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Taking the Plunge

Dear Dave
A college buddy of mine and me are thinking about starting our own firm. We have been out of school about 9 years and both of us are licensed. We work for two different firms in the metropolitan area, but have remained close since graduating and frequently get together socially as well as recently, purposely meeting to discuss setting up our own firm. I am more into the sales and management aspects of engineering while my friend is interested in the technical aspects of our work and is a genius when it comes to computers and automated design. Because of our complimentary skill sets, we think we would make a good team. What steps do we need to go through to take the idea of starting our own firm from wishful thinking to reality?

Dear KH

First and foremost is to be sure you are both philosophically aligned with your goals and expectations for your new firm. Too many firms come off the rails because firm owners don’t share a uniform vision of what it is they hope to achieve and eventually end up at odds (not unlike a bad marriage) when it comes to being in business with each other. For example, if you are ambitious and want to grow, but your partner would just as soon stay small and tinker with computers, you may end up mutually frustrated. What mix of client types and projects are you interested in doing? Where do you each stand when it comes to personal income expectations and making profits? How about work ethics? Is one of you a nine to fiver, and the other a workaholic? You need to thoroughly discuss your differences and expectations with the result being a well defined frank understanding of what you expect of the firm and from each other. If you can’t arrive at a common agenda for yourselves and your business, best bet is to walk away now and stay friends.

What is your plan and likelihood for getting work and having a viable practice? What existing relationships and networks do you have available to cultivate for projects? How much work can you realistically sell and when will it be available to be billed?

Next step is a detailed financial budget for the initial twenty four months of operation. Set this up as a spreadsheet with each month into the future its own column. Going down the rows begin with the first row being income you expect to actually collect (not bill) each month and each subsequent row being an item of anticipated monthly cost i.e. payroll, insurance, heat, light, rent, computers, software etc., Do not underestimate what it will cost each month to operate. Do your homework and be super conservative in your planning. When you feel you’ve got a good number, add on ten percent of the your anticipated monthly cost as an additional contingency line item to complete your monthly income and expense forecast. Subtract the monthly cost items from the cash receipts. Do the receipts cover the expenses each month?

Chances are you are going to need to supplement client income receipts with your own money (capital) during the early startup months. Where will this capital come from? What is the source and amount of your back-up funds if your initial income or cost forecast proves to be inaccurate? Lack of access to adequate capital is an all too common reason why businesses fail. Make sure you have access to plenty of resources to work with.

If your financial budget looks doable, next step is to visit an attorney to select then setup the appropriate form of business organization and complete all the necessary documentation. Chances are your attorney will recommend some form of corporation, or a newer form of organization called a Limited Liability Company (LLC). The key is to select the optimum structure to protect your business and personal assets while getting the best outcome when it comes to taxability issues.

From the very beginning engage an accounting firm to do your books and take care of your taxes and other financial reporting requirements. Best bet is to find a small local CPA firm to work with, as the big firms will cost too much and not provide you with the access and turnaround time you’ll need. Have your accountant review your initial business budget and make suggestions for possible modifications. Once your new firm is up and operating, have your accountant generate a monthly income statement. You and your partner need to get in the habit of reviewing and discussing your financial progress on a routine basis and reacting quickly to any potential problems.

Stay focused on the firm at all times. When you go from working for someone else to working for yourselves, you have gone from being engineers in business, to a business offering engineering services. A small change in words, but a huge change in responsibilities and daily priorities; are you ready?

Wahby and Associates