, so the expense of hiring this professional can end up paying for itself. (For more see Crunch Numbers To Find The Ideal Accountant and 10 Tax Benefits For The Self-Employed.)
If you don't want to be dependent on an accountant or have to pay their bills forever, you can transition to doing your own taxes by taking some tax preparation classes and/or seeking instruction from your accountant.
Even if you hire an accountant, you'll still need to keep meticulous records. In the next section, we'll discuss creating and maintaining business records.
Location And Licenses
The type of business you're starting, the laws where you want to open
your business, what you can afford and what suits your lifestyle will
determine what options you have for your business location.
Home Office
For many new small business owners, a home office makes the most sense. Most cities and towns will allow you to run a business out of your home as long as you meet certain criteria. Here are some examples of business situations where your city may not allow you to run your business from your home:
A major benefit of using your home as your business location is that you won't waste any time commuting and you won't incur additional costs to rent an office space. The IRS also offers significant tax deductions for a home office used for your business.
A major drawback of working from home is that you can never truly leave work. Also, many types of businesses aren't suited to a home location. (Learn how having a good work area can contribute to your success in Creating A Home Business Work Space.)
Storefront
A storefront gives you more than just a place to do business. With the right location and signage, it's also a form of advertising. If you're in the cupcake business, for example, you will likely have more customers if you sell cupcakes from a visible storefront rather than simply providing them for catered events. Of course, you'll have to determine whether the costs and extra work of running a store provide enough of a payoff. Running the store might detract from your catering work, or it might enhance it by bringing you more foot traffic and more potential catering customers. But you'll have additional costs from renting the space, paying utilities, securing additional permits and licenses, dealing with the health department and probably hiring at least one employee to help you attend to customers.
A storefront can also make sense for someone selling a service, like an accountant. But you'll have to be prepared to deal with interruptions from walk-in business and, again, be able to afford the extra expense.
Office Building
If you provide a professional service like consulting, renting a space in an office building might make sense. It will allow clients to come to your office instead of you always having to go to them, and working outside the home means a greater separation between your work and home life. You are unlikely to have interruptions (or extra business) from walk-in customers. Although you will have to spend some time commuting, working outside your home also gives you more opportunities to meet people for networking.
Permits, Licenses and Business Registration
There are both federal and local requirements for business permits, licenses and registration. The requirements depend on what your business does and where it is located.
The only types of businesses that require a federal license are ones that fall under the supervision and regulations of a federal agency. Some of the types of business are listed below:
Your state will probably require you to have a business license for tax purposes. Depending on your line of work, you may need a state occupational license. Doctors, attorneys, real estate agents, insurance salesman and hairdressers - among others - commonly need an occupational license. If you want your business to sell liquor, lottery tickets, gasoline or firearms, you may need a special state license.
If your business will operate under a fictitious name, you will probably need a "doing business as" or DBA permit from your city. You may also need a basic business operation license from your city.
Certain businesses, such as manufacturing, require zoning and land use permits. Nightclubs and bars may require fire permits. If you'll be selling taxable merchandise, you'll need a sales tax license/seller's permit. If you'll be preparing or selling food, you'll likely need a health department permit.
And yes, almost all of these permits and licenses cost money. Some are flat fees and some are based on your business income, also known as gross receipts. The websites for your state and local government are a good place to find information on the permits, licenses and registration necessary to open and operate your small business. Calling your city hall is another good place to start.
Employer Identification Number (EIN)
You will need to apply for an employee identification number (EIN), also known as a taxpayer identification number, with the IRS if your business:
Your state may also require you to get a state tax identification number if your state has an income tax.
Now, we'll discuss whether you should hire employees for your new business.
Home Office
For many new small business owners, a home office makes the most sense. Most cities and towns will allow you to run a business out of your home as long as you meet certain criteria. Here are some examples of business situations where your city may not allow you to run your business from your home:
- Clients or customers will be visiting your home
- The business will be located in your garage
- You want to manufacture a product on your premises
- You want to repair vehicles on your premises
- You will have one or more employees
- The business will create a noise disturbance
- The business will occupy a large percentage of your home
A major benefit of using your home as your business location is that you won't waste any time commuting and you won't incur additional costs to rent an office space. The IRS also offers significant tax deductions for a home office used for your business.
A major drawback of working from home is that you can never truly leave work. Also, many types of businesses aren't suited to a home location. (Learn how having a good work area can contribute to your success in Creating A Home Business Work Space.)
Storefront
A storefront gives you more than just a place to do business. With the right location and signage, it's also a form of advertising. If you're in the cupcake business, for example, you will likely have more customers if you sell cupcakes from a visible storefront rather than simply providing them for catered events. Of course, you'll have to determine whether the costs and extra work of running a store provide enough of a payoff. Running the store might detract from your catering work, or it might enhance it by bringing you more foot traffic and more potential catering customers. But you'll have additional costs from renting the space, paying utilities, securing additional permits and licenses, dealing with the health department and probably hiring at least one employee to help you attend to customers.
A storefront can also make sense for someone selling a service, like an accountant. But you'll have to be prepared to deal with interruptions from walk-in business and, again, be able to afford the extra expense.
Office Building
If you provide a professional service like consulting, renting a space in an office building might make sense. It will allow clients to come to your office instead of you always having to go to them, and working outside the home means a greater separation between your work and home life. You are unlikely to have interruptions (or extra business) from walk-in customers. Although you will have to spend some time commuting, working outside your home also gives you more opportunities to meet people for networking.
Permits, Licenses and Business Registration
There are both federal and local requirements for business permits, licenses and registration. The requirements depend on what your business does and where it is located.
The only types of businesses that require a federal license are ones that fall under the supervision and regulations of a federal agency. Some of the types of business are listed below:
- Aviation
- Investment advising
- Drug manufacturing
- Preparation of meat products
- Fish and wildlife
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Ground transportation
- Selling alcohol, tobacco, or firearms
Your state will probably require you to have a business license for tax purposes. Depending on your line of work, you may need a state occupational license. Doctors, attorneys, real estate agents, insurance salesman and hairdressers - among others - commonly need an occupational license. If you want your business to sell liquor, lottery tickets, gasoline or firearms, you may need a special state license.
If your business will operate under a fictitious name, you will probably need a "doing business as" or DBA permit from your city. You may also need a basic business operation license from your city.
Certain businesses, such as manufacturing, require zoning and land use permits. Nightclubs and bars may require fire permits. If you'll be selling taxable merchandise, you'll need a sales tax license/seller's permit. If you'll be preparing or selling food, you'll likely need a health department permit.
And yes, almost all of these permits and licenses cost money. Some are flat fees and some are based on your business income, also known as gross receipts. The websites for your state and local government are a good place to find information on the permits, licenses and registration necessary to open and operate your small business. Calling your city hall is another good place to start.
Employer Identification Number (EIN)
You will need to apply for an employee identification number (EIN), also known as a taxpayer identification number, with the IRS if your business:
- Is a corporation or partnership
- Has employees
- Files employment, excise, alcohol, firearm or tobacco tax returns
- Has a Keogh plan (a type of small business retirement plan)
Your state may also require you to get a state tax identification number if your state has an income tax.
Now, we'll discuss whether you should hire employees for your new business.
Making The Leap
Often, the best way to strike out on your own is to do it gradually.
This reduces the risk that you'll be without an income and allows you to
test the waters and see how much potential your business idea has
before you give up your regular paycheck. If you're currently employed
full time, it may seem impossible to muster up the time or energy to
work on a business plan. Hopefully, the excitement you feel for becoming
independent will motivate you to use your nights and weekends to get
your business up and running.
If you can find the time to do the work and it doesn't create a conflict of interest with your existing employment, it's smart to start acquiring clients and customers and providing your product(s) or service(s) to them while you still have your day job. You'll start creating a revenue stream for your business and get an idea of whether your business has the potential to sustain you if it becomes your only source of income. But before you do anything else, you should create a business plan.
Developing a Business Plan
Every business should have a business plan, but it doesn't necessarily have to adhere to a specific template. The complexity of the business you're starting, the type of business you're starting and your funding needs will determine what kind of business plan you need. (Find out how to put this important document together in 4 Steps To Creating A Stellar Business Plan.)
For a simple business that you will be funding yourself, the purpose of a business plan is not so much to create a formal document as it is to think through the details of how you will make your business a success. You will be much more likely to succeed if you consider every aspect of your business before you jump in. To get started, ask yourself these questions:
Basics
Work/Life Balance
Financial Data
A. Loan applications
B. Capital equipment and supply list
C. Balance sheet
D. Breakeven analysis
E. Pro-forma income projections (profit & loss statements)
F. Three-year summary
G. Detail by month, first year
H. Detail by quarters, second and third years
I. Assumptions upon which projections were based
J. Pro-forma cash flow
Supporting Documents
A. Tax returns of principals for last three years
B. Personal financial statement (all banks have these forms)
C. For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchiser
D. Copy of proposed lease or purchase agreement for building space
E. Copy of licenses and other legal documents
F. Copy of resumes of all principals
G. Copies of letters of intent from suppliers, etc.
There are many excellent sources of business plan information online and at the bookstore. There are also many business plan software programs that provide templates for all kinds of businesses. There is bound to be a template out there for a business similar to the one you plan to start. You can use this template as a guide to create your own business plan instead of starting from scratch. This way, you'll be less likely to omit key information and you'll have a professional format to work with.
Developing a Budget and a Plan for Lean Times
Another key element of planning your business and transitioning from being an employee to a small business owner is budgeting. Just as you would create a budget to manage your personal finances, you must create a budget to manage your business finances. If you haven't been keeping a budget for your personal finances, it's time to start. The success of your business will depend on your ability to manage money, and your personal financial situation will be directly linked to your business's financial situation. (Refer to our Budgeting Basics Tutorial for more information.)
Tracking Inflows and Outflows
Your business budget will show you exactly how much money you have coming in and going out. It will show you where your income is coming from and what you're spending that income on. It will help you make both short and long-term projections about your business's income and expenses. It is key for having a clear picture of where you stand financially and where you're likely to end up, and it can help you see potential problems before they arise as well as help set goals and time lines for those goals.
A budget can also help you plan for changes in your business and help you manage your money well enough that you can afford to give yourself some time off once in a while. Budgeting will help you plan for making tax payments (more about those in section 8). And, while everyone should have a budget, managing your money is extra important if your business has investors or creditors to pay.
You can create your budget with a notebook and pen, spreadsheet software, financial software or an online program. You'll need to keep track of every expense, whether it's $2 for a package of ballpoint pens or $300 for a laser printer, as well as every dollar you take in.
Building a War Chest
Just as you have an emergency fund for your personal finances, you'll need to create an emergency fund for your business. Budgeting will help you do that by letting you see how much you can afford to set aside in savings each month. The bigger your business's emergency fund, the more stable your business will be.
If you're used to earning a steady paycheck and having taxes withheld from your paycheck, the fluctuations in income and expenses you'll experience as a small business owner may be shocking. Eight months of the year, you'll pay no taxes, and four months of the year, you'll make large payments. Your income might be $1,000 one month and $10,000 the next month. It all depends on how many sales or assignments you have and when your customers or clients actually pay you. In the month when you bring in $1,000, you'll need to rely on your savings. In the month when you bring in $10,000, you'll need to set aside a lot of that money to handle the next shortfall.
Your budget will help you see how your income and expenses are averaging out over time and what kind of profit or loss your business is seeing from month to month and overall. (To learn more about weathering unexpected events, check out Keeping A Small Business Afloat.)
You've determined how you will run your business and manage your business's finances. But there are still more steps to take before you're up and running. In the next section, we'll explain how to find a business location and how to obtain the necessary permits and licenses.
If you can find the time to do the work and it doesn't create a conflict of interest with your existing employment, it's smart to start acquiring clients and customers and providing your product(s) or service(s) to them while you still have your day job. You'll start creating a revenue stream for your business and get an idea of whether your business has the potential to sustain you if it becomes your only source of income. But before you do anything else, you should create a business plan.
Developing a Business Plan
Every business should have a business plan, but it doesn't necessarily have to adhere to a specific template. The complexity of the business you're starting, the type of business you're starting and your funding needs will determine what kind of business plan you need. (Find out how to put this important document together in 4 Steps To Creating A Stellar Business Plan.)
For a simple business that you will be funding yourself, the purpose of a business plan is not so much to create a formal document as it is to think through the details of how you will make your business a success. You will be much more likely to succeed if you consider every aspect of your business before you jump in. To get started, ask yourself these questions:
Basics
- What will my business name be?
- What product(s) or service(s) will I provide?
- What makes me qualified to run this business?
- Do I need any additional education, training or credentials to be successful?
- Is there a demand for my product(s) or service(s)?
- How have I determined that this demand exists?
- Who are my primary and secondary target customers/clients?
- How will I get them to purchase my product or service?
- If I am providing a product, who will my suppliers be?
- What will my business hours be?
- Where will my business be located?
- Will I have any employees?
- What will my business expenses be?
- How much money does my business need to make annually for me to stay in business?
- What price will I need to charge for my product(s) or service(s) to meet my financial goals?
- What assets do I already have for my business? What assets do I need to acquire? How much will they cost?
- What other startup costs will my business incur?
- How long might it take my business to break even? To turn a profit? Can I afford to wait that long?
Work/Life Balance
- How many hours a week will I need to work for my business to be successful?
- How many hours a week can I realistically work given my energy level, focus, family commitments and other obligations?
- How will I balance running a business with my other obligations and activities?
- Who is my competition, and how will I differentiate myself from them to gain market share?
- How will I market my business?
- What alternate product(s) or service(s) could I branch out to if my initial ones aren't successful?
- How will I maintain my business through tough times?
- How much time or money can I afford to devote to my business in lean times before I have to go back to having a regular job?
Financial Data
A. Loan applications
B. Capital equipment and supply list
C. Balance sheet
D. Breakeven analysis
E. Pro-forma income projections (profit & loss statements)
F. Three-year summary
G. Detail by month, first year
H. Detail by quarters, second and third years
I. Assumptions upon which projections were based
J. Pro-forma cash flow
Supporting Documents
A. Tax returns of principals for last three years
B. Personal financial statement (all banks have these forms)
C. For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchiser
D. Copy of proposed lease or purchase agreement for building space
E. Copy of licenses and other legal documents
F. Copy of resumes of all principals
G. Copies of letters of intent from suppliers, etc.
There are many excellent sources of business plan information online and at the bookstore. There are also many business plan software programs that provide templates for all kinds of businesses. There is bound to be a template out there for a business similar to the one you plan to start. You can use this template as a guide to create your own business plan instead of starting from scratch. This way, you'll be less likely to omit key information and you'll have a professional format to work with.
Developing a Budget and a Plan for Lean Times
Another key element of planning your business and transitioning from being an employee to a small business owner is budgeting. Just as you would create a budget to manage your personal finances, you must create a budget to manage your business finances. If you haven't been keeping a budget for your personal finances, it's time to start. The success of your business will depend on your ability to manage money, and your personal financial situation will be directly linked to your business's financial situation. (Refer to our Budgeting Basics Tutorial for more information.)
Tracking Inflows and Outflows
Your business budget will show you exactly how much money you have coming in and going out. It will show you where your income is coming from and what you're spending that income on. It will help you make both short and long-term projections about your business's income and expenses. It is key for having a clear picture of where you stand financially and where you're likely to end up, and it can help you see potential problems before they arise as well as help set goals and time lines for those goals.
A budget can also help you plan for changes in your business and help you manage your money well enough that you can afford to give yourself some time off once in a while. Budgeting will help you plan for making tax payments (more about those in section 8). And, while everyone should have a budget, managing your money is extra important if your business has investors or creditors to pay.
You can create your budget with a notebook and pen, spreadsheet software, financial software or an online program. You'll need to keep track of every expense, whether it's $2 for a package of ballpoint pens or $300 for a laser printer, as well as every dollar you take in.
Building a War Chest
Just as you have an emergency fund for your personal finances, you'll need to create an emergency fund for your business. Budgeting will help you do that by letting you see how much you can afford to set aside in savings each month. The bigger your business's emergency fund, the more stable your business will be.
If you're used to earning a steady paycheck and having taxes withheld from your paycheck, the fluctuations in income and expenses you'll experience as a small business owner may be shocking. Eight months of the year, you'll pay no taxes, and four months of the year, you'll make large payments. Your income might be $1,000 one month and $10,000 the next month. It all depends on how many sales or assignments you have and when your customers or clients actually pay you. In the month when you bring in $1,000, you'll need to rely on your savings. In the month when you bring in $10,000, you'll need to set aside a lot of that money to handle the next shortfall.
Your budget will help you see how your income and expenses are averaging out over time and what kind of profit or loss your business is seeing from month to month and overall. (To learn more about weathering unexpected events, check out Keeping A Small Business Afloat.)
You've determined how you will run your business and manage your business's finances. But there are still more steps to take before you're up and running. In the next section, we'll explain how to find a business location and how to obtain the necessary permits and licenses.
Top 4 Financial Jobs You Can Do From Home
For many people, being able to work at home gives them the best of
both worlds; they have the job security and income of a regular
full-time job, without the time, expense and hassle of going to an
office. The financial industry has seen an increasing number of jobs in
this sector moving to become available for telecommuters. These jobs
range from full-time corporate positions, to opportunities for
entrepreneurs and independent contractors. In this article, we'll
provide a breakdown, in no particular order, of the four highest-paying
positions available in this sector.
Tutorial: Starting a Small Business
Day Trader
A day trader holds positions in stocks for a very short period of time, often from minutes to hours, and makes numerous trades each day. In most cases, all open trades are closed before the end of the day.
While this "job" does not offer a guaranteed salary or other benefits, it does provide those who are successful at it with potentially huge returns on capital. Some traders can post returns of 300% or more in a year, while others will see much less. Being a successful day trader requires more than a lucky guess; day trading requires specific skills and tools, available capital and emotional stamina. In order to achieve success, day traders must have:
Financial Writer
While this position is perhaps one of the least publicized in the industry, talented and experienced writers are constantly in demand. There has been an explosion of financial news, literature and websites over the last several years, as well as an increased demand for professional financial education and training.
This job is perhaps one of the easiest to do from home, as all written material is easily deliverable electronically via email and web servers. There is rarely a shortage of work for a competent writer, especially one who can produce good copy under a tight deadline. Good financial writers and editors can command up to several hundred dollars per article, and there are even some jobs that can pay salaries in the range of $70,000 to $90,000 per year.
To achieve the top salary as a financial writer, you'll usually need a master's degree in management, finance, economics or journalism. Professional experience in the financial industry will set an individual apart from the competition. However, some writers have become successful just by having the ability to write professional-level copy consistently, about financial topics that are well-researched and financially sound. (To find out more profiting from your pen, see Becoming A Financial Writer.)
Independent Financial Planner
Although not common, it is possible for independent financial planners and advisors to base their offices out of their homes, as long as their homes provide a sufficiently professional backdrop for their practices. Obviously, a client would be more interested in seeing a financial planner in a larger house, in a more affluent neighborhood with a dedicated area for the home business, than a poorly maintained apartment in a neglected area of town. In addition, some business licenses will only allow one client to be at your home at one time, so if this creates a legal issue for you, having clients come to your home may not be the best option.
There are also positional issues to consider, such as parking, access for persons with handicaps, restrooms and so forth. Furthermore, a key factor in deciding whether to take this approach will be whether the advisor's family is willing to share the house with a business.
At the same time, advisors who are able to make this arrangement work for them and their clients, can substantially reduce their overhead expenses as well as eliminate their commuting costs. The compensation range for successful advisors who work at home will likely mirror the compensation received by advisors with similar practices, who work anywhere else, without the high overhead expenses. (To keep reading on this subject, check out Is A Career In Financial Planning In Your Future?)
Corporate Financial Careers
This last category of work-at-home jobs encompasses several different areas, including financial analysts, certified public accountants, tax researchers, computer programmers and many others. An increasing number of these jobs are being farmed out to independent contractors. Many computer-based jobs can now be done from anywhere, therefore, employers can be reluctant to justify using expensive office space to house additional employees. In fact, existing employees are often allowed to work at home, at least part time. Many corporate jobs now only require employees to come into the office once or twice a week, for meetings or presentations, and allow them to do their remaining work at home.
Financial Analyst
A financial analyst researches macroeconomic and microeconomic conditions along with company fundamentals to make business, sector and industry recommendations. They also often recommend a course of action, such as to buy or sell a company's stock based upon its overall current and predicted strength. An analyst must be aware of current developments in the field in which he or she specializes as well as in preparing financial models to predict future economic conditions for any number of variables.
Becoming A Financial Analyst
The Bottom Line
As with other sectors of the economy, laptop computers and mobile phones are allowing the financial industry workforce to become increasingly mobile. More and more work is leaving the office to be done at home or out in the field, and this trend is likely to continue far into the future. Employees in the financial industry who are tired of the office routine, now have several highly compensated home-based alternatives from which to choose.
Tutorial: Starting a Small Business
Day Trader
A day trader holds positions in stocks for a very short period of time, often from minutes to hours, and makes numerous trades each day. In most cases, all open trades are closed before the end of the day.
While this "job" does not offer a guaranteed salary or other benefits, it does provide those who are successful at it with potentially huge returns on capital. Some traders can post returns of 300% or more in a year, while others will see much less. Being a successful day trader requires more than a lucky guess; day trading requires specific skills and tools, available capital and emotional stamina. In order to achieve success, day traders must have:
- A long-term trading strategy and access to up-to-the-minute market information, including real-time quotes.
- The ability to correctly interpret the short-term movements of the markets.
- Continuous access to multiple live news sources, such as CNBC.
- Analytical software, which allows day traders to discover trading patterns much faster and reduce trade execution times.
Financial Writer
While this position is perhaps one of the least publicized in the industry, talented and experienced writers are constantly in demand. There has been an explosion of financial news, literature and websites over the last several years, as well as an increased demand for professional financial education and training.
This job is perhaps one of the easiest to do from home, as all written material is easily deliverable electronically via email and web servers. There is rarely a shortage of work for a competent writer, especially one who can produce good copy under a tight deadline. Good financial writers and editors can command up to several hundred dollars per article, and there are even some jobs that can pay salaries in the range of $70,000 to $90,000 per year.
To achieve the top salary as a financial writer, you'll usually need a master's degree in management, finance, economics or journalism. Professional experience in the financial industry will set an individual apart from the competition. However, some writers have become successful just by having the ability to write professional-level copy consistently, about financial topics that are well-researched and financially sound. (To find out more profiting from your pen, see Becoming A Financial Writer.)
Independent Financial Planner
Although not common, it is possible for independent financial planners and advisors to base their offices out of their homes, as long as their homes provide a sufficiently professional backdrop for their practices. Obviously, a client would be more interested in seeing a financial planner in a larger house, in a more affluent neighborhood with a dedicated area for the home business, than a poorly maintained apartment in a neglected area of town. In addition, some business licenses will only allow one client to be at your home at one time, so if this creates a legal issue for you, having clients come to your home may not be the best option.
There are also positional issues to consider, such as parking, access for persons with handicaps, restrooms and so forth. Furthermore, a key factor in deciding whether to take this approach will be whether the advisor's family is willing to share the house with a business.
At the same time, advisors who are able to make this arrangement work for them and their clients, can substantially reduce their overhead expenses as well as eliminate their commuting costs. The compensation range for successful advisors who work at home will likely mirror the compensation received by advisors with similar practices, who work anywhere else, without the high overhead expenses. (To keep reading on this subject, check out Is A Career In Financial Planning In Your Future?)
Corporate Financial Careers
This last category of work-at-home jobs encompasses several different areas, including financial analysts, certified public accountants, tax researchers, computer programmers and many others. An increasing number of these jobs are being farmed out to independent contractors. Many computer-based jobs can now be done from anywhere, therefore, employers can be reluctant to justify using expensive office space to house additional employees. In fact, existing employees are often allowed to work at home, at least part time. Many corporate jobs now only require employees to come into the office once or twice a week, for meetings or presentations, and allow them to do their remaining work at home.
Financial Analyst
A financial analyst researches macroeconomic and microeconomic conditions along with company fundamentals to make business, sector and industry recommendations. They also often recommend a course of action, such as to buy or sell a company's stock based upon its overall current and predicted strength. An analyst must be aware of current developments in the field in which he or she specializes as well as in preparing financial models to predict future economic conditions for any number of variables.
Becoming A Financial Analyst
The Bottom Line
As with other sectors of the economy, laptop computers and mobile phones are allowing the financial industry workforce to become increasingly mobile. More and more work is leaving the office to be done at home or out in the field, and this trend is likely to continue far into the future. Employees in the financial industry who are tired of the office routine, now have several highly compensated home-based alternatives from which to choose.
Top 10 Green Industries
One of the most important natural resources we have is
water; it is crucial to our survival. However, there has been a lot of
fear that we are running out of clean water sources as the global
population continues to grow. For investors, this has created a clear
opportunity to invest in companies that collect, clean and distribute
water. The largest water utility company in the U.S. is Aqua America
(NYSE:WTR),
which supplies water to nearly three million people. Another company in
the industry, on the purification side, is ITT Industries (NYSE:ITT), which produces water purification systems that help to make water drinkable.
To see the power of water, one needs look no further than China's massive Three Gorges Dam project. While this $25 billion structure on the Yangtze River will be the largest hydroelectric power station in the world, it's sure not the only one. Hydropower involves a lot of technology, a lot of infrastructure and a lot of power-hungry customers. Every one of those areas holds potential opportunities for investors. On the power side, two publically traded producers include PG&E Corp. (NYSE:PCG), which has one of the world's largest hydro operations and Idacorp (NYSE:IDA), which has 17 hydro projects. (For related reading, see Water: The Ultimate Commodity.)
Windmill farms are sprouting up around the world. Australia, Europe and the United States are all investing in wind as a leading source of renewable energy. The business of wind not only includes the generation and sale of power, but also the design and construction of wind turbines. Few countries rely on wind for more than a tiny fraction of their power generation needs, but many countries are interested in the possibility.
If this is of interest to you, look for wind farm companies that sell wind-generated energy or companies that produce the windmill technology. There are few pure play stocks that deal in wind in the U.S., which will likely change over time, but companies like General Electric (NYSE:GE) have a presence in this market.
To see the power of water, one needs look no further than China's massive Three Gorges Dam project. While this $25 billion structure on the Yangtze River will be the largest hydroelectric power station in the world, it's sure not the only one. Hydropower involves a lot of technology, a lot of infrastructure and a lot of power-hungry customers. Every one of those areas holds potential opportunities for investors. On the power side, two publically traded producers include PG&E Corp. (NYSE:PCG), which has one of the world's largest hydro operations and Idacorp (NYSE:IDA), which has 17 hydro projects. (For related reading, see Water: The Ultimate Commodity.)
Windmill farms are sprouting up around the world. Australia, Europe and the United States are all investing in wind as a leading source of renewable energy. The business of wind not only includes the generation and sale of power, but also the design and construction of wind turbines. Few countries rely on wind for more than a tiny fraction of their power generation needs, but many countries are interested in the possibility.
If this is of interest to you, look for wind farm companies that sell wind-generated energy or companies that produce the windmill technology. There are few pure play stocks that deal in wind in the U.S., which will likely change over time, but companies like General Electric (NYSE:GE) have a presence in this market.
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