September 19, 2017

Smart Financial Strategies For Women Entrepreneurs

To celebrate American Business Women's Day, we offer our winning financial strategies for women entrepreneurs.
Nina Mitchell, Principal, Senior Wealth Advisor & Co-President, Colony Sports & Entertainment

Every year on September 22, the US celebrates American Business Women’s Day to honor the contributions and accomplishments of millions of women in the workforce and women business owners.  The American Business Women’s Association is responsible for establishing this day and has been championing the efforts of women in business since it was founded almost 70 years ago.

Women who own businesses have come a long way since then. According to an American Express 2016 report on the state of women-owned businesses, there are 11.3 million women-owned businesses in the US employing nearly 9 million people and generating over $1.6 trillion in revenue. From 2007-2016, the total number of women-owned firms increased by 45% - a rate 5 times faster than the national average during a period that included a severe recession.

We salute women who have stepped into the role of entrepreneur and business owner, and we also recognize the personal and financial struggle required to make their vision and companies succeed. There’s a delicate balance between having enough passion and enough capital to grow an idea into a thriving enterprise. You won’t succeed unless you have both.

Everyone’s journey is unique and in most cases, your path to success will take several turns along the way.  I talk from personal experience as I too started my own wealth management business about 11 years ago after having worked as an employee for 30 years. The firm my partners and I own and operate today is significantly different than when I began. 

As women business owners, we face additional challenges that we may not realize. While women-owned firms make up one-third of all U.S. companies, the majority of them are small businesses operating in service industries. Growing revenue and accessing capital to start a business and keep it operating and thriving are ongoing concerns.

A recent eye-opening study by the Kogod School of Business Tax Policy Center shows our current tax policy puts small service firms at a disadvantage because most are not incorporated or do not have capital-intensive investments—the types of tax incentives targeted to help small businesses grow. Since many service firms are owned and operated by women as sole proprietors, they are excluded from these specific small business tax-saving benefits.

Even with these challenges, there are many smart financial moves that women entrepreneurs can make along the way, especially when it comes to maximizing potential tax savings or using capital efficiently. I thought I would share some of my personal experiences and strategies to help empower women entrepreneurs in much the same way that Her Wealth® empowers women with financial confidence and resources to take control of their money and wealth.   

Set yourself up for success

Starting your own business comes with some serious personal and financial risks so before becoming your own boss, review your family’s finances very carefully.  Make sure you have separate savings built up to cover your personal living expenses for at least the next 12 months to give yourself a financial cushion. Take the time to ensure you have the full support of your spouse or partner and close family with a clear agreement on the financial resources needed for both your personal and business cash flows, as well as what sacrifices may need to be made financially. Being realistic about your financial tradeoffs and time commitment as you launch your new business is critical for you and your family’s success.

When I started my wealth management business with my first partner, we did a lot of advance planning, created a detailed business start-up checklist, enlisted the services of specialists and divided the many tasks on our never-ending checklist between each other. Be prepared for what likely will be many long and stressful hours in the early stages. Stay organized and set up your infrastructure properly from the get-go so you can focus on building your business venture with fewer distractions.

Win the tax game

As I mentioned earlier, the tax code may be stacked against many women business owners simply because they are not incorporated or tend to operate in service industries. Even so, you should take full advantage of any tax savings that you can. To do this, you’ll need to have a solid accounting system in place and someone who understands the importance of accounting for your daily business activities.  Most CPA firms offer small business accounting and bookkeeping services.  You should always consult your tax advisor regarding specific tax strategies, but here are some tax techniques to consider:

  • Start-up costs:  You can deduct up to $5,000 of qualified start-up costs like market research, human resources, legal fees and office supplies in the year you begin operations. Amounts over this limit may be amortized as costs over a longer period of time.
  • Section 179 Expenses:  You can deduct up to $510,000 of new or used qualified business property purchased or financed in 2017 plus a bonus depreciation of 50% for new equipment only. Common examples are business equipment, computers, computer software and office furniture. The Section 179 deduction cannot exceed the net income of your business and is completely phased out for businesses that spend more than $2.5 million on qualified business property (for 2017). Section 179 expensing basically allows small businesses to deduct the full cost of qualified business equipment upfront instead of depreciating it over longer time periods.     
  • Travel and Entertainment:  Business-related travel that requires you to be away longer than an ordinary work day is deductible.  Meals and entertainment costs are limited to a 50% deduction
  • Auto use and mileage:  Here’s an area where good record keeping is a must as you can deduct 53.5 cents per mile (for 2017) when your car is used for business purposes. If your car is used for both business and pleasure, only the business portion is tax deductible.
  • Healthcare: Deductions are dependent on the size of your business and the extent to which you provide insurance to employees. As a small employer with fewer than 25 full time employees, you may be eligible for a health care tax credit if you purchase coverage through the small business health options program known as the SHOP marketplace.  If you’re self-employed and your business has a net profit, you may deduct health insurance premiums for you, your spouse and dependents on Form 1040 line 29 instead of Schedule A.   
  • Retirement Plan Contributions:  One great advantage is that business owners can supercharge their retirement savings through plans such as a SEP IRA or Solo 401k.  Depending on the circumstance, these plans available through small businesses, have higher contribution limits than a traditional or Roth IRA contribution. For example, if you are 50 or over, your maximum contribution for a Solo 401k is the lesser of your net earnings or $60,000 (for 2017).  Make sure to consult with your tax advisor about deadlines for setting up your specific retirement plan and funding contributions.  

Leverage the data

Many business owners struggle to separate their business from their personal finances. Having a good accounting system with proper internal controls and monthly financial reports can make this much easier to accomplish.  This is also critical for tax compliance, managing your business cash flow and securing future capital.

From my perspective as financial advisor, another benefit that comes from having a good handle on your business expenses and profitability is to ensure that you don't sacrifice or risk too much of your net worth on your business. That can be difficult in the early days when profits tend to be zero or negative. 

This is when a good advisor or business consultant can help give you an independent assessment of the success of your business, and how best to leverage your personal assets without overdoing it. Successful entrepreneurs frequently need more capital along the way to fuel growth, so it’s common for our clients to ask for advice on how to deal with temporary cash crunches in their business.

Creative fundraising

Women-owned firms face an uphill battle when it comes to raising capital.  Research indicates this is why there’s a predominance of women owning businesses in service and retail industries where start-up capital is less important. Since adequate capital is a leading indicator of long-term success, this is one of the most important areas of managing your business.

One way savvy businesswomen sidestep this battle for capital is by leveraging personal assets.  If you take this route, you aren’t alone. For both start-up and expansion financing, women are more likely than men to use personal and family savings.  In today’s low interest rate environment, using a margin line on taxable investment accounts, or leveraging home equity through a home equity line of credit (HELOC) are common strategies.  These methods of harvesting the value in your personal wealth require analysis and a clear understanding of the pros and cons. You should consider how each strategy could potentially affect your overall level of risk and the long-term effects on your net worth. 

If you’re considering the use of margin, you’ll need to know the current valuations in the equity and bond markets, or the value of your home when considering a HELOC, and the prevailing interest rates.  Both of these strategies should be employed only after understanding what additional monthly cash flow would be needed to pay ongoing margin or HELOC interest charges. If you are unfamiliar with the pros and cons of using margin, I recommend that you read How To Make A Margin Account Work For You.

Another way to leverage personal assets to raise business capital is to use those assets as collateral for a Small Business Association (SBA) loan.  If you’re considering that option, be aware that a 2014 report prepared for the National Women’s Business Council found that even though women own 30% of all small companies, their businesses account for only 16% of conventional small business loans and only 17% of SBA loans. If you have an existing business, you may be able to utilize assets such as equipment, buildings, accounts receivable, and inventory as collateral for an SBA loan.

Outsource to save and grow

While having access to and employing capital strategically is critical, having the right advice at the right time is invaluable.

Since 90% of women-owned businesses operate without any employees, women business owners are doing more themselves.  With this challenge of leveraging personal time and talents to run the business singlehandedly, businesswomen can find the assistance they need through outsourcing and part-time help.  These options save money in the near term and allow you to try out professionals before making a longer-term commitment.  Outsourcing also provides much-needed flexibility to change as the business progresses through the milestones of a startup to a more mature business. 

Another strategy for finding resources is to utilize the assistance of business organizations whose mission is to support women-owned businesses. National Association of Women Business Owners (“NAWBO”) and Her Corner are great places to go to learn from other women owners who are in different business stages and have gone through growing pains.

Now in its 42nd year, NAWBO was one of the earliest non-profit organizations designed specifically for women. With chapters across the country, NAWBO supports the economic success of women entrepreneurs and works to impact women-related social and political policies. 

Her Corner works with existing businesses as “An Accelerator for Women Entrepreneurs.” With chapters in Washington, DC and Philadelphia, women find community with other owners and are supported with educational and mentorship opportunities. 

Another suggestion is to form an Advisory Board of other professionals who are willing to mentor you, give honest feedback and provide introductions to expand your network.  With the increasing rate of women entrepreneurs, I have found that women are more than willing to help each other.  At Her Wealth®, we established an advisory board to help us build and grow our mission and their advice and connections have been invaluable.

Owning a business can be very gratifying. It can give women the flexibility they need to balance their work and family life, have an ‘encore career’ after retirement or to fulfill a passion to create something of their own. Regardless of why you start a business, your success depends on knowing and understanding both your personal and business financial resources, assembling the right team to advise you and taking advantage of the support and encouragement you’ll need from other women entrepreneurs.

Tweet

Shawn: Now you hear all kinds of deals about leasing cars, how can you negotiate a better deal if you want to lease?

Nina: Okay, well many people don't realize that they can actually negotiate the sticker price on a leased car in the same way that you would do that if you're buying a car. And since when you lease -- when you're, you know, your lease payments basically cover the depreciation, the difference between the sales price and the residual value. So it's definitely in your best interest to try to reduce that sales price as much as possible because then you'll pay you know, smaller dollars over the life of the lease. Make sure you pay attention to the down payment at the lease signing. And so here's an example, you might see an ad that says you know, lease payment is only 1.99 a month and that sounds like a great deal for thirty six months. The catch is, is that it might require a $3,600 down payment. So, if you amortize the down payment, then actually that 1.99 special, becomes 2.99. So, you really have to kind of look at total costs. 

And then lastly, dealerships use the term, money or lease factor, when they're calculating your financing costs and a lease factor is not the same as an interest rate. So, you have to make sure the dealer converts that lease factor into a comparable interest rate so you know what your financing charges are. 

Shawn: At the end of the day, does one method wind up being more expensive more often than the other, or can we tell that?

Nina: You know what, it really depends on how long, if you're going to hold the car for a long time, you're better off buying. But if you know, and if you're not, if you just really enjoy driving and you want to have a new car, then go ahead and lease. I mean, there's pros and cons to both, to be honest with you, it's not one size fits all.

Shawn: Alright Nina, great. Happy Thanksgiving to you. Alright, Nina Mitchell is with The Colony Group, for more go to wtop.com and search Her Wealth.

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Nina Mitchell, Principal, Senior Wealth Advisor & Co-President, Colony Sports & Entertainment

With over 25 years of finance, tax and investment advisory experience, Nina advises an elite group of professional athletes, executives and high net worth individuals. She is a driving force behind Her Wealth, Colony's initiative to empower women with financial knowledge, resources and confidence.