IPAfan
Familiar Member
Joined: Jan 1, 2011 16:17:11 GMT -5
Posts: 890
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Post by IPAfan on Jun 1, 2011 14:46:34 GMT -5
t4c,
I absolutely do plan on adding associates and possibly shareholders down the road. I'm building the business from scratch and started it with about $1,000. I have to pour a lot of cash into the business before I'm ready to hire an associate, but it's definitely on the horizon. In fact, it's recently occurred to me that maybe I could skip the middle step of hiring a secretary/assistant and actually just hire an associate attorney right out of law school.
Here's the bottom line. I'm risk averse. My business doesn't require a lot of fixed capital (even if I grow it with associates), but it does require quite a bit of operating, administrative, and selling expenses. This "overhead" should be covered by cashflow, but if I grow my overhead much faster than my gross sales, I risk cutting into profitability or even having substantial business losses in a month.
I absolutely plan to work on growing the top line at my business and to hire secretaries, paralegals, associates, and possibly part owners. I'm conservative in that I don't want to overstretch (and some of my competitors are very leveraged).
1) Revenue - I want to upgrade within my current average revenue. Investments in my business will likely increase my avg. revenue going forward, but I want to have cashflow from my current business to cover investments.
2) Liquidity - Ideally I want a current ratio of at least 1 (so current assets > current liabilities) and enough in actual cash/short term investments to cover 6 months of overhead. I'm WAY short, and I'm balancing growth with improving my business financial metrics.
Right now Liquidity is the big problem. In the current ratio I'd include (Cash+short term investments+short term receivables)/(Short term debt + Current Liabilities) - So if I hire an employee my short term liabilities increase by salary X 12. This means that I need more cash, liquid investments, and short term receivables. If you include my $4,000 for personal expenses then right now my liabilities are about $6,500/month right now, which means my current liabilities are ~ $78,000 on the balance sheet. My current ratio is less than 1 at this point.
I also want enough hard cash/short term investments to cover 6 months of overhead. Again, that would require $39,000 in cash/short term investments at my current level of overhead.
Also, these numbers basically include paying myself a salary of $4,000 a month which is probably low. I think that's understated by at least $2,000/month or $24,000 a year. So you see, from my way of looking at things, how underfunded the business is even if it requires little in the way of balance sheet assets.
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IPAfan
Familiar Member
Joined: Jan 1, 2011 16:17:11 GMT -5
Posts: 890
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Post by IPAfan on Jun 1, 2011 14:54:49 GMT -5
So honestly I'm put in a situation where I can grow my business, but if I want to be conservative I need to improve my business balance sheet. I see three ways to do this, and I'd love input on other opportunities.
1) Devote all extra income to cash for 1-2 years until I have enough cash to comfortably grow my business organically with sound financial ratios. 2) Pull money out of ROTH IRAs (we have $42,000 in ROTH accounts) - This is my least favorite choice, and strongly doubt I'll do this. 3) Borrow long term money. This is probably the ideal scenario. The key here is that the debt has to be long term unsecured. This is tough, and the only way it really seems possible would be to borrow from family. Again, if I can borrow money that's due in 5 years I'd even pay 10% interest on the funds. $30,000 due in 5 years at 10% would be enough to bring me up to the appropriate financial ratios for my current level of business (and increase my liabilities by the interest cost).
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