Sunday, August 22, 2010
Be Proactive About Cash Flow
If you are starting a business what are your biggest risks? What keeps the business owner up at night especially the business owner who is just starting a new business?
In addition to personal liability which we discussed in a previous post, one of the biggest risks the business owner faces is having enough cash. Cash is the life line of every business. Without cash you are handcuffed. You cannot pay employees, you cannot pay for inventory, you cannot pay the rent, phone bill and utilities. Simply put the flow of cash into your business is the fuel that runs the business. If there is no cash there is no business.
Through the efficient use of cash the maximum amount of income can be produced. Therefore we need to look at where cash inefficiencies can take place which essentially are the causes of cash flow problems. I wrote a Free report on solving cash flow problems which identifies 12 causes of cash flow problems and some recommended solutions.
Here is a cause of cash flow problems. Let’s talk about too much debt. I know I am not telling you anything new but debt will kill you. This is another area where the business owner is going to think it is impossible, but if the debt is killing you it is time to renegotiate your terms. The key is to have a good relationship with your bank and your banker. There is an old expression and it is “Feed your Banker”. You should be feeding your banker both literally and figuratively. You should be taking them out to lunch, but you should also constantly communicate to them about your business. Your bank needs to understand your business. They need to understand your business so when times are good they will understand your growth plan and when times are tough they will understand how you will pull through. The confidence that you have in your business should be communicated to your bank so they have confidence in your business. Every banker I speak to the number one problem they have with their clients is their clients run and hide when times get tough coupled with the fact that they do not understand the clients business. This confluence of the hiding client with not understanding the business causes panic by the banker and then the bank starts to do irrational things. They do irrational things because they simply do not know what is going on and they automatically think the worst and act in the worst way.
Communicating with your bank is a process. If you do not have such a relationship I suggest that you start creating one. In the meantime, you need to go back to your bank or lender and renegotiate your loan. In my E-Book called "Things You Should Know About Starting A business" I wrote about renegotiating your property lease and having to go to the landlord with good financial statements and good reliable numbers. That is the same approach with your bank. Have good reliable numbers ready. You need to identify the key metrics in your business and show the bank your businesses strengths and weaknesses. You have to be transparent and show the bank as much information as possible. Then you have to show your bank a forecast which will show both you and the bank how you are going to recover and be able to pay the loan on normal terms. Show your banker what expenses you are going to cut, show your banker how you are going to increase sales and margins, how you now have an inventory receipt and payment plan. Basically show your banker how you are going to generate more earnings in order to pay down debt. Areas to negotiate with your bank are interest rate reductions, increase in the number of years or interest only payments. One trade off may be offering the bank a higher interest rate, but getting interest only payments in return resulting in lower overall payments.
Work with your bank to refinance high interest credit card debt. If you have high interest credit card debt show the bank through your cash flow forecast how eliminating credit card debt will allow you to use your cash more efficiently. I don’t have to tell you what those high interest credit cards are doing to your business.
Let’s talk a little bit about stockholder debt. If there is any debt that bankers and outside investors have little regard for it is stockholder debt. Stockholders who are holders of debt instruments of a company must understand if the company they are debt holders of is failing they must be the first to make concessions. I mean total concessions including converting the debt to equity. The bank is not going to make any concessions if the very stockholders who have a stake in the company do not make major concessions.
In addition to personal liability which we discussed in a previous post, one of the biggest risks the business owner faces is having enough cash. Cash is the life line of every business. Without cash you are handcuffed. You cannot pay employees, you cannot pay for inventory, you cannot pay the rent, phone bill and utilities. Simply put the flow of cash into your business is the fuel that runs the business. If there is no cash there is no business.
Through the efficient use of cash the maximum amount of income can be produced. Therefore we need to look at where cash inefficiencies can take place which essentially are the causes of cash flow problems. I wrote a Free report on solving cash flow problems which identifies 12 causes of cash flow problems and some recommended solutions.
Here is a cause of cash flow problems. Let’s talk about too much debt. I know I am not telling you anything new but debt will kill you. This is another area where the business owner is going to think it is impossible, but if the debt is killing you it is time to renegotiate your terms. The key is to have a good relationship with your bank and your banker. There is an old expression and it is “Feed your Banker”. You should be feeding your banker both literally and figuratively. You should be taking them out to lunch, but you should also constantly communicate to them about your business. Your bank needs to understand your business. They need to understand your business so when times are good they will understand your growth plan and when times are tough they will understand how you will pull through. The confidence that you have in your business should be communicated to your bank so they have confidence in your business. Every banker I speak to the number one problem they have with their clients is their clients run and hide when times get tough coupled with the fact that they do not understand the clients business. This confluence of the hiding client with not understanding the business causes panic by the banker and then the bank starts to do irrational things. They do irrational things because they simply do not know what is going on and they automatically think the worst and act in the worst way.
Communicating with your bank is a process. If you do not have such a relationship I suggest that you start creating one. In the meantime, you need to go back to your bank or lender and renegotiate your loan. In my E-Book called "Things You Should Know About Starting A business" I wrote about renegotiating your property lease and having to go to the landlord with good financial statements and good reliable numbers. That is the same approach with your bank. Have good reliable numbers ready. You need to identify the key metrics in your business and show the bank your businesses strengths and weaknesses. You have to be transparent and show the bank as much information as possible. Then you have to show your bank a forecast which will show both you and the bank how you are going to recover and be able to pay the loan on normal terms. Show your banker what expenses you are going to cut, show your banker how you are going to increase sales and margins, how you now have an inventory receipt and payment plan. Basically show your banker how you are going to generate more earnings in order to pay down debt. Areas to negotiate with your bank are interest rate reductions, increase in the number of years or interest only payments. One trade off may be offering the bank a higher interest rate, but getting interest only payments in return resulting in lower overall payments.
Work with your bank to refinance high interest credit card debt. If you have high interest credit card debt show the bank through your cash flow forecast how eliminating credit card debt will allow you to use your cash more efficiently. I don’t have to tell you what those high interest credit cards are doing to your business.
Let’s talk a little bit about stockholder debt. If there is any debt that bankers and outside investors have little regard for it is stockholder debt. Stockholders who are holders of debt instruments of a company must understand if the company they are debt holders of is failing they must be the first to make concessions. I mean total concessions including converting the debt to equity. The bank is not going to make any concessions if the very stockholders who have a stake in the company do not make major concessions.
Saturday, August 14, 2010
Know Thy Competition
When you are starting a business, you need to analyze and assess the competition. Most of you if not all of you have competition. Competition is what makes us better business people. Your first step in reviewing the competition is Know Who the Competition is! I can’t tell you how many people go into business without knowing who their competitors are. I just spoke with a prospective new client on Friday and I asked them who the competitors are and the answer blew me off my chair. He said he didn’t really have any competitors and without going into what the product or service was just know, that it was not some new invention that was never created before. As the conversation continued I was able to point out who his competitors were. You are not learning who the competition is so you can worry and obsess about them. You are learning who the competition is so you can learn from them and about them and strategize against them. Zig when they Zag if you will.
Learning from competitors – One thing I always used to do is go to trade shows to seek out who my competitors are. Trade shows are a great way to stake out your competition. Get information from their booths and even speak to their representatives. Look at their advertisements; discover the different ways they market and communicate to the market place. See if you can figure out how their logistics work or if they use contract manufacturers. See if you can find out what their distribution strategy is. If you market regionally (like a brick and mortar retailer) you should develop relationships with businesses that do what you do who are not in your market. I cannot overemphasize the abundance of information and ideas you will get out of those relationships. I have had life long relationships with people who are in the same business as I was but were in different markets.
Strategizing against competitors – Take what you learned from the competition and put together a plan on what things you do or if you are just starting what things you will do the same and what things you will do differently. You need to figure out what separates your business from the competition. Two competitors may have the same product but they may be trying to solve different problems. See if you can solve a different problem than your competitor who may have the same product.
Another thing you need to do is find out what suppliers are giving your competition that they are not giving you. For example, is your competition getting co-op advertising or are they not paying re-stocking charges, or maybe the competitors are getting free freight or better terms. Sometimes competitors get these things because they ask for them. Certainly you should ask for these things but if you are refused, see if anyone is getting them. It takes some work, but if you are persistent you will find out and then you can go back to your suppliers and ask why your competitor is getting something and you are not.
Take a good look at competitors’ websites. Do they have blogs? Do they have forums where they impart information? Do they have videos? Do they do an internet radio show? Do they have a list of products and do they present them in a different way. I used to call up competitors to see what prices they were selling similar products. Did the competitor come up with a new pricing package or program? Plug yourself into this information.
In order to have a successful business you need to have a solution to a problem that exists in the market place. If you know what your competitor is doing maybe you can come up with a different solution than they have or at least a different way to go about it. The more you can separate yourself from the competition the more of a marketing success you will be. This is why it is so important to know thy competition.
Learning from competitors – One thing I always used to do is go to trade shows to seek out who my competitors are. Trade shows are a great way to stake out your competition. Get information from their booths and even speak to their representatives. Look at their advertisements; discover the different ways they market and communicate to the market place. See if you can figure out how their logistics work or if they use contract manufacturers. See if you can find out what their distribution strategy is. If you market regionally (like a brick and mortar retailer) you should develop relationships with businesses that do what you do who are not in your market. I cannot overemphasize the abundance of information and ideas you will get out of those relationships. I have had life long relationships with people who are in the same business as I was but were in different markets.
Strategizing against competitors – Take what you learned from the competition and put together a plan on what things you do or if you are just starting what things you will do the same and what things you will do differently. You need to figure out what separates your business from the competition. Two competitors may have the same product but they may be trying to solve different problems. See if you can solve a different problem than your competitor who may have the same product.
Another thing you need to do is find out what suppliers are giving your competition that they are not giving you. For example, is your competition getting co-op advertising or are they not paying re-stocking charges, or maybe the competitors are getting free freight or better terms. Sometimes competitors get these things because they ask for them. Certainly you should ask for these things but if you are refused, see if anyone is getting them. It takes some work, but if you are persistent you will find out and then you can go back to your suppliers and ask why your competitor is getting something and you are not.
Take a good look at competitors’ websites. Do they have blogs? Do they have forums where they impart information? Do they have videos? Do they do an internet radio show? Do they have a list of products and do they present them in a different way. I used to call up competitors to see what prices they were selling similar products. Did the competitor come up with a new pricing package or program? Plug yourself into this information.
In order to have a successful business you need to have a solution to a problem that exists in the market place. If you know what your competitor is doing maybe you can come up with a different solution than they have or at least a different way to go about it. The more you can separate yourself from the competition the more of a marketing success you will be. This is why it is so important to know thy competition.
Wednesday, August 4, 2010
Financial Budget or Plan
You do this step to make sure that you are profitable. You do this step to make sure that the sales you generate produce a profit. Prepare a budget/projected income statement and a cash flow statement. If you do not know how to do this then hire a part time CFO.
If you want to get more elaborate with your business plan because you are looking for funding then take the components of the executive summary and elaborate on each point. However as I previously mentioned in a previous post if you are doing a business plan to use as a working document you only need the executive summary, marketing plan and financial plan.
Here is the thing. Without a plan of how you are going to execute this new business you will be wasting a lot of time doing a lot of things with no direction. If your initial plan is not working then change your plan. It is ok to change your plan. That is the beauty of a business plan. The most important reason to have a business plan is to have a working document! A business plan isn’t something that you prepare once and then throw in the drawer. A business plan is not a relic. A business plan is something you need to keep you on track, to make you productive and to change when necessary. Very rarely does an initial business plan work. Many times the plan changes multiple times. This is OK! When you are starting a business you must develop a rhythm of going about it. The business plan gets you into a rhythm and I promise you by doing it you will re-discover things and create new ideas. The other reason you should have a business plan is your bank. Bankers love to get business plans. It reinforces what your banker already knows about your business and if you made the mistake of not explaining your business to your banker then the business plan will serve as a document that explains your business to your banker.
If you want to get more elaborate with your business plan because you are looking for funding then take the components of the executive summary and elaborate on each point. However as I previously mentioned in a previous post if you are doing a business plan to use as a working document you only need the executive summary, marketing plan and financial plan.
Here is the thing. Without a plan of how you are going to execute this new business you will be wasting a lot of time doing a lot of things with no direction. If your initial plan is not working then change your plan. It is ok to change your plan. That is the beauty of a business plan. The most important reason to have a business plan is to have a working document! A business plan isn’t something that you prepare once and then throw in the drawer. A business plan is not a relic. A business plan is something you need to keep you on track, to make you productive and to change when necessary. Very rarely does an initial business plan work. Many times the plan changes multiple times. This is OK! When you are starting a business you must develop a rhythm of going about it. The business plan gets you into a rhythm and I promise you by doing it you will re-discover things and create new ideas. The other reason you should have a business plan is your bank. Bankers love to get business plans. It reinforces what your banker already knows about your business and if you made the mistake of not explaining your business to your banker then the business plan will serve as a document that explains your business to your banker.
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