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Answer Desk: Your guide to business

When is a recession not a recession? Why are interest rates so low? Who is Fannie Mae?’s “Answer Desk” is your guide to business and the economy.
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OPEC's surprise move this week -- cutting oil production to try to jack up prices -- has readers wondering what the impact will be. Justin in Chicago is puzzled by the fact that crude oil and gasoline prices don't always seem to move the same way. And Gerry in Pittsburgh is wondering what OPEC's move will mean for utility stocks. As always, if you'd like to write to us, please include your first name and hometown.


I am wondering how it is that OPEC is citing falling oil prices for the reason behind them cutting production for the 4th quarter, yet I’m still paying over $2.00 a gallon at the pumps here?

Justin K. — Chicago, Ill.

MSNBC.COM: OPEC can use whatever excuse they want to cut production and force prices higher. But the fact is, oil prices have fallen since the U.S.-led invasion of Iraq in March.

Higher crude oil prices do contribute to higher gasoline prices. But that’s only part of the story: The cost of crude makes up less than half the price of a gallon of gas at the pump. Twelve cents of every dollar goes to marketing cost and profit, another 14 cents pays for the cost of refining (and profit for the refiner.) And you pay, on average, about 28 cents in taxes for every dollar’s worth of gas you buy. (Illinois charges you 48.4 cents per gallon, one of the highest taxes in the nation.)

Gas price spikes also occur when gasoline supplies run low — no matter what crude oil costs. This is especially true in regions of the country that require specially “reformulated” gasoline — designed to burn cleaner and cut pollution. If there’s a shortage of the additive used to make that blend, gasoline supplies get tight and prices go up. To make matters worse in the Midwest, your reformulated gasoline uses ethanol (made from all that corn grown by Illinois farmers) — but most refineries outside the region uses another additive (called MTBE) in their formulations. So if anything goes wrong — a refinery catches fire or ethanol supplies run short — prices in your area go up.

There are a host of other reasons why gasoline prices go up and down. For more information, check out the Department of Energy’s primer on the subject.


Would OPEC’s cutting back on production cause harm to electric utilities? How will it effect the value of the stocks?

Gerry — Pittsburgh, Pa.

MSNBC.COM: We have to answer your question with another one: What do you mean by utility? In the old days, one company made power, transmitted it and sold it to customers. Deregulation has split the industry into sub-industries, so higher fuel costs are most likely to hurt only those companies that make electricity. If you own these stocks, you need to check carefully to see exactly what business they’re in.

But even if OPEC succeeds in raising oil prices, the impact would likely be indirect. Though most of the electricity in the U.S. is made by burning fossil fuels, oil is pretty far down the list. The biggest source — which last year produced 1.9 billion megawatts — is coal. Next on the list is nuclear (780 million megawatts), natural gas (686 million), hydro (255 million) and then oil (90 million). (Only 85 million megawatts came from renewables like solar, wind, geothermal and biomass.) Here’s the breakdown on the Dept. of Energy’s Web site

OPEC’s move can have an impact on natural gas prices if higher oil prices prompt energy consumers to switch to gas. But natural gas is no bargain these days, due largely to a shortage of new supplies and the pipelines needed to bring them to market. That squeeze will likely increase — most new electric plants built today use natural gas because of the higher cost of making coal burn cleanly.

If you want to follow the impact of rising and falling energy prices on utilities, you can watch what’s called the daily “spark spread.” This favorite statistic of energy analysts is the theoretical profit margin for a power plant: It’s the difference between the cost of the fuel and the value of the electricity generated. To crunch the numbers, check out the spark spread page on the New York Mercantile Exchange’s Web site.



Where can one find the amount of compensation a CEO and other officers of a corporation receive?

Herb S. —Milwaukee, Wisconsin.

The answer is usually — but not always — available in public documents. Before you go looking, you need to ask a few more questions. For starters, is the company public or private?

For a public corporation — one that sells shares to the public on the open market — most of what you’re looking for can be found in the annual proxy statement that the Securities and Exchange Commission requires every public company to file and mail to shareholders. (Don’t bother with the glossy annual report showing happy company executives and workers, complete with management’s excuses for what went wrong.) The annual SEC 10-K report, which includes other financial data, also has some information on executive compensation, but it’s not as complete. For private companies that are about to go public, this information is required in the registration statement for the initial public offering. Quarterly financial statements, which are not audited, do not have to include executive pay information.

Then there’s the question of what exactly you mean by “compensation.” Just salary and cash bonus? What about grants of stock or stock options? Or interest-free loans? Or free use of the company jet?

Much of these items are covered in SEC regulations; some are not. In the case of perks, for example, these need to be reported only if the total cost to the company is more than $50,000 — or 10 percent of the CEO’s base salary and bonus (whichever is less). As for just what these perks are, the rules say that if any one of them is worth more than 25 percent of the total reported, the company has to come clean. Otherwise, you’ll never know unless the financial press starts snooping.

“Deferred compensation” — the item that made Mr. Grasso’s pay package look so huge — is also reported under these rules, along with any sweet deals regarding how that money is invested. (The big reason for deferring pay is to save taxes.)

To find out how much a specific CEO is getting, go to the SEC’s Web site, where you can look up the filings. (If you own the stock, you should have already gotten a proxy statement — usually in March or April — when you’re invited to the shareholders meeting and asked to fill out a ballot for directors. If you didn’t get one, call the company’s investor relations department and ask why not.) The SEC also has a useful, step-by-step guide to finding the disclosures on CEO’s pay packages and figuring out what they mean.


When negotiating for an annual cost-of-living adjustment, what would that percentage be?

Lisa S. — Granger, Wash.

You can ask for whatever you want. Tell them if Dick Grasso is worth $140 million, so are you.

But if you want to stick with what the government data suggests, the cost of living — as measured by the consumer price index — is up 2.2 percent for the latest 12 months That’s as of August, the freshest numbers available from the Bureau of Labor Statistics.

The folks sitting across the table may counter that the inflation rate in your region is lower htan the national average, but in the Seattle area the number is just about the same.

You can counter with BLS data showing that -- regardless of what the price index shows -- wages are rising more quickly. If you're working in private industry, wages on average were up 3.5 percent over the past 12 months (as of the second quarter of this year.) If your a state or local government workers, you'll be able to make a better argument -- wages there have gone up 4.1 percent over the same period. (Your bargaining adversaries will almost certainly counter that wages have risen much more slowly -- 1 percent or less -- in the latest 3 months recorded by the BLS.)

The "official" Cost Of Living Adjustment -- pegged once a year to calculate how much to raise Social Security checks -- is due out next month. Over the past 25 years, that number has soared as high as 14.3 percent (a nice raise, but raging inflation ate up almost all of it) to a low of 1.3 percent in 1998. Last October, the increase was pegged at 1.4 percent.

In the case of wage data, the BLS also serves up the data sliced by region but they aren't as fresh. The latest data in your area is from Sept., 2002.


Could you explain to me what it exactly means when a stock is overvalued and when it is undervalued? Which one of them is more attractive for investment considerations?

Ana R. -- Santa Monica, Calif.

MSNBC.COM: You always want to go with stocks that are undervalued -- and sell when they're overvalued. The problem is trying to figure out which is which.

"Undervalued" is Wall Street jargon for "cheap." If Costco is selling your favorite new TV for $10 less than the same model at Wal-mart, you might say the Costco TV is "undervalued" -- the store has attached a value to it that's less than a comparable TV offered by another seller. On the other hand, if someone on eBay is willing to pay $50 more for the same TV, it's "overvalued" on eBay.

The tougher part is figuring out what the "right" value is for a stock. Most investors historically have used a company's earnings power as a measure of its value. If earnings are strong, and going up, chances are good the stock price will too.

So now you're trying to buy a stock with good earnings as cheaply as possible. That's what "earnings per share" data and "price-earnings" ratios are for. It's simply a way to compare how much you're paying for a dollar of earnings from one company to the next. Or one industry to the next. Or one month to the next. Stock prices may change on a daily basis, but the earnings -- the "E" of the P/E ratio -- are fairly easy to nail down (as long as you believe the company's accountants). The "P" represents earnings per share -- the total profit divided by the number of shares out there on the market.

So if you can buy a stock for 10 times earnings when the company's competitors are selling for 20 times earnings -- your stock may be "undervalued." (It also could be priced lower than its peers because its in serious financial trouble -- that's why these terms are so imprecise.)

When your broker tells you he wants you to buy a stock he thinks is "undervalued" -- ask him to explain why he thinks so. The answer could be very illuminating. (And don't buy unless you fully understand -- and believe -- the pitch.)


What is the difference between "gross profit margin" and "markup"?

Tom C. -- Statesville, N.C.

MSNBC.COM: As the folks at Enron and WorldCom demonstrated, these terms can mean pretty much whatever you want them to mean.

Subtle differences in accounting practices used to be reserved for industries that had legitimate reasons for doing things differently. A bank, and airline and a software company keep their books in slightly different ways because of the nature of how they make their money. But the underlying concepts are the same.

"Gross profit margin," for example, refers to a company's profit as a percentage of its total revenues. But the devil is in the details. What expenses are deducted before you get to "profit"? How do you book revenues? Without a national accounting oversight board -- with teeth -- companies have been free to massage these numbers pretty much as they see fit.

"Markup" is more informal. It's usually used to refer to the difference between, say, a wholesale and retail price. If you manufacture office chairs, sell them to dealers for $180 each and they sell them for $200, that's a $20 markup.


MSNBC.COM: Sometimes it's more fun to ask the questions that answer them. Last week, in our response to Eric in Milwaukee, we asked if there was any way to rig our son's computer so he can only play an hour of PC games a day. Apparently, we're not the only parents with that problem. Here's a suggestion from a reader:

We use a program called WatchDog. You can set up privileges on a one-time basis (for good behavior / a project done well) OR daily time limits. You can grant internet privileges or grant access to only specific Web sites. You can block access to your programs (like Quicken). It's great with managing time between siblings too!

A word of caution for the wise: If your child is logged in and she/he is doing homework (e.g. typing in a Word doc), WatchDog does NOT send a 1 minute warning message, it just logs the child off the computer -- this can result in losing any work created since the last save -- AND if it's an unnamed file, IT IS GONE and there's NO backup created by Word because the work wasn't lost due to a power failure.

Mary Beth M. (Mom) -- Houston, Tex.


I have a good friend who's 34, has a good job and is thinking of investing some money. He looked on the Internet and somehow found some company in Florida that he has been corresponding with that is encouraging him to invest in heating oil. They want a minimum investment of $3000.00 for so many gallons. My friend is considering this investment even though it is a lot of money. I told him it sounds pretty fishy to me. I wouldn't invest that much money in a company based in Florida (we live in Oklahoma) over the Internet. I told him if he really wants to do something like that he should learn more about it and find a financial advisor here who should be able to do the same thing. What do you think?

Al C. -- Oklahoma City

MSNBC.COM: Heating oil in Florida? Tell your friend to call me about investing in air conditioners in Alaska. Besides, sending $3,000 to someone you "met" over the Internet is not investing. It's more like buying meat from some guy on a street corner.

But if, by some chance, this company really is "legitimate," it sounds like they're pitching heating oil futures contracts. While perfectly legal, these contracts allow you to buy and sell large amounts of a commodity -- everything from coffee to pork bellies -- with relatively little money. If you know what you're doing, you can make big money on very small moves in the price of the commodity.

But these markets are very complex, dominated by professionals who trade them full-time, have access to research you don't and who've followed them for years. The companies that try to reel in novices like your friend are almost invariably looking for trading commissions and could care less whether you make any money.

And you're right about looking for a local expert: I can't think of a better place than Oklahoma to find someone who knows about oil.


I am the proud owner of a new Design Patent as of May 27,2003, Pat.# D0475090. My question to you is, in your opinion, what would my next step be? I've been receiving all sorts of information from different companies claiming that, if I paid them a fee, they would help find a manufacturer, and some prospective buyers for my product. Is this a scam versus being legit or what? I have obtained various targets for this product that's already in production as we speak, and I'm not sure what's in store next. I welcome your input.

Bennie M. -- Houston, Tex.

MSNBC.COM: My father, who spent much of his career running manufacturing companies, used to say that a consultant is a guy who asks to borrow your watch, tells you the time and then sends you a bill.

There are plenty of companies that troll for business using public databases like the U.S. Patent Office, and some of them may be reputable. So are some of the attorneys who chase ambulances. Or "mortgage insurance" companies that flooded my mailbox after I refinanced.

The question you're asking, which I would be too, is: If these people are so good, why do they need to troll for unsolicited business using mass mailings? (Sounds a lot like e-mail spam, doesn't it?)

You did all the hard work: You came up with the idea (for a new ornamental design for signs, if I read the Patent Office database correctly); you invested in developing it, filing the paperwork, paying an attorney, etc. Now someone is offering you -- what, exactly?

Sure, you may need to hire someone with marketing skills you don't have to expand your patent's use. You may even want to hire a patent lawyer who specializes in licensing ideas like yours. But the old, reliable method of finding these people is best: Word of mouth, networking, maybe even a want ad in the paper.

And, if I'm reading this right, and your patent is already in production, shouldn't you be collecting royalties from the people already using it?


I just read your column and I'm thrilled. I am a 35-year-old with 12 years experience in accounting. I have a B.S. degree in finance. I have wanted to open a daycare center in Carlisle, Penn. for years. I currently work in NYC and live in New Jersey but want to move back home to Pennsylvania, ever since Sept 11th. I realize I don't do anything to help people, and now I want out of the corporate rat race and want to help children and make a difference. How do I get started? How do I get grants or other means to start? I just don't know where to start.

Lisa A. -- New Jersey

Start by learning all you can about how a day care center is run: Staffing, finances, regulations, etc. You may be able to research some of this online or in your local library, but your best source will be to find someone who runs a daycare and is willing to show you what's involved. Try a local church or non-profit center in your area.

If that doesn't work, borrow a friend's kid and visit as many daycare centers as you can find, asking as many nosy questions as you can think of. (Well-run daycare centers are very accustomed to answering lots of questions from nervous parents.)

Fill in as many answers as you can and then come up with more questions: How much does rent cost? What about insurance? Where do you find good providers? How much are they paid? What are the biggest safety issues and how do you handle emergencies? How much do centers charge? What state regulations must be met?

Then, when you've become an expert on running a daycare center, go find a place that needs one back in Carlisle: a church, local government, corporation, etc. (This step shouldn't be too hard -- this country is has a chronic shortage of good day care.) You'll be in a much better position to get funding if you can generate enthusiasm from an existing entity that needs your service.

If you decide to set up independently and go after your own grant (which presents a new round of research), start with the U.S. Small Business Administration's grants page. You should also try your state's Department of Public Welfare. They have a program called Child Care Resource Developers that apparently helps people like you find grants and set up shop. The Bi-County Day Care Administration covering Carlisle is in Williamsport. Give them a call at 570-327-6949 or 1-800-346-3020.

And don't be shy about broadcasting your plans to hometown friends, relatives, former schoolteachers, etc. You never know who might have a good lead. Or an idea for a great name for your daycare center.


Hello. I'd like to create an at home business for the after-hours from my normal job. A simple computer support service, which I go to the customers home to perform a large variety of tasks. Two questions which I can't find an answer to:

1. Do I need to "declare" myself a business with the state if I'm working from my home, or do I just start doing it?

2. What about business related expenses? Can I claim those for such a business?

Eric M. -- Milwaukee, Wisc.

You don't need to file papers with the state, though if you hire others and need to withhold payroll taxes, you should get a tax ID number for the IRS. Otherwise, your Social Security number is all you need.

The only thing the IRS cares about is that you declare your full earnings and that you deduct only legitimate business expenses. The simplest way to do this is to file a Schedule C with your personal income tax return. Here are the interactions, including guidelines on what you can write off as expenses.)

And, while I've got you, is there any way to rig my son's computer so he can only play an hour of PC games a day?


I work for a small family business with a total of 5 full time employees (4 are family members). My husband, the vice president and his father, the president, have struggled for 13 years over different philosophies about running a good business. They legally split the ownership 60/40 (pres./V.P.). After 13 years, they still battle it out constantly. My husband is effectively acting as president. He manages all the clients, the money and the daily aspects of our business. His father has lost interest in the business, and frequently plays computer games all day or goes to the movies while collecting a full salary. He also has a gambling problem. Discussions about these problems are met with hostility but he refuses to seek counseling with us. I believe the company should split to save the family relationships and our finances. What legalities are involved and how should we approach his parents about this decision? What do we do about current clients? I'd appreciate any advice. Thanks in advance.

Name and hometown withheld by request

The legalities of this one are beyond our expertise. You and your husband need to find a good lawyer who specializes in small business and then sit down and discuss your options. But is there a logical way to "split the business" so that each could continue to function? Who would own the name? Even if this works, your husband and father-in-law would still be competing against each other, which would do little to heal the family rift.

Small businesses usually don't divide cleanly into pieces; the more common solution to a falling out is for one partner to buy other out, so the seller can retire or use that capital to set up shop elsewhere. (Bringing along loyal clients to the new business is fair game.) Since you've already worked out a 60/40 split, it should be fairly simple to assess what the business is worth. The tough question, obvisouly, is who buys out whom. (If the buying partner can't afford it, the seller could finance the purchase with what would amount to a mortgage paid by the buyer.)

As for your in-laws, you should quietly explore all your options -- legal and financial -- and assess your enthusiasm and prospects for making a fresh start. Then decide what's best for your and your husband. Once you've come up with a plan, sit down with your in-laws and explain that you love them and can't stand to see the business dividing the family. If they agree, strongly consider negotiating the separation through your lawyers -- direct discussions over terms would likely be extremely heated. (If they don't agree, you may consider asking your lawyer if it's feasible to raise the issue of your father-in-law's competence. But that opens up a whole new can of worms -- and a painful one at that.)

In the end, you may not be able to repair damaged family ties. Coming to terms with fractured relationships with aging parents is beyond the scope of this column. But sometimes, despite your best efforts, parents just don't come around. As painful as it is, there are times when you just have to move on.


I have a small business with past due accounts and some unpaid accounts. Do you have sample letters I could send, without having to go through a collection agency?

Steve -- Boca Raton, Fla.

There's a variety of software packages out there at office supply stores that offer sample collection notices to cover a wide variety of situations, but you're probably best off keeping it short and sweet. (Here's a free sample from the CCH Business Owner's Toolkit.)

The basic idea is to start out with a polite reminder and gradually tighten the screws. Send them out at 30, 60 and 90 days past due. (You might want to sign the last one "Tony Soprano" and see if that helps.)

At some point, though, you have to ask whether chasing a bad debt is just throwing good money (your time) after bad. If you're truly dealing with a deadbeat, you don't really have to worry about losing a paying customer.

If you do decide to use a collection agency, shop around. Their fees -- usually a big chunk of what they collect -- are very negotiable.

For more advice on collections, check out the Small Business Administration Web site.


I have invented a product that I would like to patent, proto-type and sell (preferably to an existing company with similar product lines). I am a single mom, work full-time and do not have extra money to invest. Unfortunately, I will never forgive myself if I don't try to make this happen. I do not want to pay a third party, as many are scams. There is so much information and I can't seem to find the proper resources. I have searched the Internet for grants with no luck. I know I can go to the SBA for resources and possibly a loan but is that the best solution? Do you have any suggestions for my process?

Mindy H. -- Denver, Colo.

The main question you need to think about first is: How far do you want to take this on your own before turning this over to a larger, better-financed entity? Because it's a long road. You will likely have to spend some money upfront or give up a piece of your invention to a backer who believes in it as much as you do.

At the very least, you'll need to file a patent application -- but there's no guarantee you'll get one. The fee schedule for individuals is smaller than for big companies, but you can still spend thousands of dollars before you cross the finish line. To save money, you can file a provisional patent for $60 -- that gives you a year to develop your idea before you lay out the money for full patent protection.

And while you can file the papers for this yourself, you really should hire a lawyer. Figure anywhere from $2,000 to $15,000 depending on how complicated your invention is.

That's just the start of the road. You'll need financing to develop the prototype into a product that a manufacturer can use to set up production. (This is one of the very few areas where SBA grant money is available -- but the program is very competitive.)

Then you'll need to find that larger, better-financed company and sell them on your idea: count on burning a lot of midnight oil writing letters and filing rejection responses.

But if you do make it that far, hold out for a royalty agreement over a one-time sale of your patent. After all that work, if your invention really is a hit, you'll kick yourself if you sold it for less than it's ultimately worth. And you can't really know that until the product finally gets to market.


I'm looking for free grant money to start a lawn care business. I've been searching different books to try and find a grant that would fund my start up, but have been unsuccessful. Can you help?

James T - Mechanicsville, Md.

We get this one a lot, and wish we had better news. If you -- or other readers -- find any "free" grant money lying around out there to help start up a small business, please let us know. As the Maryland Small Business Development Center explains on its Web site, "unfortunately the availability of general small business grants is a myth passed down from generations. We hate to bust the bubble, but yes, it is true."

Small business assistance, whether from state development programs or the U.S. Small Business Administration, comes in the form of loans or loan guarantees. Ultimately, you have to convince these folks that you'll be able to pay them back -- so they can lend that money to someone else trying to start a business.

Grants typically are offered by government and philanthropic agencies to deliver social services, fund research or subsidize community arts programs, not to help you make a buck. (Very rarely will you find grants for for-profit businesses -- they are usually for fund research and development.)

But there are plenty of other programs to get new businesses up and running. Maryland, for example, has a number of financing programs for small business start-ups. They also have a Small Business Startup Kit that might help point you in the right direction

And if you do find any of that "free" money, please let us know. That Answer Desk has been thinking about this franchise idea ...


I am interested in finding ways to finance the purchase of commercial property and to build a restaurant on that property. I am looking at approximately $3 million for this project. If, for example, I were to have investors that would raise $500,000 for this purpose, would I be able to get the rest through an SBA or other type of loan?

"Chef" Rob

Financing a business that doesn't exist is the ultimate Catch-22 for people trying to get started. You're basically trying to prove to investors and lenders that your business will succeed -- without a business to show them. That's why banks do most of their lending to small businesses that want to expand.

It's also important to consider the difference between the major types of financing. With equity financing you give up a piece of the ownership of your business to investors who give you money. With debt financing, a lender gives you money that you promised to repay, with interest. Lenders are usually much harder to convince, because they don't want to own, say, a piece of a restaurant. They want their money back.

So a lender is going to ask a lot of pesky questions. (The first will likely be "Where'd you come up with that $3 million figure?")

Here are a few others (taken from the U.S. Small Business Administration Web site): Can the business repay the loan? Is your cash flow greater than your debt interest payments? Do you have collateral if the business fails? What is the future of the industry? Who is your competition and what are their strengths and weaknesses?

And then, these bankers will want to know about your business: Does it collect and pay its bills on time? Control its inventory and expenses? Have a profitable operating history? Are sales and profits growing? These will be tougher to answer since you don't have a business yet.

In your case, there's good news and bad news. The good news is that buying commercial property is relatively straightforward: the bank will want to make sure you're not overpaying and have some way of making mortgage payments. If you can't pay, they'll just take the building. The bad news is that restaurants are notoriously risky enterprises. Even experienced restaurant owners self-finance or borrow privately because bankers are understandably skittish -- knowing that the dining public can be very fickle. So getting debt financing may be a tough sell.

The SBA can be very helpful in steering you in the right direction, but it typically doesn't make loans directly: it guarantees loans made by private lenders. They can help you set things up, but in the end you'll be sitting across the desk from a banker. So it might help to cook them a nice dinner before you make your pitch.


We are a small label printing business. From time to time we have customers (businesses) that go bankrupt. As unsecured creditors, we usually receive little or nothing from the settlement. These same customers still want to purchase from us while the bankruptcy is pending. What are we legally liable to do? We currently have one customer in Chapter 7 and another in Chapter 11. How do I get information on the differences?

Kim W. -- Poway, CA

In a rotten economy, about the only people who benefit from bankruptcy filings are the lawyers. And when you delve into the fine print, you can see why.

Still, there are a few basic differences, in the various procedures for filing for bankruptcy. In Chapter 7, a "straight" bankruptcy, you "liquidate" - which means you give up almost all your assets except for some personal property -- the proverbial "clothes on your back." But you get to walk away from most debts and get a "fresh start". (Some secured debts -- like car loans -- remain. And don't bother trying to get credit for 10 years.)

In Chapter 11, the idea is to try to hang onto your business or property by "reorganizing" debts. Some debt may get paid with equity -- a piece of your business. Others lenders may take less than full payment to allow you to keep going, knowing that if they force you to close up shop, they'll get nothing.

So Chapter 7 is more or less the end of the road, while Chapter 11 is supposed to be an intensive pit stop that gets you back in the race.

As for your legal liability regarding customers going through bankruptcy, you have no obligation to throw good money after bad by selling them goods you have little chance of getting paid for. That's why vendors almost always demand cash up front before delivering an order to a company operating in bankruptcy. The only possible exception would be if your supplies are critical to your customer's survival and might help you recoup your back debts once they get back on their feet. But even in that case, assurances aren't worth the filing they're printed on. You should demand a piece of the business in return for supplying them.


My husband, an automotive technician (aka mechanic), left a job he'd had for 10 years to work for someone else, for twice the money, three years ago. The new boss spends a whopping two to three hours a day at his shop, generally spent whining about not making enough money. In the meantime, about half of my husband's previous clients have followed him to the new shop. By himself, as one of three technicians, he completes fifty to sixty percent of the work. Lately his boss has begun "holding back" several hours of pay a week, claiming that he can't pay my husband for work done when the clients have yet to pick up their cars. I think the boss is in financial hot water.

So, my question is, how long should I expect to have to work to get my husband into his own shop? Or, how much money should we set back to be sure we make it through the business-building stage? Since Hubby's client's followed him here, I have no doubt they'll follow him to his own shop. I'm willing to return to work to support us; I have a professional degree and can make $30-40,000 a year. We've re-financed the house, and are carrying another $10,000 in debts. Our income is around $55,000 a year. We have $20,000 in investments and the equity in our home (which I'm against borrowing against). Is a small business loan appropriate? How do you decide how much to borrow? I truly believe our best investment right now, is in establishing a business of our own. Am I right?

Jenny M. -- Stillwater, Oklahoma

We have no idea, but the only way you'll find out is the take the plunge. But first, you need to come up with a very specific plan.: you can't decide whether a dream business makes sense until you kick the tires and look under the hood (sorry). Make your plan conservative, but reasonable. Wherever possible, use real numbers from suppliers or other businesses. Fill in the banks to some key questions:

1) Location: How critical is this to your husband's current employer? How much would it cost to duplicate? Find a commercial real estate broker in your area, tell her you're seriously shopping for a garage and pick her brains. Or it might make the most sense to buy an existing business. If so, you'll need a broker or lawyer who specializes in these transactions to make sure you're getting what you think you're paying for.

2) Capital costs: I've been to mechanics that performed magic with the just the tools they carried in their pickup truck, but a fixed establishment will require a little more equipment. How much would this cost?

3) Cash flow: this one does in many small businesses. How many customers can you reasonably expect to follow your husband? How much cash, on average, would that generate monthly? Is the cash flow seasonal?

4) Costs: What are your monthly expenses? Power, water, heat, insurance, supplies, etc. Add them up. Make a budget, just like you do with your own finances.

5) Staffing: Working solo has its own rewards (no boss, for one) but it also involves its own set of headaches. At a minimum, it seems you'd need at least another employee to answer phones, pump gas, hold the light for that hard-to-tighten nut way up on top of the transmission, etc. How much would that cost?

6) Timeline: How long do you want to give this before it takes off (or you decide to throw in the towel)? Set deadlines for financial performance: if you're falling behind, try to figure out what's wrong and fix it. Having a timeline will also help your personal financial planning: how long can you live off savings before you need the business to become profitable?

Etc., etc., etc -- you get the idea. You can't think of every contingency, but the more you do, the fewer surprises you'll face later on.

Is it the right time? Are you ready? Who knows? More important, does your husband share your entrepreneurial zeal? He may like working as a mechanic but hate running a business. Many of the most talented people in their fields are lousy managers.

For more info, check out the US Small Business Administration web site. It's got a ton of information.

Also, check out the Service Corp of Retired Executives (addresses in your area below). These folks help connect small business owners with retired businessmen and women who, for free, advise others.


Could you please help me? I am an 18-year-old college student with a business idea. I need to know how to prepare a business plan

Amy C. -- Derby, U.K.

Business plans come in as many shapes and sizes as there are businesses; different businesses will require that you research the product or service you have in mind. The main idea is to make as many mistakes as you can in the planning stages, on paper, where it won't cost you -- or your backers -- more than the price of that sheet of paper. The basics could include:

1) Market: What's the target market for your business? Is it really there? It may sound like fun to start an ice cream manufacturing company, but you first need to find out how many people in your area buy ice cream and how much they spend. If you're developing a new product or service, have you tested it on a small scale? How much competition will you face?

2) Costs: What will it cost to operate your business? Imagine you're moving to a foreign country where you expect to be self-sufficient for a year or longer: make a detailed budget. Where will you get your supplies? Your power, water, heat, light? How much will you pay in taxes? Will you need to hire someone else? How much will advertising cost? Don't just guess: if you're thinking of opening a shop, for example, find a broker and go looking for storefronts and find out what they cost.

3) Pricing: How much can you charge for your product or service? What do your competitors charge? Can you, as a small business, hope to beat the price offered by a much bigger competitor? How?

4) Profit: How much will you get to keep after you subtract your costs? As you business grows, will profits increase or will higher costs just eat up profits? What if your established competitors respond by lowering their prices?

5) Capital: It's fine to "self-finance" with credit cards, but you still need to estimate how much you'll need before you get started. No matter how you finance your new business, you need to plan ahead and avoid one of the biggest killers of new enterprises: running out of money before you turn a profit. And if you decide you want to try to borrow from a bank -- or even your friends or relatives -- this will be the most important part of your plan.

6) Timetable: This is a step most people overlook, but it is probably the most important. You need a timetable with specific financial targets that gradually get your business on its feet. How long can you go with little or no income to pay for your own expenses? By setting a roadmap of financial targets -- again based on real world estimates, not hopes and dreams -- you can see if your business is on track and -- if it isn't -- try to figure out what's wrong and fix it.

This list is by no means comprehensive. One place to get some free advice on your business plan is your local banker: try out your plan by asking for a loan and see what kind of questions you get. Then go get the answers, and try again.

For more on starting a business, check out the U.S. Small Business Administrations Web site. (Some of this information is specific to the U.S., but most of the problems faced by new businesses are the same the world over.)


I am planning on retiring to a different state and selling my current home. My niece is very interested in purchasing it, but she has two problems. She is self-employed, working out of her home, and earning a decent income. Her husband also earns a decent income but had a bad credit history before they married two years ago. I would like to sell my house to my niece, but we know she won't qualify for a mortgage, although she and her husband earn more than enough to pay their bills. Is there a way we can work this out to both of our advantages? She wants the advantage of being able to build up equity in a home, and I really don't want to keep the mortgage in my name. Any ideas?

Janie K. -- Hammonton, N.J.

There's no reason you can't sell your home and issue a loan to your niece, based on terms you negotiate, just as if you were a bank. You'll need a lawyer to draw up the papers, but sellers do this all the time.

There are, however, a few things to think about. First, you won't get cash for your house -- you'll get what amounts to a bond paying a fixed interest rate (which is taxable as income.) As a retiree, it's likely you'd be investing the proceeds of the house anyway, and a bond or other fixed-income payment is not a bad way to go.

But in this case, you're investing in your niece, with none of the guarantees you'd get from buying a bond backed by, say, the federal government. That brings greater risks, and you should expect to get a higher interest rate to compensate you for that.

You could also co-sign a loan in her name, but the effect is pretty much the same. You're taking on the risk that if she and her husband can't repay the loan, you'll be on the hook for it. How secure are their jobs? If they hit rough times, how would you feel about covering their payments until they got back on their feet?

An alternative would be to back her with your financial resources for a short period of time -- until she and her husband are able to get credit on their own. (How bad was her husband's credit problem? How long ago?) Talk to a banker you trust and find out how long they'll have to maintain good credit to qualify for a mortgage. You could then structure a short-term loan (or co-sign a short-term mortgage) that would get them on their own and get you off the hook at the same time.


What makes more sense: to take early Social Security payments or to wait?

Barbara L. -- Derwood, Md.

As usual, the correct answer is: it depends.

To get the complete answer, call, write or e-mail the Social Security Administration and get a copy of your benefits summary. This statement will show how much you've paid in and what your estimated benefits will be -- depending on when you start collecting.

So the first question is: when do you plan to retire? If you begin withdrawals at 62, you'll get a lower monthly payment than if you wait four years. If you wait until you're 70, you'll get even more. The statement will provide estimated amounts.

The next thing to consider is whether you'll need money to pay for basic expenses. If so, the choice is easy: sign up at 62 and start collecting. But if you have additional sources of income, you may want to hold out for later, larger payments.

But there's one more major consideration that you won't find mentioned in the government's benefits statements: namely, whether Social Security payments will be cut in future years. Remember, the figures provided are only estimates. If you're years away from retirement, and the government keeps piling up trillions of dollars in deficits, you don't have to be an accountant to figure that something will have to give. With more people collecting -- and fewer people supporting each retiree -- it's a good bet benefits will be cut. In that case, you may want to take the money and run as soon as you can -- even if it means lower monthly payments.


There doesn't seem to be any justification for the recent increases in mortgage rates. Why are they going up? Do you think they will continue to rise, stabilize, or come back down in the next 12 months?

Tom (missed the boat on refinancing ) R., -- Tewksbury. Mass.

It's pretty hard to nail down the justification for most of what financial markets do. Though financial analysts and business reporters try daily to explain theses ups and downs, they (and we) have only limited success. The next time you hear that the stock market went down because of "profit taking," for example, that means those analysts and reporters have run out of plausible explanations.

Describing the movements of the financial market is a bit like describing the weather. You can explain what is happening fairly easily. But it's harder to explain just why that cold front is moving our way on Thursday afternoon and not veering off in someone else's direction.

Long-term, broad market moves, like the weather, are a little easier to explain. The simple explanation for why interest rates are moving higher now is that 1) they were way lower than normal because of a recession and depressed stock market and 2) the economy is now showing signs of improving.

What do stocks have to do with bonds? (And isn't it fun to ask yourself questions like Defense Secretary Rumsfeld?) Stock and bond markets often (though not always) move opposite directions. Why? For starters, when investors move money out of stocks (sending them lower), all that cash often flows into bonds. That creates demand and sends bond prices higher and rates lower. (Why do rates move higher as bond prices move lower? That's another column.)

That flow of money into the stock market is apparently happening now, in large part because corporate profits are improving. Another reason for the divergence is that the stock market likes good economic news (profits are rising) while bond traders don't (stronger economic growth means more borrowing, which adds to the supply of bonds, sending bond prices lower).

So what does the economy have to do with rates? When the economy weakens, the Federal Reserve pushes rates lower to make it easier to borrow and spend, with the aim of helping the economy start growing faster again. But when that happens, and companies start borrowing again, they're competing for bond investors' dollars -- so they have to pay higher rates to sell them. That seems to be happening now, which is why rates are moving higher.

Where are rates headed? Your guess is as good as Donald Rumsfeld's (maybe better.) But even if you missed the "bottom" for interest rates, you still have time to refinance. If rates go back up to 7 or 8 percent, today's rates will still look like a bargain.


I'm 60 and have just retired. I have a pension that can pay me $760/mo. or a lump sum of about $120,000. I'm torn. Should I take the monthly payment format or the lump sum? It seems that I could take the lump sum and invest it elsewhere and do better job investing it. Right or wrong?

Bill H., Birmingham, Ala.

Yes, maybe. And then again, maybe not.

Pension managers who offer this option are really asking you to make a bet with them. There are two important variables that they don't know, and neither do you: 1) how long you're going to live and 2) the rate of return they (or you) will get on that $120,000. (You also don't know much inflation will eat away at that money over time, but that will diminish your income whether you invest it or they do.)

So the first step in making this decision is to do the math both ways. If you take the $760 a month, you'll get paid a total of $120,000 in a little over 13 years.

But let's say you take the lump sum. If you figure a rate of return of 5 percent (better than you'll find today in money markets, but historically not unreasonable), and a monthly withdrawal of $760, you'll have $63,031.55 at the end of 13 years. At that point, you're ahead if you take the lump sum and invest it now.

But if you keep pulling money out of that investment, it will dry up after around 21 years. (After that point, the pension manager wins.) Here's an online calculator to help you play with the numbers.

There are other considerations: If you take the lump sum and invest for capital gains, for example, you may pay less tax than you would for pension income.

But in the end, this is not entirely a math problem. Do you like managing your own investments? Or do you prefer the security and convenience of knowing you'll get a fixed payment -- no matter what? Is the pension payable to your spouse when you die? (And don't forget to ask yourself: How sound is the company providing the pension? Is there a chance it won't be around in 25 years?)

Either way, it's a gamble. But better to make it an educated gamble than just check one box or the other without running the numbers.


What is your feeling about investing in collectibles as opposed to the usual stocks and bonds? I'm talking about everything from antiques to trading cards to music memorabilia, etc.

J.C., Coral Springs, Florida.

We try not to have feelings about investments: It just gets in the way.

But sure, over the long term, these can be profitable investments -- on occasion, even better than stocks, bonds or real estate. Or you can end up paying big bucks for worthless junk. It's very hard to jump in without detailed knowledge about the market for the specific collectible you're thinking of investing in.

While they can provide a hedge against inflation, collectibles can also be very "illiquid" -- meaning you may have a hard time getting a good price if you have to sell in a hurry. These markets are also subject to the whim and tastes of collectors, which can be very fickle. Just ask anyone who survived the Great Beanie Baby Bubble, which made the Nasdaq crash look like a mild pullback.

Still, there are active markets in many collectibles -- from stamps to souvenir spoons. For high rollers, auction houses offer a chance see what "the market" is paying for precious art and antiques. For the rest of us, there's eBay.

Most successful collectors simply enjoy learning about the objects they collect, which then brings a level of expertise that helps them spot gems at tag sales that others don't see. The more you specialize, the better you'll do. Eventually, after learning about different kinds of antiques, for example, you may develop an eye for, say, ancient Chinese porcelain.

Or not. Even when those experts on PBS's Antiques Roadshow appraise old, useless items for thousands of dollars, it still looks like junk to us.


Ever wonder what a P/E ratio is and why it's so important? Are you confused about the official definition of a recession? And just what the heck is a derivative? We're here to give you the answers.'s weekly feature "The Answer Desk" helps you make sense of business, the economy and investing. So send along your questions to and we'll try to get you the answer. (Please include your home town with your question; we'll only include your first name if we use your question.)

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