Continue reading »]]> If you’re like most entrepreneurs you enjoy talking to others about your business, and can speak at great length about all of the wonderful things that your company does. It’s probably easy for you to spend hours talking about how your new product is going to revolutionize your industry the way that Apple revolutionized the music world with the iPod and iTunes.  

But have you taken the time to perfect what’s known as your “elevator pitch”? The elevator pitch is a short summary that quickly describes your company’s value to a potential investor that you might meet in an elevator, where you’ll only have a very brief time to capture his or her attention.  If your elevator pitch needs some work—if you’ve ever been given the cold shoulder by an investor then it probably does—try following these five rules to hone that pitch so that you make the most out of future opportunities.

1.)   Keep it short.  As in one minute tops.  By this point in a pitch, if you haven’t raised your listener’s interest then you’ve lost him.  Practice your pitch and time yourself until you can confidently present the whole thing in under a minute.

2.)   Start from the top. You should begin the pitch by explaining what your company does in the simplest possible fashion.  Something along the lines of  “We are a software company that developed a product to make filing your taxes as easy as purchasing a book.” That’s it.  Stay away from any industry jargon or technical explanations, they’ll only serve to confuse your audience.

3.)   Explain the problem that you are solving.  You are solving a problem with this great new product you’ve been spending all of your time, right?  If not, then people aren’t going to care about the product.  To continue with our example, “Our Easy Tax software has helped the average user save three hours of time and nearly $600 on his taxes.”  People are wasting time and money on their taxes—a major problem—you solve that problem, and your customers wind up with both more time and more money.

4.)   Demonstrate how you are different.  Facebook didn’t invent the social network, Apple didn’t make the first MP3 player, and Google wasn’t the first to try and organize the web.  But they’ve all been really successful because they convinced investors, and customers, that they found a better way to do these things.  Chances are that your company isn’t the only one doing what it does either.  But hopefully you started the company because you’ve found a better way to do it.  Don’t let your ego get in the way and say things like “We’re the only ones that can do this.”  Instead, explain why you do it better: “Compared to the current leader in the industry, our product is 20% cheaper and requires 30% less time for the user to complete his tax return.”

5.)   Be prepared for the most common objections.  And be ready to calmly and politely address them.  By practicing your pitch on enough friends, colleagues, and family members you’ll get a sense of the initial objections that investors are most likely to pose, and to come up with a response that satisfies those objections.  In our Easy Tax example a common objection might be “I don’t understand the first thing about filing my taxes and I don’t care to learn, that’s why I pay an accountant.”  And a reasonable response would be “If you can fill out a credit-card application, you have the financial skills necessary to use our product.”

So keep practicing until you can tell a compelling story about your business in one minute or less. And then move on to working on the rest of your marketing and investor materials, because hopefully your new finely tuned elevator pitch will lead to more in-depth meetings down the road.

Continue reading »]]> Entrepreneurs the world over have been buzzing with the news that Facebook will soon be conducting an initial public offering (IPO), valuing the company somewhere between $75 billion and $100 billion USD. As part of the IPO process Facebook is required to release its revenue figures, which totaled $3.7 billion last year. So a quick check of the math tells us that that the company is being valued at a multiple of between 20 and 27 times revenue. Which may lead many of you to ask the question: How much is my company worth?

The short answer—unless you happen to have 845 million users—is, unfortunately, nowhere near 20 times revenue. But don’t let that stop you from coming up with a reasonable valuation estimate, as it will prove extremely useful when negotiating with potential investors.

Valuing a private business—particularly an early-stage one—is a difficult process that requires a blend of art and science, but it is an important project to undertake. If you value your business too high you may scare off potential investors, and if you value it too low you may end up giving away control of your business at a fraction of its true worth.

A good way to begin your valuation analysis is to pull out your financial statements and have a look at your total revenues, your earnings (if your business is profitable), and some other common industry figures like EBIT (earnings before interest, and taxes). If you have a few years worth of financial statements you’ll also want to track the growth rate of these key figures. Once you have the numbers in front of you, it is time to search for other comparable businesses to yours and see how the market is valuing them.

Finding information on publicly traded companies in your industry is usually pretty easy. Start with a web search for something like “average price to revenue ratio for a hotel” (or whatever type of business you run) and you’ll gain an understanding of how the market values your larger public competitors, as well as which financial figures are most important in your industry. Our hotel search quickly reveals that public companies in the industry currently are valued at about 2.4 times revenues (not exactly Facebook territory) and that there are several important valuation metrics that are unique to the industry such as ADR (average daily room rate) and REVPAR (revenue per available room).

Of course, if you are running a twelve-room bed-and-breakfast investors are unlikely to assign the same valuation to your company as they do to Mariott, which has about 3,500 hotels throughout the world. You’re going to have to discount your business significantly to reflect its smaller size and riskier nature compared to the leaders in the field.

In order to see what smaller privately owned businesses are selling for, try looking online at some “business for sale” sites. See if you can find data on recently completed successful sales rather than relying on the listing prices of businesses currently for sale, as the list prices can be inflated and not reflective of true value.

Finally, if you are at the stage where properly valuing your business is critical (e.g. you have investors or buyers who are interested) then you’ll want to get some professional help. If you have a good small-business attorney and accountant they can be excellent resources to consult first. And if you need more advice, then you might want to hire one or more independent valuation experts to conduct a detailed analysis of your business and assign it an estimated valuation. This won’t come for free, but a solid analysis that assigns a realistic valuation can end up saving you time and money when you are negotiating to sell a stake in your company.

Continue reading »]]> Last week we introduced readers to the third and final of the three major financial statements, the statement of cash flows, and produced the above-referenced example for our fictitious Acme Corporation.  Now it is time to do some financial analysis to see what the statement of cash flows has to tell us about the all-important cash position of a business.

At the conclusion of last week’s post we mentioned that one of the entries on the statement of cash flows may very well be the most important figure on any of the financial statements.  So without further ado, let’s reveal what that figure is and why it is so important.  The object of our scrutiny is: net cash provided by operating activities. 

While you might thank that net income (i.e. profits) would be more important as it is the famous “bottom line” number from the income statement—and a favorite of the press when discussing a company’s financial results—savvy investors­, and business owners, prefer to focus on net cash provided by operating activities.

Net income can be subject to distortions—either intentional or unintentional—through tactics like not properly recognizing bad loans or misrepresenting the value of assets.  Because it is much harder to misstate profits and working capital, it always pays to look at net cash provided by operating activities, which reflects the effects of changes in working capital on a firm’s net income.  There are many examples of companies that have reported positive net income even when they are on the brink of declaring bankruptcy; in almost all of these cases though, net cash from operating activities began to deteriorate much earlier, providing an early clue that the firm was in trouble.

In the case of Acme Corp. we can see that while it had a positive net income of $23,000, its operating activities provided a negative $2,000 of cash flow.  This should cause us some concern as we continue to work our through the rest of the statement.

At the bottom of the next section, we see that Acme’s investing activities also resulted in a negative cash flow, in this case the figure is $6,500.  And in the last section we finally see some positive cash flow, to the tune of $3,500, as a result of Acme’s financing activities. The end result of all of this is that Acme saw its cash balance decline by $5,000 during the course of the year.

So what are we to make of all of this?  Acme’s operating activities drained it of $2,500 in cash yet it spent $8,500 on new fixed assets (a long-term investment), and it covered part of these costs by increasing its debt load (the $3,500 in additional notes payable).

The situation at Acme is clearly not sustainable and this is reflected in the fact that its cash balance at the end of year declined by 42% ($5,000/$12,000).  If Acme keeps on this same path for too much longer, it will eventually run out of cash.  In order to remedy the situation, Acme needs to take a hard look at refining its core operating activities, in addition to determining whether it has the right mix of assets to support its business, and whether or not its debt load is sustainable.  And of course, if you start to see your company’s cash position weakening, it is time to think about all of these things before the situation gets too dire.

So that concludes our series on the major financial statements that most firms produce, and that most lenders and investors want to see.  We once again remind readers that this series is intended as an introduction to financial statements and a beginning look at their analysis.  We hope that you are now better armed to analyze and make decisions about your firms’ financial matters, and encourage you to read further on these topics in a financial management textbook.

Continue reading »]]> Now that we have completed our guides to understanding your company’s balance sheet and income statement, it is time to turn our attention to the third and final of the major financial statements, the statement of cash flows. Like the income statement, the statement of cash flows gives us a picture of a company’s performance for a period of time, usually a calendar year or quarter. But while the income statement is concerned with tracking net income, the statement of cash flows, as the name implies, is concerned with reporting changes in a firm’s cash position. As we take a look at our sample statement of cash flows and decipher its entries, we will see that a company’s net income is very different from its cash position.

As we can note from the above sample of our fictitious Acme Corporation, the statement of cash flows is broken down into three categories—operating activities, investing activities, and financing activities—plus a summary section at the bottom. If you are now familiar with the balance sheet and income statement from our previous posts, you should recognize most of the line items here because what the statement of cash flows does is pull information from those two statements in order to analyze their effects on Acme’s cash position. As we go through the entries below, you may want to refer back to Acme’s balance sheet and income statement to see where the numbers are coming from.

Net Income – Is the “bottom line” figure from the income statement.

Increases in Accounts Receivable, Inventories, Accounts Payable, and Accrued Payroll – These are all calculated by taking the difference between these figures on two successive balance sheets (e.g. 2010 and 2009 year-end). For simplicity’s sake we only provided one year’s balance sheet for Acme Corp., but once your business has produced two or more balance sheets you would simply use the two most recent ones in order to make these calculations. One important thing to note here is that an increase in a current asset decreases cash while an increase in a current liability increases cash. For example, if your inventory (a current asset) increased, your cash would have to decrease by a like amount to pay for that inventory.

Cash Used to Acquire Fixed Assets – Calculated by taking the difference between the “Fixed Assets” entries on the two most recent balance sheets.

Sale of Short-Term Investments – Reflects short-term investments that have been converted to cash.

Increase in Notes Payable – Indicates the amount of additional short-term debt Acme has taken on.

Net Change in Cash – Equals the sum of the net cash provided by operating, investing, and financing activities.

Cash at Beginning of Year – Equals the Cash figure at the top of the most recent balance sheet.

Cash at End of Year – Cash at beginning of year minus the net change in cash.

Next week we will teach you how to analyze the statement of cash flows and show you why one item on it just might be the single most important figure to look at when analyzing any company.

Continue reading »]]>  

In our previous Build Your Biz post we presented readers with the income statement of the fictitious Acme Incorporated duplicated above.  In that entry we gave a brief explanation of each of the items on the income statement that may be helpful to review before proceeding further into this post, which is aimed at teaching you to analyze the income statement for information about the financial situation of a business.

Let’s start our income statement analysis by calculating a very important financial ratio, gross profit margin (also known as gross margin).  The math here is about as easy as it gets, gross profit margin is equal to gross profit divided by total revenue.  In Acme’s case we come up with a gross profit margin of 0.60 or 60% ($90,000/$150,000).  Gross profit margin can be thought of as a measure of efficiency, it tells us how much money is left over from sales after accounting for the cost of the goods sold.  While average profit margins vary greatly from industry to industry, as a general rule a higher gross profit margin indicates a more efficient company within its field.

The next figure we want to calculate is operating income or operating profit, as it is sometimes referred to.  Luckily the math is simple once again; operating income is equal to gross profit minus operating expenses ($90,000 – $5,000 – $45,000 = $40,00 in our example).  Operating income puts a dollar figure on the amount of money that a business is generating from its core activities and is closely watched by lenders and investors as a gauge of a firm’s ability to repay loans or pay dividends to investors.  If a business is experiencing growth in its operating revenues, then it will have more money available for expansion, debt repayment, or any other management initiatives.  The opposite is also true of course, so if your business’s operating income has been steadily declining this should give some cause for concern.

Now let’s go ahead and calculate Acme’s operating margin, which is equal to operating income divided by total revenue ($40,000/$150,00) or 26.67%.  Operating margin tells us how much a company keeps from each dollar of sales, before it has to pay interest and taxes.  As with profit margins averages will vary among different industries, but the higher the figure, the better.  Looking at your company’s operating margins over time, by comparing different years’ income statements, can be an effective tool to measure how effective your firm is at keeping what it earns in sales revenue.  If your revenues are increasing but your margins are shrinking, it may be time to assess whether those additional revenues are worth the money it costs to acquire them.

So hopefully now you have an idea of what the income statement can tell you about your business and how to calculate some simple, yet important, ratios that will also be of interest to lenders and investors. As with our discussion of balance sheets, this series on the income statement is not meant to have been an all-inclusive analysis.  We have left out a discussion of some of the more complex items that can appear on the income statements of large corporations, such as amortization and depreciation, although we may cover these in future posts if readers are interested. In any event you should now have the tools to understand a good deal about your own company’s income statement, and if you wish to read further, we’d once again recommend an introductory undergraduate-level financial management textbook.

Continue reading »]]> We recently wrapped up our two-part piece on balance sheets, and today we are going to move on and start taking a look at the next financial statement on our list, the income statement. Unlike the balance sheet, which looks at a company’s financial position at a specific moment in time, the income statement reflects performance during a period of time, typically a calendar year or quarter.  Let’s continue with our fictitious Acme Incorporated and have a look at its income statement below.

As with our sample balance sheet, your company’s income statement will not look exactly like this one (it may be missing some of our entries and contain some additional line items), but it should follow the same general pattern.  It will start with a figure labeled total revenue or perhaps net sales—which is essentially the same thing—at the top, and then break down various expenses before concluding with a net income (or loss) figure on the bottom line.

Let’s go through Acme’s example line by line and see if we can start to get an understanding of some of the major items that you can except to see on an income statement.

Total Revenue (or Net Sales) – This is pretty straightforward; the figure represents the total amount of money that the business brought in for the period covered by the income statement.

Cost of Goods Sold (COGS) – COGS tells us how much money we spent to acquire and produce the goods that we sold to generate the revenues included in the line above.

Gross Profit – Is equal to total revenue minus COGS.

The next section of our income statement breaks down a group of costs known as operating expenses, which include things like salaries, office supplies, and other items that are essential to the day-to-day functioning of a business.  If an expense can’t be included under COGS (i.e. it is not directly related to the production of a good or service) then it should appear as an operating expense.  Acme’s operating expenses are divided into the following two entries.

Research and Development (R&D) – These costs are often thought of as those that pertain to the future of a business, such as the testing and development of a new product or prototype.

Selling, General, and Administrative Expenses (SG&A) – This broad category encompasses all of a firm’s personnel costs (salary, benefits, and the like) as well as things like advertising and travel expenditures.

We now move on to the operating income section of the income statement, which in our case contains these four items.

Earnings Before Interest & Taxes (EBIT) – This figure shows us a company’s total profit before accounting for interest and taxes that it has to pay.  Although this may not seem like a useful metric, and indeed there are many who argue that it is not, because everyone has to pay taxes and all borrowers must pay interest on their loans, some people find it helpful to isolate a company’s ability to generate profit and to compare similar companies with different tax rates.

Interest Expense ­– The amount of money that a company pays as interest on its loans during the period covered by the income statement.

Taxes – We’re all familiar with this one, on the income statement the figure represents the total tax bill for the period and is sometimes expressed as a percentage (i.e. a tax rate) as well as a dollar figure.

Net Income – Offered referred to as a company’s “bottom line” because of its position on the income statement, net income is what is left over from total revenue after subtracting all expenses.

That brings us to the end of Acme’s statement and of this week’s post.  Next week we’ll dive deeper into how to analyze and interpret the income statement.

Continue reading »]]> In our previous Build Your Biz entry, we introduced readers to the balance sheet of the fictitious Acme Corporation presented below.  At the time, we gave a brief explanation of each of the items on the balance sheet that you may want to review before diving into this post, which is aimed at teaching you to “read” a balance sheet for information on the financial condition of a business.

So what exactly can a balance sheet tell a small-business owner?  It can help you to gauge the financial health of your company and to analyze trends that may be occurring over time.  It is also one of the cornerstones of financial reporting that lenders and investors will want to analyze before deciding whether or not to provide funding to your business.

One very important figure we can calculate is the current ratio, which is equal to current assets divided by current liabilities; in our example $35,000/$18,000 equals a current ratio of 1.94.  Because the current ratio measures a company’s ability to pay its short-term liabilities, it is a favorite of banks and other lenders. While current ratios will vary from industry to industry, a rule of thumb for small businesses is that lenders like to see a current ratio of at least 2.0.

Because inventory typically represents the least liquid of a firm’s current assts, we also want to gauge short-term financial health without relying on converting inventory into cash.  We accomplish this by looking at the quick ratio, which is equal to current assets minus inventories, divided by current liabilities. A company’s quick ratio (in our case ($35,000-$10,000)/$18,000 = 1.39) will obviously be lower than its current ratio but it will hopefully be greater than 1.0, meaning that it can pay off its current liabilities without having to worry about selling its inventory.

Because it represents a picture of a company’s financial situation at a specific moment in time, a single balance sheet is not useful for analyzing trends.  In order to do this though, we simply have to look at two or more balance sheets and see how things have changed over time.  For example, are your inventories growing much faster than your revenues?  If so, this may be a sign that you are stockpiling too much product at the expense of more liquid assets like cash.

You’ll also want to keep a close eye on how your receivables change over time.  If they are increasing faster than your revenues, then you may need to improve your collections process and take a realistic look at who owes you money and how likely they are to pay it back.  If you find that you have one or two problem customers, it may be time to have a talk with them.

Hopefully you now have an idea of what your company’s balance sheet is all about and how to read if for clues as to the health of your finances.  While our discussion has been by no means comprehensive, it should have left you with an understanding of some of the most important information that a balance sheet contains.  For even more detailed analysis, an introductory college-level financial management textbook can be a great resource.

Continue reading »]]> Today we are going to begin a multi-part series in which we explore, explain, and hopefully enlighten Build Your Biz readers about the often-confusing world of financial statements. We’ll be looking at the three most common statements—the balance sheet, the income statement, and the statement of cash flows—and trying to give you an understanding of how to interpret them and what they are telling you about your business.

Let’s start with the balance sheet, which presents a snapshot of a company’s financial position at a specific moment in time, often on the last day of the year. The left side of the balance sheet lists a company’s assets (i.e. the things that it owns). The right side lists the liabilities and equity, which represent the financial obligations that the company has to others. Assets are listed in order of liquidity, or the length of time that it takes to convert them into cash, and liabilities are listed in the order in which they must be paid.

Now let’s take a look at this sample balance sheet from the fictitious Acme Incorporated and break down each of the items in a little more detail.

We’ll begin with the asset side before moving on to liabilities and equity.

Cash – This one is pretty easy. In addition to actual bank notes, cash also includes any money that is immediately available, such as funds in a checking account. Cash is, by definition, the most liquid of all assets.

Accounts receivable – This represents money that is owed to Acme Inc. by its customers.

Inventory – Inventory is the value of the goods that Acme has in its possession but has not yet sold.

Total current assets – Are all assets that can be easily converted into cash within a year. In Acme’s case its total current assets are the sum of its cash, accounts receivable, and inventory.

Fixed Assets – Fixed assets include things such as buildings, machinery, and office equipment which are necessary to run the business but which are not expected to be converted into cash.

Total Assets – Equals the sum of all of the assets of Acme Inc., in this case the figure adds up to $50,000 and is comprised of $35,000 in current, or short-term, assets and $15,000 in fixed, or long-term assets.

On the right side of the balance sheet we see the following items:

Accounts payable – The opposite of accounts receivable, this figure represents the money that Acme owes to suppliers, vendors, and other creditors that is due within a year.

Notes payable – Are loans that must be repaid within a year.

Accrued payroll – Is money that is owed to employees. Because Acme, like most companies, does not pay its employees daily it will accrue this liability to its employees between paydays.

Total current liabilities – All liabilities that must be paid within a year, in Acme’s case accounts payable, notes payable, and accrued payroll.

Long-term debt – Is any financial obligation of Acme’s that is due more than one year from the date the balance sheet was prepared.

Total liabilities – Equals total current liabilities plus long-term debt.

Common stock – Represents the value of the stock that has been issued to investors in Acme Corp.

Retained earnings – Are the earnings of Acme that have been reinvested into the business.

Total common equity – Also known as owners’ equity or stockholders’ equity, this figure is the sum of the value of the common stock plus retained earnings.

Total liabilities and equity – Comprises all of the money that Acme owes to others, plus the value of its common stock and retained earnings, in this case $50,000.

While the precise line items on a balance sheet will differ from company to company, the format that we have laid out here will not vary. And while each company will, of course, have its own unique values for each entry on the balance sheet, one thing that holds true for Acme Corp. holds true for all companies: total assets are equal to total liabilities plus equity. Now that you hopefully grasp what we mean by assets, liabilities, and equity, this equation should make intuitive sense. If Acme Inc. were to sell off all of its assets it would receive $50,000; if Acme pays off all of its liabilities it will have to shell out $38,000 leaving it with $12,000, which is equal to the company’s total common equity. Thus we see that assets minus liabilities equal common equity, and some simple math then tells us that total assets are equal to total liabilities plus equity. Common equity is what is left when liabilities are subtracted from assets and is therefore sometimes referred to as the net worth of a company.

In our next post we’ll get into a more in-depth explanation of how to read and interpret a balance sheet.

Continue reading »]]> In our previous Build Your Biz post we defined a global recession and discussed the possibility that we could be headed for one. While we are not here to make economic predictions, we would like to offer small-business owners five strategies to help cope with the next recession whenever it does arrive.

Focus on Costs

Your bottom line is, of course, driven by your revenues as well as your costs. And while it can be tough to increase your revenues even in the best of times, you do have control over some of your costs, specifically your variable costs.  Just as you may be struggling with your business, your suppliers are not immune to the effects of recession either. Because they don’t want to lose you as a customer, now can be a good time to negotiate with suppliers for lower prices.

If your business is operating well below capacity you may have more manpower than you need, and it may be time to think about cutting back some of your employees’ hours. While cutting hours or laying off employees can be very difficult, it is critical to honestly assess your business’s needs in order to survive difficult times.

Preserve Your Cash

The old adage that cash is king is never truer than during a recession. Because banks become reluctant to lend as the economy sours, previously available financing can dry up very quickly, so managing your cash efficiently can make the difference between survival and failure. Make sure to stay on top of your accounts payable, and if you are able to take advantage of credit (without getting over-leveraged) in order to preserve much-needed cash, then by all means do so.

Embrace the Barter System

Contrary to what you might think, the barter system did not disappear with the advent of the market economy, it is alive and well today. Say you really need to update your website in order to make a marketing push (and marketing is something you should try not to skimp on during a recession), but you don’t have it in your budget to pay a web designer. Well, chances are pretty good that there are quite a few underemployed designers around, and if you are persistent you may be able to find a good one who is willing to exchange some of his time for whatever goods or services your business has to offer.

Ramp Up Your Customer Service

While ramping up anything in a recession may seem counterintuitive, customer service is one area in which you can actually have an advantage over your bigger competitors, particularly during turbulent economic times. When large companies struggle with massive layoffs and restructurings, their customer service—which often isn’t a strong point to begin with—can suffer greatly. As the owner of a small business, you have much greater control over your company’s interactions with customers than the CEO of a giant multinational does. And during a recession you may have more idle time to assess and improve those relationships; taking the time to do so will not only help you ride out the storm but should build loyal customers who remain with you during the good times too.

Focus on What You Do Best

When times are tough and business is slow it is important to ask yourself the following, “What is it that my business does best?” Like a lot of entrepreneurs you may have branched out from your initial focus and become involved with a number of different products or business lines. Now is the time to take a hard look at the numbers for each area of your business to see what is working and what isn’t. By refocusing your resources on what you do best (i.e. what makes you the most money) you’ll wind up with a more efficient and profitable company.

While there are no surefire tricks to surviving a recession, following the preceding advice should increase your odds of making it through until things get better; and in the long run, they always do.

Continue reading »]]> If you’ve been paying attention to the (mostly grim) financial news lately then you may have noticed a good deal of chatter about whether or not the global economy is headed for a double-dip recession. And while some of you are probably familiar with the dreaded double-dip when it comes to chips and dip, you may be wondering what exactly constitutes a double-dip with regard to recessions, or, for that matter, who determines whether we are experiencing a recession and how exactly one is defined. So let’s try and answer these questions before moving on to offer some advice on how to cope with a recession, double-dip or otherwise.

The International Monetary Fund (IMF) defines a global recession as a period when world Real GDP growth (PPP-weighted) falls below 3%. While this is a fairly technical definition that may be a little confusing to those of us without a degree in economics, we can hopefully shed a little light on it by looking at the components:

GDP stands for Gross Domestic Product and represents the total value of all goods and services produced in a country in a given year. In order to calculate world GDP, the IMF totals up the GDP of each country around the globe.

PPP is short for Purchasing Power Parity and refers to the concept that an identical basket of goods should cost the same amount in any country once we take exchange rates into account.

And the word “Real” that precedes GDP simply means inflation-adjusted. Because the quantity of goods and services that a specific amount of money can buy changes dramatically over time due to inflation, economists like to use real figures when calculating GDP. Because Real GDP strips out the effects of inflation, it more accurately reflects changes in the actual amount of goods and services that are produced.

So we now know that during a global recession the total amount of goods and services being produced in the world is either growing only slowly (less than 3% a year) or declining. And that we may be headed for another such period even though we only recently emerged from the particularly nasty recession of 2007 through 2009.

And while the IMF does not define a special category of double-dip recession, practically speaking this refers to a recession that begins shortly after the previous one has ended. In the current case people are concerned that there may be another recession looming, despite the fact that the one that resulted from the global financial crisis just ended in 2009.

So what does this mean for small-business owners? Because the amount of goods that gets produced goes into decline when we experience a recession, recessions are often characterized by periods of high and rising unemployment, as employers are forced to lay off workers when demand for their products sags. As more folks enter the ranks of the unemployed, the demand for goods and services can fall further, as it is tough for the out-of-work to justify buying anything other than the essentials. In this way recessions and unemployment can have a negative self-reinforcing effect that makes things tough not just for the unemployed, but also for those trying to keep their businesses afloat during these turbulent times. Fortunately there are some strategies that can help you cope, and we’ll explore a few of these in our next post.