A CRASH COURSE IN FINANCE

CAPITAL EQUIPMENT CAN MAKE THE DIFFERENCE BETWEEN "YES" OR "NO"

2008-05-30T07:32:00.000-07:00

Make a capital equipment list and keep it up to date. Capital equipment is depreciable items that the business will use up over a period of year or more. Maintaining an updated capital equipment list is useful for insurance as well as tax and inventory purposes, and can make the difference between a “yes” and a “no” on a credit application. Banks and other funding source (trade, SBA, investors) look to collateral as a comfort factor. If you can provide a clean, up-to-date capital equipment list to substantiate your collateral claims, it gives these people a warm, friendly feeling about your business.

Use your cash-flow budget to carefully manage your cash. There are only four sources of cash: net from operations, new debt, sale of fixed assets, and new investment. That’s it. No others allowed. Cash gushes out in innumerable ways, though many are really part of net from operations. In fact, the only dependable and lasting source is from operations. If net from operations continues to be negative, you can only sell off so many assets before you can’t continue to be in business. If it looks like it will be negative, new debt or new or new equity will be hard to come by; investors and bankers aren’t fools. Or won’t be for long.

It all comes down to cash from operations. The reason for a cash-flow budget is to control the outflow of cash, to make sure that the cash you do spend is used for business reasons that fit in with your business plan. The discipline involved here is tremendous: Operating expenses can be controlled. Profits are tied to operating expenses – “A penny saved is a penny earned” – in the most direct ways. You cannot place too much stress in maximizing operations net.

What Should You Put on Your Financing Proposal?

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Make sure to establish the appropriate time frame for your operating budget. Operating budgets cover a period of time, usually a fiscal year (required for tax purposes), but are most useful is broken down to a monthly or even a weekly basis.

Most businesses will find that a monthly budget is the most useful, as it allows enough time to smooth out some of the bumps, yet is short enough so that if you find something going wrong (r going better than you expected) you can take timely action. Information that is 12 months old can arrive too late to do you much good, especially during the early months of a start-up when reliable patterns haven't been established.

Next, determine how much you really need. Bankers and other investors look with justifiable skepticism at unsubstantiated requests for funds. Try to determine how much you really need as opposed to what you think would be nice to have. What is the least you can get by with? Do you have a compelling argument for more money - in terms of added growth, profits, lessened risk, and so forth?

Your Financing proposal should make clear:

How much money you want
What you want it for
What kind of money you are seeking (debt or equity)
When you want it
Why it will make your business better
How you'll pay it back
What your contingency plans might be just in case things don't work out

Budgeting is Play an Important Role

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You can't run your business successfully without a budget. Nobody can. Cash is slippery and cost rise unless closely watched. You can't borrow money from a bank, secure trade credit, or attract investors without a budget.

Your operating budget serves a variety of purposes. It helps you hold down spending, provides and supports financial self-discipline, and helps you set time-lines and measurable goals. It gives you a scorecard, a way of seeing how well you are ding and whether or not you need to change some business behaviors.

You don't have to become an accountant to understand and use a budget. In fact, you are already familiar with budgeting from handling your personal finances. All your operating budget does is set down the expected amounts and timing of revenues and expenses in a standard form that can be used to strengthen your business decisions. Your operating budget allow you to know when you need financing - and when you don't.

No horse gets anywhere until he is harnessed.
No steam or gas ever drives anything until it is confined.
No Niagara is ever turned into light and power until it is tunneled.
No life ever grows great until it is focused, dedicated, disciplined.
- HARRY EMERSON FOSDICK, D.D.-

Facts Impress Bankers while Guesses Do NOT.

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It is important to be accurate and descriptive and to use vendor sources rather than guesstimates for start-up costs.

The process of going over start-up costs again and again, looking for economies and ways to lower those costs, is excellent practice for actually running your business. Careful cash management is one of those business skills that spells the difference between success and failure.

You will be very accurate in projecting start-up costs if you speak with vendors, check out catalogues and price lists, and look for hard (as opposed to approximate) prices. Don't guess. A businesslike listing of assets will help you build credibility, especially if you can show that you have indeed done everything reasonable to hold costs down.

Accuracy also pays off when you sit down with your banker and explain why you need to borrow money for your start-up. That portion of the start-up costs you pay for personally will show up as part of your investment in the business and can on occasion be used as collateral for a loan. Facts impress bankers. Guesses do not.

Use the form called "Start-up Costs You Only Have to Pay Once" to organize your start-up costs. Not all items will apply and you may have to add others.

Remember that you can't run a business without cash. Working capital is defined as current assets minus current liabilities - but for now, you can estimate working capital plus contingency needs to equal the costs of running the business for two months.

To Start a Business, "Well begun is half-finished"

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As the old adage goes, "Well begun is half-finished." If you start your business out on the right foot - which means with enough capital to get it up and running without being pinched for cash - your chancer of success soar. Part of the puzzle involves start-up costs for initial inventories, leasehold improvements, licenses, and all th other one-time costs that you will incur when you start up your business.

You can hold some of these costs down by using secondhand or borrowed equipment, renting space, and leasing equipment instead of purchasing. But the total amount will probably be more than you expect. Don't underestimate what you might need.

The dangers of under capitalization cannot be too strongly emphasized. Get the real figures. If they are manageable, great. If not, perhaps you can find ways to lower them. Don't plow ahead until you are pretty sure that you can afford to go to into business.

Use your cash-flow projections to determine how much capital you really need. Look for the deepest cumulative cash-flow negative point. A rough rule of imately how much capital your venture needs.

Avoid Poor Decisions and Repeat Good Ones on Business and Finance

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Finally, you have to decide whether you can afford the financing. Is the right time to take on more debt? If capital costs 14 percent (interest rate), and the compay earns 5 percent on sales after taxes, how great an increase in sales is required to service a term loan of $10,000? Can the company achieve or exceed that increase? A term loan of $10,000 at 14 percent annual interest amortized ober five years costs $232 per month, or $2,784 per year to service. Annual sales would have to increase $55,680 to cover this amount. Is the addition of the equipment purchased y the loan practical? Or is it not going to have that impact on sales?

A side point: The new equipment may increase productibity and profitability, may be necessary so that the business remains competitive, or may represent and expansion of the market for the company (and so on). No financial decision should be made in isolation of such factors – nor should a borrowing decision be made without at least considering the impact of the loan on sales and profits.

What is the timing? Another way to pare down loan costs is to pay close attention to the timing of the disbursement of the loan proceeds. If a loan can be postponed, it may result in lowered costs.

How will it make your business more profitable? Why does the loan make good business sense? The supporting (and counter) arguments should be jotted down to make sure that good decisions are made more often than not. It's easy to forget why a decision was made months after it was made. The planning process helps you to avoid repeating poor decisions – and makes it easier to repeat good ones.

What Do You Really Need? Plan It!

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What are you planning to buy with the proceeds? Although it may sound odd, many small business owners raise money (or try to) before thinking their needs through. If you don't know what you need and why you need it, you can't defend your plan, nor present a cogent argument to financing sources.

What do you really need? Look at what you think you need from three points of view: bare bones, most likely, and what you'd get if money were no object. Keep in mind that ultimately any acquisition has to be paid for out of operating profits. Impulsive purchase destroy budgets. Moreover, bankers look askance at furnishing and equipment that seem to indicate lack of proper business restraint. The less you spend on frivolities, the more you'll have for necessities!

Common Purposes for Financing and Their Sources

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The purpose of the investment drives the type and source of the investment. The need for start-up cash is different from the frantic rush to meet payroll or making a calm decision to expand into a new market. Some of the more common purposes for financing and their sources include the following:

Starting a business: Equity from the owner, investment from three Fs (friends, family, and fools) or perhaps an outside investor, loans drom the Small Business Administration (SBA) and other government agencies, credit cards, payout from an early retirement.
Aquiring Inventory: Cash from operations, terms, and dating from suppliers.
Purchasing Equipment: A loan from an equipment manufacturer or bank, payment made to a credit card or finance company; or a business owner may decide to lease instead of purchase.
Expanding a business: Cash from cash flow and operating profits, new equity, a medium to long term bank loan to be repaid from profit, risk capital, proceeds from retirement funds (under some circumtances).
Acquiring another business: Funding from direct investment, a bank loan, cash flow of the acquired entity, seller financing.
Paying normal business bills: Cash from operations secured credit from a bank, warehouse financing, or funds from a factor of finance company.
Increasing working capital: Stretching payables, funds from new equity, a long-term bank loan, or operating profits.
Meeting unexpected personal financial needs of owner: Personal savings, personal loans, credit cards, a loan from the business, a salary advance.
Acquiring fices assets: Funds from a mortgage, a long-term debt, seller financing.
Unanticipated disaster: Proceeds from an insurance policy, retained earnings, owner's assets.

Trade Credit and Commercial Finance Companies to Financing Your Business

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Trade credit may be available if you approach your suppliers in a businesslike manner. They want new customers just as much as anyone else, but don't want to be reckless in their credit policies. Treat them with the respect you treat your banker or other outside investors with, and you will secure some credit from them. This may be for a modest amount at first, perhaps no more than extended dating on small orders, but as you develop a history of prompt payment with your vendors you may be able to get a significant amount of your financing this way – not at start-up though.

Commercial finance companies are a good source of financing for new businesses. Visit (www.scoredelaware.com/financing) for a clear short article on commercial finance companies. (SCORE is shorthand for Service Corps of Retired Executives, another SBA program to visit). Some familiar commercial finance companies include The Money Store, CIT Financing, and TransAmerica. Most major banks have a commercial finance company (for example, Fleet Financial Company). Look in the Yellow Pages. These companies are set up to handle more risky loans than banks are comfortable with, and can provide you the capital you need to get into business.

Equipment manufacturers are eager to develop you into a bigger and better customer. If your venture will need a substantial amount of equipment, look into this kind of financing. Suppose you need 10 personal computers and a server to launch your e-business. You could presumably pay $25,000 out of pocket (mainly for the server and licenses) or lease the equipment (small down payment and a fixed monthly payment thereafter) or finance it through a captive finance company. The decision is partly dollars and best suits your business and its prospects. A captive finance company is one owned by the manufacturer. They can take more of a risk than other lenders, but have to charge for it.

If a man look sharply and attentively,

He shall see Fortune,

For though she is blind,

She is not invisible.

-Francis Bacon-

Never Use Your Credit Card for Funding Your Business

2008-05-24T01:24:00.001-07:00

There is no sin except stupidity.

-Oscar Wilde-

SBA Low doc, microloan, and 7(a) loans are all good sources of start-up funds. The Small Business Administration's Web site (www.sbaonline.sba.gov) is the best place to start, as it will give you a great overview of the SBA loan programs. Your next step is to visit the list of certified and preferred lenders. You want the preferred lenders (they are more small business friendly, as a rule, than other banks).

Credit cards, given the historically low rates and the ludicrous offers to switch all of your debt to a new card, make attractive alternative financing sources. This can become a very expensive form of debt if you aren't careful. A 2 percent discount for money you repay in 30 days works out to 24 percent a year. Scarcely a bargain, and if you don't repay it in time you'll be looking at anywhere from 9 to 22 percent on the unpaid balance – and that's in addition to the original discount. No wonder the credit card companies can afford to be generous in their offers.

Bank Loans or Home Equity Loans

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If yours is a B2B Business, few going concerns will want to do business with you. Reliability and reputation are extremely important in business-to-business ventures. Price, convenience, and service are important, but secondary. If you can't deliver on time and on budget the customer's business suffers, a risk that led to the famous "You can't go wrong buying IBM" mentality. Keep this in mind when preparing revenue projections. It takes time to create a perception that your business will indeed fill orders on time. Some advisors suggest that you back up any projected sales to large companies by six to 12 months. You may be able to shorten this time frame by enlisting an ally in the big company, a normal marketing ploy. Still, plan on it taking longer for revenue to develop than you expect - a conservative and prudent approach to forecasting revenues.

Start-ups and inherently risky. Banks don't like risk. Therefore banks don't like to lend money to start-ups. That doesn't mean that you can't get your banker to lend you money for start-up. If your personal credit history is good and the amount you seek is small, you might be able to get an unsecured loan. The distinction is that the banker will look to you rather than to your business for repayment of the loan. Then there are nonbusiness loans that are commonly used for business purposes. For example, home equity loans can be used for any legal purpose. If you go this route, make sure to get advice from your accountant to avoid unpleasant tax implications in the future if you withdraw funds you have loaned to your venture.

Tips For Finance Your Start-ups

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Write your own business plan. Get help if you need it. Small Business Development Centers (SBDCs) were created to help you with business planning and financing. Go to www.smallbiz.suny.edu for a listing of SBDCs on the Net. Then get outsiders to critique the plan before presenting it to outside investors.

Be aware that almost nobody wants to finance start-ups. Good start-up financing sources begin with your own assets and those of family and friends. If your idea is good, then you should have no qualms about giving your family and friends a chance to invest in your business. If you are queasy about asking, it's a tip that perhaps your idea isn't that good.

Life is not easy for any of us. But what of that?
We must have perseverance and, above all,
confidence in ourselves.
We must believe that we are gifted for something,
and this thing, at whatever cost, must be attained.
-Marie Curie-

You Must Push a Detailed Cash Budget

2008-05-22T23:39:00.000-07:00

It is one of the most beautiful compensations
of this life that no man can sincerely try to
help another without helping them self.
-Ralph Waldo Emerson-

The learning curve for start-ups is very steep. Even if you have a lot of experience in the business there will be unexpected challenges. In our experience no start-up ever goes as planned. Your best defense - and this will affect your financing plans - is to talk with as many other business owners who have gone through start-ups similar to yours as you can find. Ask your banker, accountant, friends, trade associations, and other informed folks. While much of the advice and other informed folks. While much of the advice you receive will be anecdotal and perhaps not pertinent to your situation, much will be relevant. More important, it will make you aware of he kinds of challenges that you may have to address. The key question to ask is: If you knew then what you know now, what would you have done differently? While every start-up is different, there is a common set of problems they all face.

Start-ups face lots of competition. You have to know these competitors are in order to satisfy this important question: Is there enough room in this market for another player? You can get data from trade associations on how large a market is needed to support your hardware store. If there are two stores in your area already, will there be room for you? What if one of them is a "big-box" store, like Home Depot or Wal-Mart? By paying attention to what the competition does you may be able to find an undeserved niche that can become a profitable market for you. It always comes down to marketing! How can you attract and satisfy the customers you compete for? Are there enough of them? This is vitally important in making your sales projections.

The first question investors ask are, "How much?" and "What for?" Therefore, you must push a detailed cash-flow projection (a cash budget) to determine how much cash your business needs. Go out, month by month, until the cash flow turns positive. The deepest point of cumulative negative cash flow gives you a clue about the size of investment needed to make your business work. The rule of thumb is then to double that figure, thus ensuring that surprises and shortfalls will be covered. If you are wise you'll also prepare a personal cash flow to determine what your own financial needs will be and make the decisions about where that cash will come from before draining funds from your new venture.

They know enough who know how to learn.
-Henry Adams-

Win The Battle of Credibility with Your Investors

2008-05-22T09:35:00.000-07:00

Plan ahead: It wasn't raining when Noah built the ark.
-Richard Cushing-

There are more than 35,000 trade associations in the United States. Join the one that most closely mirrors yours. You can also visit comparable businesses and ask the owners about their start-up experience. The Net is a great source for this kind of information. For example, Business Town's Web Site (www.businesstown.com) has a dandy list of trade associations that you can query. Suppose you plan to start a retail business. Follow the link to the National Retail Federation (www.nrf.com) and you'll find a wealth of information, including links to your state's retail trade association. If you can't leverage that into good data for your start-up you shouldn't be in business at all!

Start with your proposed costs. It is easier to pin down start-up expenses than to estimate start-up revenues and cash flow-and the expense side gives you a clue to the level of revenues you will need to make your venture work. The Small Business Administration (www.sbaonline.sba.gov) has a useful for for calculating your start-up expenses, including those one-time costs and some operating expenses that can be calculated in advance. And while you are figuring out your start-up expenses, keep track of how you arrive at each figure. A quote from supplier will be more useful than a guess, and will help you win the battle for credibility with your investors.

Do Some Research To Produce a Good Business Plan

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In order to come up with good business plan you need information about how your business will operate. Unfortunately, it's difficult to get good operating data for a start-up. The standard source of such data are based on averaging operating data for businesses that gave already survived the start-up phase. Those businesses are of all sizes, ages and locations. What does a start-up restaurants in Portsmouth, New Hampshire, have in common with an established restaurant in Houston or Los Angeles or Chicago? Not much beyond being in the same industry. However, there is a source on the internet that will get you started. Googling or visit www.morebusiness.com/tools/bizstats to compare your business's projected figures to trade or industry - but keep in mind that the base is not formulated using start-up numbers.

Once you have your projected revenues and expenses, check with your accountant to see how well they fit what your banker's or another sophisticated investor's ideas of what your financial picture should be. Or better yet, sit down with your banker, show him or her your early numbers, and solicit his or her advice on how to make your projections as realistic as possible. This shows that you are serious about your business and helps build credibility with your banker.

Prepare Your Start-Up

2008-05-22T08:54:00.000-07:00

By failing to prepare you are preparing to fail.
-Benjamin Franklin-

Investors (you, bankers, or anyone else who lend the money) want to be sure that their investment makes good financial sense - that is, the risks and rewards are acceptable, the investment will help the business grow, and the investment will pay off in reasonable length of time. This is tough enough for any business, but especially tough for a start-up. (Turnarounds are much like start-ups so if you are seeking financing to turn a failing business around, you will face the same problems).

The greatest single problem is finding information to support your financing proposal. This is an area where the Internet (Net) is unavailable. Throughout this, we will refer to web sites that help you gain the results you seek. If you are not on the Net, you are making a major mistake, although you can still access the information you need, the work will be harder than it has to be.

Start-ups need business plans. They need them even more than going businesses do, since there is no track record for the investor to rely on. Your business plan helps you to model your business concept, test ideas, predict costs, play "what if", and examine different scenarios and assumptions. More than that, it helps the investor understand what you have in mind and why your business will be successful. While a financial model (you projected balance sheet, income statements, and cash-flow budgets) is only a model, it is a lot better than unsubstantiated hope. Don't forget, you are the biggest investor in your start-up: your time, energy assets, and dreams are on the line. The financial statements will help you make better business decisions.

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