‘Debt Peonage’ for Small Business Owners

A recent article in the Huntsville Times by Paul Huggins discussed ‘lending’ practices for small businesses during the depression. The banks weren’t interested in making loans to small businesses, so small businesses (farmers) had to depend on trade creditors (equipment & feed and seed dealers) to get them through cash crunches. UAHuntsville associate professor Dr. Stephen Waring referred to the loans a “debt peonage.” This is where everything the farmer owned was pledged to the lending merchant as collateral for the trade account. Debt Peonage is the practice of holding persons in servitude or partial slavery to work off a debt, in this case. Secret store prices lead to the small business being cheated by hidden fees and high finance rates.

Sound familiar? It should, we’re going through a similar time today. Most banks will not grant loans to small and start-up businesses. For them to even consider making such a loan, they require the business owner to pledge all his personal assets as collateral for the loan.

The article example was a very extreme case where the farmer ‘financed’ $5.57 in feed and seed product and had to pledge his entire farm as collateral. That’s pretty extreme.

The debt pricing practices today are more reasonable than in the 1930s; consumers are protected by laws that prevent lenders from gouging them with hidden fees and exorbitant rates. However, the things that haven’t changed are the use of trade credit to finance small business working capital and the pledging of all assets, even for a small loan. Most banks require the business owner to pledge all their personal assets to secure a small business loan. This practice can cause a small business owner real financial hardship, especially if they need to purchase a new vehicle, home, finance a college education for a kid or have a medical emergency. I’m not suggesting that we have a debt peonage situation today, just a lack of good financing options for small and start-up businesses. I’ve written and spoken about this for several years.

Entrepreneurs need to think about their financial situation very carefully before getting in a position where they have to make the best of only bad choices in financing their business. Cash flow issues are probably the single biggest ‘cause’ of small business failure. I use quotes around cause because the real cause is operator error. You, as the owner should have taken steps to prevent the condition or should have planned for this in advance. As my friend and mentor, Michael Gerber told me, these are the things small business owners should know before they start a business. Amen, Michael.

Do you have a story of a bad financial situation that you survived or need help getting out of a bad situation? Let me hear from you.

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The Elusive Fortune

I talk frequently to hopeful entrepreneurs and groups about a concept I call the “5 Deadly Sins of Entrepreneurism.” Many times these “sins” get into an entrepreneurs mind and take over their thought process. At that point hopeful business owners go from thinking about how to make their business successful to thinking about being successful. Many times this is a premature state and causes the business to stall or fail.

Sin #2 is Fortune. I saw an Inc. magazine article recently that suggested some rather startling statistics about founder fortunes, at least in terms of founder pay in the technology sector where the survey was conducted. I suspect that these statistics are fairly common across the industry spectrum.

The survey measured how often the founder is the highest paid executive in the firm. Here are the findings:

Highest Paid           17%

Tied                       24%

Not Highest Paid     59%

To get really good people, who are typically employees not entrepreneurs, you have to pay them well. There may not be enough cash flow left over to pay yourself well. In fact, the survey found that in the 283 tech companies surveyed, that the founder was paid less than at least one of their subordinates in almost 60% of the companies. This situation has been experienced by several of my business acquaintances who started businesses and were in some cases the lowest paid employee during the start-up phase.

Now clearly this situation will change over time if the start-up is successful. But it’s a cautionary tale for entrepreneurs to think about their expectations for their start-up. You’ll likely not be super successful over night. Time commitments, cash flow difficulties, and the like take their toll on entrepreneurs who aren’t prepared for the lean start-up times.

This discussion is never meant to scare people off, but to prepare them for the reality of starting a business. If you and your family are prepared for what’s coming, you’ll stand a better chance of surviving and getting to the payoff time later.  

Recipe for Success: Get Creative

Many small businesses are struggling to survive in this difficult economy. Restaurants have been particularly hard hit by rising raw material costs. Prices for staples like butter have increased significantly over the past year. And most small restaurants can't really buy in bulk due to lack of adequate storage space or food spoilage issues. So how do they survive without passing on higher menu prices, which many owners fear will drive away customers in a fragile market environment? They get creative.

Sourcing food products from local sources allows owners to buy just what they need. While the price may be slightly higher on a per unit basis, you only buy what you need. Buying from the large restaurant supply firms means you buy most products by the case, even if you can only use half that much. For example, a raw material is available from the national vendor at $2.00/lb. but must be bought in 8 pound cases. A local provider will sell any amount of the same raw material, but at a price of $2.25/lb. The unit price for the national seller is 12.5% less.  However, the restaurant can only use 5 pounds before the product goes bad. The total cost of the raw material from the national seller is $16.00, versus only $11.25 for the same usable quantity from the local provider, an almost 30% reduction in actual cost.

What ways have you found in your business to save money? If you have some interesting tips for other small businesses, please share them here. 

For a more complete discussion, view my white paper: Weathering the Economic Storm.

PowerPoint, Not Just For Presentations Anymore

One of the fun parts of being a start-up coach and consultant is I get to review lots of business plans. As you would imagine, some are good and others not so much. There has been what I consider an alarming trend over the past few months though. Entrepreneurs are using PowerPoint to create a "business plan." 


Now clearly, you can't write a business plan in PP unless maybe it's for a lemonade stand. Most people are clueless how to use PP to support a presentation, much less use it for a business plan. Don't get me started on the insane presentations people make using PP. Who in their right mind would try to write a business plan using presentation software? I know, it's nuts, but so-called entrepreneurs are doing it every day. 


If you need help writing a real business plan or developing a real presentation, drop me a line. I'm happy to help with either, but we won't be mixing them together.


www.BluePointStrategies.com

Show Me the Money

Over the next several posts, I’ll discuss some of the key questions entrepreneurs should ask before deciding to start a business.  The first one is how much cash do you have to invest in your new business?

You do realize that you need some of your own cash, right?  This is a great time to take a personal financial inventory.  How much do you have in your checking and savings accounts?  How much do you have in your investment account?  What about home equity and retirement savings?  Where is your money, can you get your hands on it and in what time frame?  Make a list of these sources of funds for your reference.

Does your spouse consent to your investing your savings into a new venture?  This would be a good time to discuss it.

Do you have the ability to personally borrow funds to invest in your business? Maybe you have a family member that wants to support your new business.  What about assets you can use as collateral for borrowing?  Maybe your car is paid off and you can use it for collateral at the bank.  What about home equity or credit cards?  Be careful with the use of these borrowed funds, but in a pinch, they might be the source you need to get launched.

So before you get started too far along in this new venture, figure out how much cash you can invest into your own business.  Make a list of possible sources of personal funds.  Whether it’s from your own cash in checking accounts or cash borrowed from a home equity loan, make a list of all these sources and figure out what you have available.  It’s not time yet to decide how much you will invest, but how much you can invest.

If you need a worksheet template for your financial figuring, go to my book website,www.BusinessStartup101.com.  Look in the templates page and download the sources of cash worksheet to use as a guide.  And if you haven't yet bought my book, Business Start-up 101: From Great Idea to Profit...Quick! then now would be a great time to do so.  It's available from my book website or directly from Amazon.

Not getting paid? It's probably your own fault!

Extending credit, that is allowing your customers to buy your products and services with the promise of payment later, can dramatically increase your sales in certain industries.  Customers tend to buy more product per order and order more frequently from your business if they can pay for those goods and services at a more convenient time.  Package deals, case quantities and even a full truck-load of merchandise are more palatable when payment doesn’t have to happen on the spot.  And while extending credit can help you sell more product, it can also help your customers better manage their inventory, reduce costs by buying in quantity and better utilize cash during the normal cash flow cycles of their businesses.  Extending credit to customers can really be a win-win situation, and in some industries, is necessity if you want to compete in the marketplace.

  

And for every positive reason for extending credit, I’ll be we can come up with a corresponding negative reason why not to do so.  The fact is, if you mismanage your accounts receivable, you’re going to get burned—and in most cases, it’ll be your own fault.

  

Let’s face it, sometimes people don’t pay.  It may be that they intended to pay, but mismanaged their own business to the point that they ran out of cash or are about to fold.  Every once in a while, and in my experience this is VERY seldom, people request credit with the intention of not paying.  There’s really very little you can do to prevent the occasional bad debt loss.  It’s a cost of doing business and should be included in your yearly budget.

  

However, systemic bad debt loss can be prevented if you properly manage your credit policies.  And the first place to start is by actually having a credit policy.  Determine under what circumstances you will offer credit and the kind of information needed to establish a credit account.  This really isn’t that difficult.  Look around at other businesses in your industry or related industries and see what kind of credit policies they have in place.  At a minimum, require a credit application with detailed information about the business and owner.  If you don’t typically use purchase orders in your business, you should also include a promise to pay.  This section should include any and all purchases and require the signature of an officer of the customer company.  If you utilize purchase orders, you can skip this step.  Some companies try to sneak a personal guaranty statement into their promise to pay.  I find that this generally prevents getting a signature on the application needlessly and doesn’t really grant you much protection in the form you are seeking anyway.  If you need a personal guaranty to sell the account, create a separate legal document for that purpose.  And remember, in most states, getting the signature of only one spouse is practically worthless.

  

After you collect the information from the customer, look at it.  It sounds simple enough, but many companies and credit personnel think that the process is about getting the application signed and a file created.  And while that’s a great start, it’s just a start.  Check the references from their other trade vendors and analyze the information.  If the prospective customer pays their other trade vendors in a timely fashion, they’ll probably pay you on time.  Don’t think that they will treat you differently though.

  

Based on the information contained in the application and from credit references, establish a credit limit that reasonably meets the needs of your customer.  My approach has always been to try to meet the needs of your customer.  If they are requesting a $10,000 credit line, analyze the information in terms of justifying that amount.  If you are comfortable with that request based on their information, then grant the request.  Send the customer, in written or electronic form, a summary of their credit line and your requirements for payment.

Before ever selling the first item on credit, make sure the customers understands your payment terms.  You’re selling valuable products and services at a fair price.  They should expect to pay you on time.  Don’t be afraid to tell them that you expect timely payment.  Start doing business with the expectation that they will pay on time and that they should not expect to get additional products and services if their account is over limit or late.

  

After the first sale, call the customer and confirm that the order was received and copies of all paperwork are in order.  You should reiterate that you appreciate their business and that you’ll call again right before payment is expected to make sure everything is on track for timely payment on their account.  Then, right before payment is expected, call the customer again and actually confirm that everything is on track for payment.  Create the expectation that you will be paid on time.  Follow-up with the first few orders to insure that a new customer is happy with your service, receiving their paperwork and that payment will be timely.

Training your customers to pay you on time is half the battle in accounts receivable collections.  Helping them keep their account in order and payment on time is actually a valuable service to them and helps you generate more sales.  If you have to put their account on hold for late payment, they can’t buy additional products and services and tends to create hostility.  You can prevent this by properly managing the account and keeping it in order from the start.  At the first signs of problems, talk with the customer and help them through their issues.  Letting their account get into bad shape only creates a bigger problem in the future.

Store Management Complete

Store Management Complete, By Frank Farrington. Published originally in 1911, this version 1922 by Byxbee Publishing Co.
  

I found this little book  (it's 4.5" x 7.5") in an antique shop in Decatur, Alabama a few weeks ago.  I love books and couldn't turn down a nearly 90 year old instruction manual for running a retail operation.  It's a funny little book, but also very interesting in it's common sense approach to business.  For entrepreneurs, it lays it all on the line in the first sentence of the book.

"It is the man himself that makes or mars the business."

Couldn't have said it better myself.  Mr. Farrington goes on to say that a business can have every advantage, properly stocked shelves, great location, good price, excellent marketing and promotion, but if the business owner doesn't know what he's doing, he'll run it into the ground in no time.

It was really the last sentence on the first page that I found most interesting:  "A merchant needs to be an all around man, a man who knows much about many things, who can himself do any part of the store work in need be, in order to show an employee how it should be done, and a man who can make himself agreeable to people and exhibit a high degree of proficiency in salesmanship."

I think he just described a small business owner.  In modern language, someone who can wear many hats.  Doesn't that describe most any small business owner's job?  Before you can, in Mr. Farrington's world, become a financier, you have to start small and do most of the actual work yourself.  As you grow and develop your business into a real business enterprise, you can start to hire employees to do the actual work and you can manage the direction and finances of the business. 

As a financier, you are managing the investment that is your business.  As a merchant, you're managing the store and the people and doing much of the actual work.  Just like Horace Vandergelder, the grumpy half-a-millioniare merchant in Yonkers, New York in Hello Dolly, we envision a merchant with a tweed suit and an apron.  He's the classic business owner and manager.

This book is in remarkable condition to be 88 years old and is delightful in its language.  I'm sure I'll have much more to say as read Mr. Farrington's Store Management Complete.

Sins of Entrepreneurism

The dream of business ownership is like an addiction running through the veigns of entrepreneurs.  We crave the start-up and break out into cold sweats at the very thought of a new business opportunity.  When done properly, a start-up is a wonderful thing, flourishing with profits and cash flow.  When mangled and mismanaged, the beauty tarnishes and becomes a dirty needle driving us to a metaphorical over dose.

So what happens that causes us to lose our way and take what we thought was such a wonderful idea and turn in into such a mess?  For many unenlightened entrepreneurs, they take their eye off the contest and start coveting the prize.  Instead of focusing their serious intention on building an enterprise, they lose focus and just create a job.  

For some, being self-employed is just fine.  Just understand that being self-employed is not a business.  Being self-employed is still trading hours for money.   The dream of entrepreneurship for many is realizing fame, fortune, liesure, travel and a healthy cashe of possessions.  That’s the prize for creating a well-run enterprise.   Let me say up front that I too hope to realize those prizes.  There’s nothing inherintly wrong with any of those things.  But they only come at the end, after you’ve created the enterprise.  The problem is, many hopeful entrepreneurs take their eye off the start-up and start focusing on the prize, before the enterprise is even established. For these people, the prize becomes a poison and bitter reality instead of the comfort.

For these lost entrepreneurial souls, fame turns out to be the dog remembering you, for your family has long forgotten your face since they never see you.  Your fortune becomes a huge pay cut, the result of a poorly run business.  Your liesure has been traded for living at your office.  You trade your 40 hour per week corporate job for an 80+ hour per week self-employment nightmare.  Your travel has become nothing more than a mind-numbing commute from your home to your office.  Your possessions are not exotic cars and vacation homes, but accounts payable, credit lines and inventory.   

How did you get yourself into this nightmare?  For most, the answer is in conducting the proper research, developing a solid marketing plan and testing for viability.  This simple process would have told many business owners that their business model was flawed and needed adjustment.  Unfortunately, they never really did any business planning.   By focusing on the prize and not the process, these starters never really got started…at least not properly.  The process is not complicated, but you do need to follow it.  If you don’t understand the process, get some coaching, find a mentor, or read a good book.  That reminds me, entrepreneurs can buy my new book Business Start-up 101 by visiting www.BusinessStartup101.com or Amazon.com.  If you want to chat, drop me a line.

What Entrepreneurs Can Learn From The Boy Scout Slogan

As I mentioned in my previous post, I love the Boy Scouts.  I spent many years as both a boy participant and an adult leader. Scouting teaches boys important skills and manners that will serve them well as adults and as business leaders.  

The Boy Scout Slogan offers another great opportunity learning opportunity for entrepreneurs and business leaders.  Do a Good Turn Daily.  It seems simple enough.  According to the Scouting literature, that can mean something as simple as a small, thoughtful act like helping a child across a busy street, going to the store for an elderly neighbor or welcoming a new student to your school; or a really big turn like saving a life, helping out after a disaster or working on a conservation project.  It goes on to say that a good turn is more than simple good manners; it is a special act of kindness.

The slogan calls for boys to do a good turn every day.  Now if a boy were to have not only good manners, but also behave with special acts of kindness ever day, that would make for a pretty special boy.  Little old ladies and young children standing on street corners would be clammering for such boys and their demand would be high.  Everyone would want such a boy in their neighborhood.  One and all would lavish praise on such a boy.  He would be a hero among boys.

What if we replace ‘boy’ with ‘company’?  What would happen in the neighborhood, let’s call it a market, if the boy, let’s call him a company, were to act with not only good manners, but also with special acts of kindness, let’s call it superior customer focus, every day?  How would such a company be regarded in the market and by its customers?  It would be an anomoly in the industry.  In fact, such companies do exist, but they are so rare as to have special case studies written about them in business schools because of their unusual behavior.  Books would be written about such companies defining how they do what they do.  Articles would tout the awesomeness of their employees, systems and management.  

So why don’t we, as entrepreneurs, embrace this idea of ‘Do a Good Turn Daily?’  Do we get so hung up in the day-to-day activities of running our little businesses that we forget who our customers are and that this whole process is really about them, not us?  Do we just get tired or worse yet, just don’t care anymore?  Obviously, the answer is different for each of our organizations.  Maybe we should go back to our Mission Statements and Value Statements and see what it is that we’re supposed to be all about.

I think the Boy Scout Slogan reminds us that it’s not about fancy systems and better technology and improved products necessarily.  It’s about serving our customers in a way that makes them happy to do business with us.  It’s about providing value.  It’s about making your customer’s life better.  It’s about special acts of kindness, every day.  That’s not really so hard, is it?

What Entrepreneurs Can Learn From The Boy Scout Motto

I have been involved with the Boy Scouts for many years.  While I’m not currently doing any scouting, I was a Cub Scout, Webelo and Boy Scout as a kid.  As an adult, I was an adult volunteer, Assistant Scoutmaster of a Troop in Ohio and started a Cub Scout pack in Georgia.  One of my biggest regrets in life was not working harder as a Boy Scout to get my Eagle Scout rank.  It didn’t mean anything to me as an early teen and baseball and band took over my life as more important activities and I eventually quit attending Scout meetings.  I wish I’d done more.

The Boy Scouts is a fine organization.  They teach boys how to be better students, better stewards of the land, better citizens and better men.  It’s hard to find many critics of the program’s outreach and positive influence on boys.  But I think there’s another great benefit to be gained from Scouting.  It makes better entrepreneurs.

In this series of blog posts, I’ll discuss what entrepreneurs could learn from the Boy Scouts by studying the Boy Scout Motto, the Boy Scout Slogan, the Boy Scout Oath, and the Boy Scout Law.  Those of you who grew up in Scouting are smiling already and can probably jump ahead to the punch line, so let’s begin with the Boy Scout Motto.

The Boy Scout Motto:  Be Prepared!

Need I go on?  Someone asked Robert Baden-Powell, founder of the Boy Scouts in about 1908, “Be prepared for what?”  To which Baden-Powell responded “Why, for any old thing.”  

Baden-Powell wasn’t just thinking about emergencies either.  He thought Scouts should prepare themselves to become good and productive citizens and to be ready in mind and body for any of life’s struggles that might lie ahead.  He wanted Scouts to be prepared for life!  He wanted the boys to live happily and without regret, knowing that they had done their best.  That’s really what Scouting is about, at its core. 

Entrepreneurs could adopt the same approach for their ventures.  Be prepared for business! Anyone who’s worked in business knows that every day brings a new challenge, even for the best run organizations.  For small businesses, the challenge is even greater due to the small staff and many duties fow which each member of the team is responsible.  So how do you ‘Be Prepared’ in your business?

Take time to plan.  Iit’s difficult to run a business when you’re never ahead of the curve.  Only by setting aside a little time for you and your staff to plan for upcoming events and activities, to work on your business instead of in it, will ever be prepared.  What is the vision and goals of the company?  Do you employees know against what to evaluate potential problems or opportunities so that the company can grow and properly support its customers? 

Create an operation's manual.  Working by yourself or with your staff if appropriate, study one piece of your business at a time and define the best practices for that area.  Document the policies governing the activity and procedures by which you’ll get the work done.  Take time to train your existing and new employees in the company policies and procedures.  Think of your business as a franchise.  If you were going to sell franchises in your buisness, how would you set it up?  If you wanted your business to run perfectly without you being there, how would you arrange things? 

Measure your performance.  If you don’t know where you are now, how can you know when you get there?  And where is there?  Create a full-blown system of metrics for your business, or just a corporate dashboard.  Start somewhere.  Measure your performance on a regular basis and share the information with your employees.  Get them involved in the measurement and goal setting process.  It does almost no good for you to set goals and measure your progress in secret.  If you employees know what the goals are and especially if you get them involved in the measurement process and goal setting, they’ll get excited about growing the company into the organization of which you dream.  Employees want to work on something grand.  Create a system that allows them to be part of the process and take pride in their work and they’ll surprise you with their efforts.

NEXT:  What Entrepreneurs Can Learn From The Boy Scout Slogan

8 Big Mistakes Small Businesses Make

Do you realize that there are mistakes you can make at various stages of your business’ growth that can be slowly killing it for months or even years if you don’t watch for them?  These mistakes do exist and they are not just reserved for the rookie companies. Many working businesses, including those you might think are “successful” because they’ve been around for 10+ years, are often still making them… and are possibly losing a lot of money and/or wasting a lot of time in the process. 

Although some of these mistakes seem aimed more at service type companies, they really do fit the bill for almost any type of industry.  I’ve done my best with the listings below to give examples to prove it.

1. Underestimating Project/Service Time - This is a big one and it pertains to service companies as well as companies that sell a product. This is a service company’s bread and butter.  If you don’t estimate your time to perform each and every service in your repertoire, you will get burned and there is little you can do about it but bite the bullet and learn from it.  The best way to estimate time is to do it once yourself or watch your best employee do the task and then throw in a little fudge factor on top of it.  For product companies, time becomes an issue with logistics so be aware!
   
2. Not Knowing YOUR Company Numbers - Notice I emphasized the word “your”. It’s a common mistake to use a competitor’s numbers as your pricing gauge without actually knowing why they use those numbers.  Think about the nightmare you will get yourself into if you take a competitor’s price, cut it by 10% and then start selling. What if the competition has a bad pricing structure and is barely making money or even losing money?  What if your costs are more than theirs?  You can use competitor prices as a starting point but you can’t base your whole strategy on it.
   
   Different industries have their own cost variables and you need to be aware of them for your project or product pricing.  What you pay for a product you are going to sell is not the only cost to have in your head when you are pricing products.  How much your labor and materials cost for a service is only a piece of an hourly rate.  Employees cost more than just salary and not every employee is part of your labor cost.  Every company has insurance in addition to overhead expenditures that need to be part of your price.  Oh, by the way, the big one that many people forget about in their price is the quality factor. What you include as “standard services” or “standard product features” as well as job site etiquette or in store service or warranties all need to go into your pricing.
3. Not Charging for All of Your Time & Costs - This seems like a ridiculuous statement to some but I bet most business owners will admit that they have given away a little too much of the farm at times.  Hey, there is nothing wrong with giving a little extra here and there to show you care. But either way, that’s not what I’m talking about here. What concerns me are those that put a lot of quality into their work or products or stores and do not cover the cost for it.  As an example, say you run a service company and your competitors don’t do a certain standard service that you do.  You can’t just undercut their price to steal a job; you need to have that cost covered in your rate and advertise the fact that it comes with the price upfront.  Stores undermine themselves, for example, when they put more people on the floor for customer service but don’t charge for it. These things cost you money and when your competitors don’t do them it costs them less money.  Put out better service and then under price them, and your competition just has to wait a little bit for you to fall on your face so they can swoop back in.
   
   As a business owner, you need to believe that you are providing your clients worthwhile wares that deserve to be paid for.  If you get the chance to explain why your prices are higher, then take that opportunity and do it.  If they don’t like the fact that you include things that others charge extra for later or that you treat them better, then they are most likely completely price shoppers.  You don’t want them as regular customers anyway.
4. Not Getting Paid Fast Enough - That’s right, the old cash flow issue.  As long as you are actually making enough money to pay the bills, this problem can be solved, prevented or at least made to be not as bad as it could be.  Here’s the deal:  First off all, bill customers very promptly.  It is very common for a small business to not have the procedures or systems in place to get invoices generated and out the door in a timely fashion.  Again, this would seem unlikely since that’s the reason why we are doing the work- to get paid. But it is very easy for the people responsible for getting this info to the billing people to be too busy to get it there or not have enough organization to give it to them the right way.
   
   The second part to slowing down or stopping a regular cash flow crunch is to make the quickest payment deals possible with customers and the slowest possible with vendors and employees.  If there is any way not to pay employees any more than twice a month, you better do it.  Contractors always have an issue with this. If you must pay weekly, then tell them before they are hired that they will be getting the first week held back, essentially buying you a week.
   
   Part three involves credit.  If your company can get a credit card, then get it. This allows for certain important things to be bought (that you can afford) that might come up during a cash flow crunch.  Better yet, especially if you have no choice but to deal with 45+ day customer payments, do your best to get a company line of credit.  This is a must if you plan on selling to the government or doing commercial service work.  These clients often have 60 to 90 day wait periods. 
5. Failure to Have Solid Systems and Procedures in Place - Too many procedures (known as “red tape”) is the reason why many people start their own business in the first place.  Unfortunately, having no procedures and systems in place at all is not an alternative.  Depending on the type of industry, business owners must come to a happy medium or chaos and the unknown will ensue. Some basic examples where procedures or systems are needed include billing, collections, payroll, human resources (interviewing, hiring, vacations, benefits, job responsibilities, etc.), manufacturing, operating equipment, maintaining equipment, inventory, sales calls/visits and logistics to name a few.
   
   Even a one person show needs to have some admin procedures in place.  This will make it easier to hire temps and subcontractors and control what they are doing for you.  Without at least a watered down version of a system or procedure to do everyday work, you will be to blame for causing many major headaches as your company grows.  I can’t emphasize how important this is for when you bring on new employees.  I’m sure you heard this before, but I am also a big proponent of having an employee handbook even for one employee.  It’s amazing the trouble people can cause business owners just because they allow you to pay them.
6. Spending Advertising Money Just to Say You Advertise - I would almost rather see my clients not advertise then to spend without regard to tracking the results.  There is no point in a marketing campaign if you do not put things in place that allow you to measure how well the plan is working.  The other wasteful part of marketing is not tracking their previously successful campaigns.  Why some people think that just because a $400 dollar a month ad worked once very well for one busy season, that it will automatically work every year after that is beyond me.
7. Spreading Yourself Too Thin - This is a classic mistake made by every entrepreneur. The key is to figure out when you are at that “wearing too many hats” point and start getting some help.  The solution here is to know your strengths and to be able see when you are not performing the duties that demand these skills.  If you are the best sales person on the company, you can’t get caught up in day-to-day operations.  If you do, sales will slip and eventually you won’t have any operations to worry about.  Think about this to help you figure out if you are spread too thin: Did you really go into business for yourself to work 80+ hours a week?
8. Not Getting Help Soon Enough - Set goals to know when to hire people to take over where you are light on knowledge. Not getting help or waiting too long can kill a company.  Most people who start a business do it because they are good at the technical end or the sales end.  If you know the best way to make a widget, then your strength is in production and that is where your time should be spent.  Hire an outside company or consultant to take care of the sales and marketing and then hire inside when you can afford someone full time.  Don’t be something to your company that you are not. It will only hold you back.
   
   The three big issues people like to tackle themselves but usually are least knowledgeable about are legal issues, accounting/bookkeeping issues and daily operations issues.  The odds are that these three things are your weakest link so if you don’t have a partner that has the background for these subjects, then be prepared to get help as soon as possible.  It’s preferable that you do this before you start a business.

Although looking for these problems at any time is a good idea, the end of a year or season is an excellent business interval to make sure you are not making these errors.  Take the time, or make the time, to fix these problems. If you don’t know how to reverse the problems, then get some help.  If you really don’t have enough time to either figure out if you have these issues or know they are there and can’t break away long enough to do it right, then get some help.

13 Ways to Bootstrap Your Start-Up Capital

Starting a business without borrowed money is an awesome thing.  The lack of readily available funds forces you to concentrate on the basics, maximizing resources to save capital for when you really need it.  Your discipline is sharpened and you don’t waste resources on stuff that doesn’t translate to bottom line success.  But sometimes, business owners need to borrow money to grow or start their businesses.  I recommend borrowing money as a last resort, and when you do borrow, utilize your bootstrapping ways as a first line of defense.  Only resort to banks and other official sources when all avenues have been exhausted.

So what are the bootstrapping ways of borrowing money and what other unofficial sources are out there other than banks?  I’m glad you asked…

1. e-Bay – Sell your stuff.  You’ve probably got an attic or basement or both full of stuff, junk mostly.  But some of it could be dusted off and sold on e-Bay or other auction sites, in a local antique or flea market or at a garage sale.  Remember the adage, “One man’s trash is another man’s treasure.”  
2. Pawn Stars – Pawn valuable stuff you don’t want to sell.  Okay, this isn’t a great plan for long-term financing of your business, but it could be used to raise a small amount of capital for an immediate need that could be repaid with other more long-term sources of funding.  It’s a way to raise capital quickly, in a pinch.
3. Car Equity – Tap into your car’s equity.  Refinance of finance your vehicle to get the ‘equity’ out of it.  Just remember, as your vehicle gets older, its value will decline and so your opportunity to get cash from it.
4. Credit Cards – Borrow money off your credit cards.  While this technique isn’t as readily available as it once was, you can use personal credit cards to pay your business bills.  Apply for cards and use balance transfers to pay off older balances with new cards at introductory rates.  I have a friend who built a house using credit cards to finance the construction.  He paid the cards off with a permanent first mortgage after the construction process was over.  This is a short-term solution as credit cards have high interest rates.  This also isn’t a solution for individuals who have no money management skills.  Wait!  On second thought, starting a business isn’t a good option for individuals with no money management skills.
5. Family – Borrow from your family.  An infamous local entrepreneur is often quoted as saying, “Don’t borrow money from people you sit across the Thanksgiving table from.”  The downsides of borrowing money from family are too many to enumerate.  However, the transaction can be fast and easy if you have a family member who has the extra cash and is interested in investing in your business.  There are two keys for borrowing money from family.  First, don’t borrow money that the family member will likely need to live on.  Unless you plan to support the family member and be responsible for all the bad things that happen to them when their living expense money disappears because your business couldn’t repay the money when expected or needed.  And second, treat it like a bank loan.  Get a note document on-line and modify it to meet your needs and then live by its terms.
6. Friends – Borrow from your friends.  SEE #4 above for ground rules.
7. Local ‘Angels’ – Borrow from local business acquaintances and professionals.  Most ever city and town has a group of wealthy citizens, whether they are retired businessmen and women or professionals or maybe they inherited their wealth.  The point is these people have more money than they have good options for investing it.  If you have an interesting plan and can compellingly sell your idea, these folks may be just the ticket.  You’ll need official legal documents, but it’s significantly easier than borrowing from a bank.
8. Vendors – Borrow money or products from your vendors.  If you have a major or potentially major vendor, they might be interested in help you establish a business.  These vendors have a vested interest in your success since you’ll be buying must of your product from them.  In some cases, these vendors maybe willing to help you get your business established by either loaning you money, product, location or other resource to help you get in business.
9. Factoring – Sell your accounts receivable.  Factoring may not be a great way to get into business, but is can help in the beginning.  If you have some large accounts receivable from a special job or large order, consider factoring.  You sell your receivable to a third party firm in exchange for cash.  You’ll receive between 70% - 90% of the value of the receivable, depending on the risk involved.  It’s an expensive financing method, but might help you out in a pinch or allow you to take a huge job that you wouldn’t have been able to take otherwise.  Just remember to factor in the cost in the analysis.
10. Clients – Borrow from clients or have them pre-pay for services.  While this may seem like a dumb move, your clients may be intimately knowledgeable of your start-up plan and more than just a disinterested third party in your success.  Your client may help you to get started so that you can provide products and services to them.  If you have an excellent relationship with a potential client who could benefit from your success, maybe they’ll help you get started.  If they aren’t interested in loaning you cash, maybe they’ll pre-pay for products or services at a slight discount to help out.  I don’t recommend that you ask random clients to borrow money, but for those clients with whom you have a special relationship, this could be a great option.
    When all else fails, consider these options.
    
11. Investments/401(k)/IRA – Borrow from or liquidate retirement accounts. You may have options for borrowing from or cashing out investment and retirement accounts.  These are more last available option type choices, but they are available if you have money invested in these type accounts.  Remember, withdrawing money from a pre-tax retirement account will mean tax penalties and income taxes have to be paid on these withdrawals.  Factor these costs into the equation and understand the consequences before using this source.
12. 529 College Savings Plan – Liquidate or borrow from your child’s education fund.  While using your child’s college savings to start a business might not be such a great idea; it might have to do in a pinch.  This is another last line of defense consideration.  Just be prepared for your kid to work her way thorough college if your business doesn’t make it.  On the other hand, you’ll be especially concerned about achieving success and paying this money back before her college years begin.
13. Home Equity – Tap into your home’s equity.  Either refinance your home mortgage or take a second mortgage or equity line of credit to utilize the equity in your home.  I consider this a second tier option due to the possible side affects should your business fail.

Have you got some other ideas?  Let's hear them.

Weathering the Economic Storm - Part 5 - Business Relationships

This is the fifth and final entry in the series.  To review, we’ve covered:

1. Corporate Dashboards

2. Review Profitability

3. Review Costs

4. Cash

5. Business Relationships

Now in part five, I’ll discuss improving your business relationships and why you should care.

Work on Your Relationships

During difficult economic times, it’s especially important to try to improve your business relationships.  Pay attention to the needs of your larger customers.  Schedule face-to-face meetings to review their needs and your ability to solve their problems.  If you can find ways to cut costs on your side and serve them more efficiently, you both win and they’ll appreciate your being proactive in the relationship.  Your customers are probably doing the same kinds of analysis and reviews of their situations as you are doing in your business.  They want to find ways to cut costs and improve cash flow.  Don’t let them go away because you didn’t take the time to talk with them.  Even if you only have a face-to-face status update or take them to lunch for a friendly chat.  They’ll appreciate your concern and attention.   

But don’t stop with your customers, talk with your vendors.  Letting your vendors know that you’re looking for ways to improve delivery reliability and reduce on-hand inventory and costs will open up discussions for way to improve your working relationships.  It could be that they’re doing all they can do with what they have to work with.  However, maybe a slight change in the rules by which you operate give them flexibility to work with you on some items that are important for your business in exchange for your helping them with items that help them in their business.  You’ll never know where there are even possibilities unless you talk.  Don’t assume that they aren’t interested in working with you to find way to be more efficient together.  On the other hand, if they’re not interested in finding way to work together more efficiently, you probably need to look for another vendor.  

 Finally, talk with your financial partners.  Banker, insurance brokers, regulatory agencies and other business partners are all interested in your long-term survival.  Most of these groups will share information about the industry and ways to improve your operations to achieve more profitability, lower costs and higher efficiencies and safety ratings.  A higher quality business is a more profitable business.

Summary

Running a business is tough, even more so during harsh economic times.  Engage your employees and management to look at every aspect of your operations to make improvements, increase efficiencies and raise quality.  Measure your progress as you make changes to achieve continuous improvement.  Focus your financial eyes towards the cash and constantly strive to bring your customer and vendors closer by adding value to your relationships.

If you need help in any of these areas, give me a call.

Weathering the Economic Storm - Part 4 - Cash

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I spoke about managing your business to improve profitability.  While you should be doing these things all the time, you should pay even more attention to them during a period of economic distress.  Part three discussed reviewing your costs.  Now, in part four we’ll talk about the king of all concerns for small businesses: Cash.

It’s the Cash, Stupid!

In the verbeage of the 90s and the lesson painfully learned by President Bush (41), “it’s the economy, stupid!”  Times have changed and for the worse, but the theme for small business stays the same.  It’s not the economy, it’s the cash.  It’s always been the cash.  It’ll always be the cash.  For small business success, CASH IS KING.  A small business can survive a period of less-than-optimal profitability.  But as soon as a small business runs out of cash, it’s out of business.  If you can’t make payroll on Friday, how many of those employees will show up on Monday and keep working?  If you can’t pay for that last load of raw materials, do you think you’ll get another?  What if you don’t make your loan payment to the bank?  I’ll tell you what, you’re done!

Cash is important for small business success in all times, but especially so during times of economic turmoil.  Look for ways to collect your cash faster and conserve it once in your possession.   A few options to consider might include:

• Collect your accounts receivable faster
• Review your credit policies
• Consider shortening your payment terms or offering a larger cash discount for quick payment
• Postpone expansion plans until the market is stronger
• Don’t build new buildings or add more office space
• Postpone any risky projects
• Delay hiring new employees unless they will directly improve cash flow
• Reconsider expanding into new sales territories

In some cases, your business will need to do new things and expand in some ways.  The key is to postpone any risky ventures until times are better.  Those ventures that you consider worthwile need a rock-solid and fast ROI to prevent excessive cash drains.  When you do dicide to try new things, make sure you have ample cash reserves in case your time-frames lengthen and cash doesn’t flow as you anticipated.  Remember, iIt’s difficult enough to profitably expand and conserve cash during good times, much less during bad times.

NEXT AND FINAL INSTALLMENT:  Relationships

Weathering the Economic Storm - Part 3 - Review Costs

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I spoke about managing your business to improve profitability.  While you should be doing these things all the time, you should pay even more attention to them during a period of economic distress.  Here in part three, I'll discuss reviewing your costs.  Yes, I know it's another 'Duh', but....

Review Costs

The small business owner should review cost structures and operating efficiencies and make improvement plans.  Start with your product costs.  Look for ways to reduce costs in every phase of operations.  If you can save a few pennies of cost in each operation, you’ll make your whole business more profitable.  Some of the more obvious ways to reduce your product costs are:

Inventory Management:

• Better manage your inventories
• Improve your purchasing efficiencies
• Review your min-max order points to reduce costs
• Work with vendors to improve delivery lead times
• Consider bulk purchase contracts to reduce costs
• Use vendors to warehouse raw material inventories
• Use just in time deliveries where possible
• Evaluate employee counts and efficiencies

Review Operating Costs of:

• Employee workloads and counts
• Benefits coverage and costs with your insurance agent and make changes as appropriate
• Your energy usage; on plant equipment, warehouses, offices - everywhere you use it
• Operating costs of in-plant vehicles
• Fleet efficiencies; track # of deliveries, % of truck full, speed, idling

Review Costs of Services:

• Telephone
• Internet 
• Waste disposal
• Electricity, natural gas, water
• Confidential shredding
• Temp employee contracts
• Office equipment service contracts

Financial Costs:

• Insurance coverages
• Bank line interest rates
• Credit card fees
• Merchant account fees

The lists can go on and on, but I think you get the picture.  With your management team, divide and conquer.  Split the company operating costs in to categories and assign each to the manager most able to attack costs in that part of the company.  Take each category and apply a simple Pareto analysis to the costs and start with the biggest.  Don't be afraid to think outside the box either.  If the only way to decrease fleet costs is to design and implement a fleet safety policy, then do it.  Generally speaking, the safer and more well trained your fleet, the less accidents they'll have.  Fewer accidents mean lower insurance cost, lower deductible costs and lower damage to leased delivery vehicles.  You win all around, plus your employees behave more safely, and that's always a good thing.

Once you've reduced costs as far as possible on the first item, start working on the second item.  On the other hand, if you find that you can save money on an item further down the list by making a simple change, do it.  Take whatever approach works for you and your company.  As those shoe guys say, "Just Do It!"

NEXT:  It's the Cash!

Weathering the Economic Storm - Part 2 - Review Profitability

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I'll talk about profitability.  I know, many of you are saying "duh!"  But my experience in nearly three decades of business, large and small, is that things that go without saying, should be said.

Review Profitability

While a dashboard is the first place to start, it’s only the beginning.  In difficult economic times, you need to re-evaluate your whole business model and squeeze out every penny of cost and every measure of efficiency in your systems.  Begin by looking at the big picture, but on a smaller basis.  Create weekly income statements and cash flow reports to discover faster if you have problems.  If something doesn’t look right, dig deeper into the numbers to see what’s happening and hopefully be in a position to take action quickly.  Don't wait for a whole month to go by and then wait a couple of weeks more to prepare official statements before you look at something.  Use the basic output from your accounting system and call it 'close enough' and take a look every week at your performance.  You'll know which accrual items are missing and which month-end entries are not included.  Don't get hung up on those details.  Look at the basic performance of the business units and hunt for abnormalities.  If you find them, go to the source department and try to determine the root cause of the issue.

Also look at the profitability of your major product lines and customers.  Do you have products that aren’t carrying their weight?  Evaluate the possibility of raising prices, changing the cost structure or physical makeup or whether to quit making the product or service all together.  It does you no good to produce products at a loss unless a very small real dollar loss is creating big profits or dramatically reducing costs in another product line.

If you have customers that aren’t profitable, evaluate them in the same way you would a loss-producing product.  Do you really need a customer that causes you to loose money?  Unless they provide some other benefit far in excess of the losses they produce, you need to discuss price increases to make them somewhat profitable or help them find another supplier so you can stop your bleeding.  While getting rid o a customer flies in the face of conventional wisdom, you don't need to keep a customer who's putting you in the red.  In some cases, customers who know their accounts are not profitable will be willing to work with you to find solutions so they don’t have to find another supplier.  However, if they don’t care about your mutual profitability, it’s time to send them packing.

NEXT:  Reviewing Costs

Weathering the Economic Storm - Part 1 - Corporate Dashboard

The economy is slow and jobs are disappearing by the day.  The outlook for most businesses is not so rose-colored these days.   How’s a small business owner to survive this economic storm?

Over the next five entries, we'll look at strategies that small business owners can employ to re-evaluate their business model and operating efficiencies.  This is no time for halfhearted management.  Times of economic distress call for decisive action and clear plans.  You need your whole team working to forward your plan in the most efficient and productive manner possible.

Corporate Dashboard

Start by re-evaluating your corporate dashboard.  What’s a corporate dashboard, you say?  It’s like your car’s dashboard in that you have a few gauges that tell you the important aspects of your cars performance.  For instance you have a speedometer, tachometer, fuel gauge, temperature gauge and voltmeter.  Perhaps your car has more, perhaps less.  In any event, these few gauges measure and tell you in a visual way, how the most important functions of your car are performing.  In the same way, you and your management should evaluate and determine the most important functions of your business and then keep your eyes on them every day.  By creating a ‘dashboard’, you have a single sheet of paper or even better, a single computer screen displaying the vital characteristics of your business.  If one of the gauges is off, you should investigate.

On a regular basis, you and your team should determine if your dashboard is still serving as the most important measures of your business.  If not, make the necessary changes.  Once you've determined what to look at, then actually look at it.  Having a nice dashboard set up in your corporate intranet and then not using it to better manage your business is like buying a new car and not filling it with fuel.  It might look nice sitting there, but it doesn't provide you any transportation and it costs a lot of money.

When your dashboard tells you that something is amiss in your operations, investigate further and get to the bottom of the problem.  Determine the best course of action to fix the problem and then measure your results.  Continue tweaking the problem and measuring your results until the problem is solved or the process is improved.  The key is to take action and measure results. 

NEXT:  Reviewing Profitability

Starting a Business - 5 Tips to Ignore

I coach a bunch of new entrepreneurs every month and read loads of information that others publish and discuss about starting a business.  I am constantly amazed at some of the bad advice that well-meaning people will give a new or potential business owner.  I've put together a list of tips to business owners that I think you should just ignore.  You may have others to add to the list.

“If you were the boss, you’d do things differently.”

Perhaps, but did you ever think about why your boss does things the way he does them.  Often, the priorities of the business and the owner clash with the priorities of an individual employee.  While you may think that his decisions are unwise, they may make perfect sense in the overall corporate mission.  When you are the boss, and especially when you are the owner, you think about the overall organization goals, not just the specific situation in a particular job.

“If she can be successful, you can too.”

Well, maybe.  Unless you have the same skills as her and an idea that’s just as good and a plan that’s just a well executed, then maybe not. What other people do is largely irrelevant in your world.

“You can always go back to your old job.”

Can you really?  Most people really can’t physically go back to where they were before, in the same job or situation.  While you were gone,you were replaced and they’ve moved on. Even more importantly, you don’t have the same mental state about working for somebody else as you did prior to starting your own business.  It’s best to stay where you are as you start your business and then quit after your new venture is successful.

“You’ve been successful in your career; you’ll do great running your own business.”

The skills required to perform well in a job do not necessarily translate to another job.  If your job is managing the accounts payable for a professional baseball team,that doesn’t mean you can play second base. Job skills tend to be compartmentalized within a company.  The skills required to manage the accounts payable are not the same skills required to manage the marketing communications department or the quality control department. Running a small business requires you to perform well at ALL the job functions until you grow the company large enough to hire employees to handle the different functions.

“Don’t worry about the cash, just sell, sell, sell.”

In the small business environment, cash is king.  If you’re having cash flow difficulties, then growing the sales will likely exacerbate the problem.  Long-term, businesses need profits and cash flow to survive.  However, in the short-term, you can survive without profits as long as cash flow is good, but you can’t survive without cash.  The minute you run out of cash, you’re out of business.

And a bonus:
“Don’t worry, if you fail, you can just walk away.”

This is extremely unlikely. Small businesses can rarely do business on their own.  That is, they need the financial backing of the owner to get started.  If you do business with a bank or major vendors, they’ll likely require the owner to personally guarantee any loan or account until the business has established its own creditworthiness.  In addition,you’ll probably be investing your own money to help get the business started.  Sure, you can walk away from the business, but your investment will be gone and the debts will likely follow you personally.