Teach your kids that money doesn’t grow on trees—it’s earned. Likewise, teach them to earn and save up money for things they want. Don’t be their money tree every time they want to buy something.
WORK AND SAVE
Every kid should have expectations for being a responsible family member. Homework, picking up toys, grooming and maybe something like emptying the dishwasher each day. Beyond that, make a list of age-appropriate chores that they can do to earn money. Mowing the lawn pays $10 while taking out the trash pays $1. Let them decide what they’re willing to do to get that new toy.
For older kids, teaching them that saving money isn’t enough. Teach that investing is just as important. Explain the basics of the stock market, bonds, bank accounts, charge cards and short versus long term planning. Make sure they understand the concept of time and money and eventually house down payments and retirement savings. When they start working, they will need to understand the concept of income taxes.
There’s a bright side to today’s unprecedented market conditions: Agile people may discover opportunities to start new business ventures. Start-ups need a comprehensive business plan, including detailed financial forecasts, to drum up capital from investors and lenders. Entrepreneurs may also use forecasts as yardsticks for evaluating and improving performance over time.
However, forecasting can be challenging for a business with no track record, especially during today’s unprecedented conditions. Here’s an objective approach to developing forecasts based on realistic, market-based assumptions.
Revenue is a critical line item in the forecast, because it drives many other accounts, such as direct costs, accounts receivable and inventory. To create a credible estimate of your start-up’s revenue-generating potential, consider the following questions:
What’s the size of the potential market?
How many competitors are vying for market share? What positioning strategies will the start-up use to compete?
How will the start-up price its products and services? Will its prices fall below, match or surpass those of competitors?
How will the start-up distribute products or services?
How many customers can the start-up support with its existing infrastructure? How will the start-up scale its operations to meet forecasted increases in demand?
It’s generally a good idea to develop multiple revenue scenarios — best, worst and most likely case. Then weight each scenario based on how likely it is to happen.
Costs and investments
Next, the costs directly attributable to producing revenue, such as materials, utilities and labor, need to be identified and quantified. These variable costs are typically stated as a percentage of forecasted revenue.
Some expenses — such as rent, insurance and administrative salaries — are fixed. That is, they remain constant over the short run, though they often have limited capacity. For example, you might need to add office space and headcount once a start-up grows beyond a certain level.
Besides expenses that are recorded on the income statement, start-ups may need working capital to ramp up operations. They may also need to invest in fixed assets, such as equipment, furniture and software. These expenditures are typically capitalized (reported) on the balance sheet and gradually depreciated their useful lives.
Finally, it’s time to focus on the missing puzzle piece: financing. You may need an initial round of capital to acquire (or produce) inventory, purchase essential assets and generate buzz about your new offering. Plus, start-ups often need ongoing access to capital — such as a revolving line of credit — to help fund the cash conversion cycle as the business grows.
Don’t let a competitor beat you to the punch!
Time is of the essence if you want to capitalize on emerging opportunities. So that you can focus on starting the business, we can help create an objective, defensible financial forecast for your start-up and benchmark your forecasted results against other successful businesses. This diligence will help impress prospective investors and lenders — and build value over the long run.
Lori is retired and concerned about the fallout from the pandemic affecting her finances. What steps should she take to help protect her investments?
Start by evaluating your income needs and sources. If you rely heavily on investments for income, but your portfolio took a hit, you may have to reduce your spending and withdrawal rate for a while to prevent having too little in your later years.
On the flip side, if you have been taking required minimum distributions (RMDs), but do not need the income, you can skip it this year, because the CARES Act suspended the RMD requirement for 2020. That would leave you with more money invested and save the taxes you’d have to pay on the distribution amount.
Next, meet with your financial professional to review how recent market volatility has impacted your portfolio. Rebalance the asset allocation if necessary, to align with your risk tolerance, and short- and long-term needs and goals.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.