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Get more cash

Avoiding a Cash Flow Crisis

Maximizing profits and growth while also maintaining adequate cash flow is one of the most difficult challenges a young business faces, but it’s also one of the most important.
The old adage that “cash is king” has never been truer given today’s challenges for securing a funds or attracting investors.

To utilize capital to spur growth and avoid a cash flow crisis consider the following guidelines:

Prioritize cash flow

Determine how much cash your company should have on hand at all times. (A general rule of thumb: shoot for at least enough to cover operating expenses for three to six months.) Then make it a top priority to meet that goal week after week. Without cash, even a rapidly growing company won’t last long.

Invest

If you have more than enough cash-on-hand, consider using excess capital to grow your business. Fail to invest in capacity and you risk failing to meet growing demand. On the other hand, overestimate demand, invest too much capital or invest it poorly and you could kill your business entirely.

Spend wisely

It’s easy to rationalize spending money on infrastructure, equipment or new hires that will make doing business easier or more convenient, but if it won’t directly lead to more or new revenue flow, it’s probably too risky. Look at it this way: small and new businesses can usually only afford to spend on projects that will bring in more money than they cost. You don’t want to spend $100 to make $50.

Plan for accounts receivable growth

If you’re anticipating growth, be sure your billing department is prepared. As the number of clients increases, it becomes harder to keep close track of each account; without oversight, an increasing percentage of clients may become delinquent on payments. When this happens, cash flow can slow to a trickle even if business is good and sales are up. You might be surprised to learn some up-and-coming companies are profitable right until they file for bankruptcy, thanks to such accounts receivable problems.

Collect

Closely monitor which customers have outstanding debts, and develop a working plan of action for pursuing delinquent accounts. You don’t want to lose clients by being inappropriately aggressive. On the other hand, without payment you could lose your business. If your company consistently has problems collecting payments, consider changing your billing structure. That might mean requiring new clients to pay some money upfront, integrating a retainer or subscription fee or making payments due sooner after delivery.

Keep track

Consider implementing a financial dashboard system to assess your business’ cash flow on a weekly basis, and use what you learn to inform spending decisions. For example, if the amount of cash-on-hand is shrinking, examine the numbers to find out why. Are you spending too much on incidental costs? Are clients consistently late making payments? You can’t fix the problem until you identify it, and you can’t accurately identify it without data.

Even if your business is thriving, you still need to keep a watchful eye on cash flow. Fast-growing companies get into trouble when cash-on-hand dwindles, sometimes going from profitable businesses to bankrupt ones overnight. (For real world examples, check out these interesting case studies that recently appeared in Inc. Magazine.) Make cash a priority, and you can grow your business without going out of business.

Robyn Barrett is founder and managing member of FSW Funding, specializing in factor financing for small to mid-size companies. For more information, visit www.fswfunding.com.

Economic concepts

Managing Deductions: Steps to increase revenue

Unfortunately, it is common for customers to pay less than they owe, taking deductions off their bills or underpaying their invoices. For small businesses, this can create a significant loss in revenue and problems with cash flow. Some businesses have reported losing as much as 10 percent of their gross sales to deductions. Fortunately, companies can take steps to address and resolve these issues.

Reasons for deductions

Customer deductions can point to systemic issues such as quality control or a lack of communication between departments. Other organizational problems that may contribute to customer deductions include: poor relationships with trading partners, incorrect invoicing, shipping irregularities, problems with order fulfillment or inadequate order processing methods.

Some companies automatically write off deductions under a predetermined amount. However, savvy customers sometimes catch on and deduct amounts slightly below that threshold. Others take discounts on terms like two percent 10 net 30 even when they are paying bills monthly.

Large retailers are implementing more stringent compliance standards, leading to more deductions. For example, Wal-Mart introduced its Must Arrive by Date program in 2010. Suppliers who fail to deliver goods to Wal-Mart within a four-day window more than 90 percent of the time during a month are automatically docked 3 percent of the cost of goods sold. Since Wal-Mart is a leader in the retail industry, other companies are likely to follow a similar policy.

Deductions can be divided into three categories:

• Intentional deductions are sales-related and include advertising, markdown allowances, and special promotions. These deductions are considered the “cost of doing business” and are usually legitimate, so opportunities for recovering money are limited.
• Preventable deductions are frequently associated with compliance issues, such as shipping too early, too late or using the wrong carrier. These are easy deductions to address. A quick investigation can pinpoint where operations are failing, and correct the issue.
• Unauthorized deductions occur when customers short-pay their invoices because of pricing, returns, or full and concealed carton shortages. These are also deductions which can be prevented when proper oversight is in place.

Solutions to reduce deductions

Once business owners review current practices they can create best practice guidelines and invite team members to be part of the solution. Order fulfillment steps can include:
• Establishing checks and balances to ensure correct quantities, prices and sizes
• Inspecting products and cartons before shipping
• Reviewing customer’s compliance requirements to make sure all shipping, packing and labeling requirements are met
• Examining invoices to ensure documents contain correct purchase orders, invoice numbers and clearly defined payment terms
• Automating the accounts receivable process to better identify, document, track and resolve deductions

Deductions can be the result of any number of errors in a company’s process. Conducting a root cause analysis to reveal why customers are taking deductions can help determine appropriate recovery efforts and thresholds for automatic write-offs. Until the right tools and solutions are implemented, company revenue and cash flow will be in jeopardy.

Robyn Barrett is founder and managing member of FSW Funding, specializing in factor financing for small to mid-size companies. For more information, visit www.fswfunding.com.

Coldwell Banker

How to establish trust with your bank

According to a recent survey, financial services and banks were noted as the least-trusted industries in 2012.  Despite the fact that the financial crisis occurred five years ago, people are still concerned about the reliability of banks.

The 2012 Edelman Trust Barometer had more than 30,000 online respondents, in which only 46% of U.S. respondents said they trusted the financial services industry, and only 41% said they trusted banks. Clearly, the last few years tainted the banking industry’s image, and it is taking time for public perception to change.

Despite what the public may think due to the history with the bank crisis and the bad press, banks are not inherently sneaky or dishonest. But like any business, it comes down to building relationships.

To establish trust with your bank, there are a few precautions you can take that will help to set the foundation for a strong relationship.

Don’t put all your eggs in one basket

When you are establishing your business, don’t have all your banking relationships at one bank. For example, many bank documents will cross collateralize loans and bank accounts – both personal and business. Set up your operating business account at one bank and payroll at another. It is also a good idea to open personal accounts and loans at a completely different bank than your business.

Grow the relationship

While it is vital to have a great relationship with your primary banker, you need to move beyond that relationship in the bank. Bankers are transient and move positions within the bank or to another bank quite often. If you only build a relationship with your banker and your banker is promoted or leaves the bank, you will be left with no allies. Get to know your banker’s boss and associates. You never know who will be your banker tomorrow.

Know your bank

The relationship you are trying to establish is really with the bank, so take the time to learn about the banks you do business with. Understand the services they offer. Search the Internet to read blogs and reviews from happy and unhappy business customers. This will help you better understand if this bank is a good fit for you.

Sources and uses of cash

When you talk to a banker about the best loan for your company make sure the banker understands what the money will be used for. Don’t assume the banker knows. For example, if you need money to fund payroll and pay vendors, you need a working capital loan. A working capital loan is based on short-term assets (accounts receivable and inventory) and is used to finance short-term liabilities (payroll, accounts payable).  Don’t let a banker talk you into an SBA term loan to finance working capital. Match assets and liabilities – short term loans fund short-term liabilities and long term loans fund equipment and real estate.

Read the loan documents

So many smart business people are more concerned with the terms on their cell phone contract, but never bother to read or understand the details on a commercial bank loan. While most bank loan documents are standard and the bank may not make any changes, a business owner should still have an attorney review all the documents. The attorney’s role would be to advise you on what is in the documents – what are events of default?  What are cure periods? What should the business owner make sure they do in terms of financial reporting, notice of management or ownership change?  If you understand your loan documents, you will be better protected against surprises.

The public’s perception of the banking industry is clearly still hindered by the scandals, government accusations and lawsuits brought on by the financial crisis. Fortunately, the reality of the situation is better than it is perceived.

Regardless of the industry’s image, it is always best for business owners to take a proactive approach. Taking the time to get to know your bank is the key to building a long term successful relationship; one that you can feel confident in, where you can trust your financial service provider.

 

Robyn Barrett is founder and managing member of FSW Funding, formerly Factors Southwest LLC, specializing in factor financing for small to mid-size companies. For more information visit: www.fswfunding.com

 

internet

Research potential clients online to protect against fraud

While many business-to-business companies use the internet as a way to gather information on the individuals and organizations they interact with, the web can reveal much more than an  address, phone and basic facts on the products or services offered. Before getting into business with a company, it is important to do your research—and the internet makes that easier than ever.

Search engines such as Google are now a valuable vetting tool to gauge the risk of doing business with a new customer. Aside from the information you may uncover from a search engine’s results, social media sites such as Facebook, Twitter, LinkedIn and Yelp can also be used to cross-check information and determine the legitimacy of an organization.

Learn the basics

Begin by finding out how long the company has been in operation, who the leader is, and what sort of goods and services they provide. Verify that the information is up-to-date and check to make sure it is consistent on each site.

Start with the company’s website and determine if it appears professional and informational. Then, consider checking reviews of the company. People that interact with that company are likely to post their positive and negative experiences, which can allow you to see how they are perceived by others. If you are unable to find out any information online, it could be a sign the business doesn’t exist, hasn’t been operational for very long or has recently changed names.

Find out who you are dealing with

If you receive a large order online or over the phone, check out the address on Google maps. Does the address indicate a real office or is it in the middle of a parking lot? When dealing with international clients, it is important to know that some countries are a higher risk than others. High-risk countries can be determined by checking the Corruption Perception Index, which measures the perceived levels of public sector corruption in 176 countries and territories.

Aside from looking into the business and its location, consider running a search on your contact at the organization and/or the person who is ordering the goods or services. If the Facebook profile or LinkedIn account says the person is younger than 18 then it is safe to say this is not a prospect. If their profile says they are in a different location or with a different company, it can be a red flag or a simply a sign that they don’t update their information regularly.

Connect online

Many businesses of all sizes are creating Facebook pages to stay in touch with their customers and connections. It can be valuable for you both as an individual and as a business to “like” the pages of the companies you are interacting with on a regular basis.

Not only will “liking” the Facebook pages of your clients show them you are interested in their businesses, it will also keep you informed of any news, events or promotions that are taking place at the company. Although these updates are often good natured, they can also alert you to any red flags you should be aware of such as a sudden clearance sale or sudden move. Doing a big clearance sale on Facebook can be a red flag for credit managers and collection people that the client may be having cash flow issues. Also, if you have a client that suddenly closes the company’s doors and moves to another city, their Facebook page will often show where they moved to so that you can collect any debt owed.

Ask detailed questions

Although internet research can provide a wealth of knowledge, sometimes it can be just as valuable to ask your potential client questions about your concerns. It is important to know who you are dealing with to protect your own business from the hassles of non-payment, fraud and other undesirable situations.

 

Robyn Barrett is founder and managing member of FSW Funding, formerly Factors Southwest LLC, specializing in factor financing for small to mid-size companies. For more information, visit www.fswfunding.com.

financial statements

What Your Financial Statements Can Tell You About Your Company

You don’t have to be a CPA or rocket scientist to decipher the information on financial statements. If you have been intimidated or reluctant to take the time to learn to read your company’s financial statements, now is a great time to learn.

Below are a few quick and easy steps to untangle the web of financial reports like income statements, balance sheets and cash flow statements.

Income statement

Income statements can be used to make key decisions, such as whether to extend credit to new accounts; increase or decrease an existing line of credit; offer certain terms or discounts; and, most importantly, whether a company will get paid.

The income statement records a company’s performance over a set period of time and starts with net operating income, sales or revenue, and ends with the net income. The net income is what the company earns after deducting expenses like the cost of goods sold, overhead and interest.

Key metrics to look at on the income statement include the interest coverage ratio and gross profit margin. The interest coverage ratio or times-interest-earned ratio lets you know if the company has enough money to cover the cost of its debt. The gross profit margin shows the company’s relationship between revenue and the cost of goods sold. You can use the percentages to gauge whether a company is incurring insufficient volume or excessive purchasing or labor costs.

You want both the interest coverage ratio and the gross profit margin to be high so that your company is not carrying too much debt and there is enough money to pay expenses.

Balance sheet

A balance sheet captures a company’s financial position at a specific point in time. This shows the company’s total assets such as cash, short-term investments, inventories and equipment; total liabilities like accounts and notes payable; and shareholders’ or owners’ equity. The quick ratio and the debt-to-equity ratio are important to note in the balance sheet.

Quick ratios are considered to be a more conservative measurement than the current assets ratio because inventories are excluded. Inventories are “less liquid” than cash, and if a company needed to sell its inventories to pay debt, it could be difficult to arrange a quick sale.

A high debt-to-equity ratio could indicate a company has aggressively financed its growth with debt. On the up side, if the borrowed money assisted with increased or improved operations, the company might generate more earnings.

Each industry is different, and it is essential to compare to its peers. Some industries have low gross margins which could be considered bad, but if it is an industry norm and the fixed costs are low, it should be less of a concern.

Cash flow statement

Cash flow statements tell where a company is getting cash and how they are using it. Cash flow statements are divided into three sections: operating, investing and financing activities. Some key information contained in cash flow statements comes from income statements and balance sheets.

Operating activities — cash and non-cash

The first line item is consolidated net income. You can add certain line items like depreciation and non-cash transactions to net income and subtract other items, such as deferred income taxes, to calculate how much cash a company has generated during a specific time period.

Investing activities — inflows or deposits

A cash flow statement’s investing activities section details a company’s property, plant and equipment purchases, sales of short-term investments, or the acquisition of a business during a specific time period.

Financing activities — outflows or payments

Understanding significant changes in a company’s cash flow can help you make informed decisions. You want to know whether your company’s cash is increasing or decreasing. Gains may signal an organization financed its debt and investments and had more money remaining than in the prior period. Similarly, if a company’s cash flow is decreasing, the organization may experience future cash flow management problems.

While you may still need to hire a professional to help you maintain your financial statements and documents, it is always good to have a general understanding of what each financial statement is used for. As a business owner, it is important to know the financial trends to determine if the numbers are increasing, declining or staying flat. Then you can be proactive and steer you company in the correct financial direction.

For more information about financial statements and/or FSW Funding, fswfunding.com.

Embezzlement

Protect Your Business From White-Collar Crime, Embezzlement

In a tough economy, white-collar crimes are more rampant than ever. A study by Marquet International, Ltd. on 2010 embezzlement data found that the average scheme lasted more than 4.5 years, the average loss was $1 million and two-thirds of the incidents were committed by employees who held finance and accounting positions. Whether you run a small start-up business or a Fortune 500 company, your finances are important ― and keeping track of them is essential.

While your business strengths may lie in production management, business development or customer service, it is imperative that you put certain safeguards and precautions in place to protect your business. If not, it doesn’t matter how strong you are in the other business areas.

To help protect yourself from financial fraud or embezzlement, consider implementing the following practices:

Conduct background checks prior to hiring

Although this may seem obvious, very few companies or small businesses actually do it. You not only want to pay attention to the criminal record, but also the credit history of the people you are hiring. This is especially true for people you are trusting to work in the finance department handling payments, credits, cash or expensive equipment.

Separate responsibilities

While you may consider the employees in your finance department very trustworthy, it is a good idea to have a system of checks and balances throughout the finance process. Avoid allowing a single individual to be in charge of all of the bookkeeping. Assigning separate employees for billing, accepting payments and depositing funds can serve as protection. If you have a small business that cannot disperse the duties, a simple safeguard can be limiting the number of people who can sign for checks, or only allowing specific people access to checks from certain accounts. This way, if something looks funny, you can easily trace it back. Having the business owner as the only one who can sign payroll checks is one idea, as well as only allowing the financial person to have access to the account that issues payments for goods or services.

Understand your books

Knowing the basics of your company’s finances can make all of the difference. Basic things like recognizing who your key vendors are and keeping record of all invoices, payments and purchases is an easy way to begin. Often times, embezzlement occurs by someone issuing payments to a vendor that doesn’t exist, or issuing additional payments on something that has already been paid.

Audit regularly

Along with the regular checks and balances, it is important to audit your books and inventory regularly. Surprise audits are sometimes a good idea if there are long periods of time between your routine audits. Consider hiring an outside professional to audit your books once a year to make sure that everything is on track. In addition to finding irregularities, you might find ways to improve efficiency or cash flow with these audits.

While you cannot anticipate every circumstance, establishing internal controls can help eliminate the risk of embezzlement within your organization. Of course, it is always a good idea regardless to know the financial aspects of your business — even if you decide to let someone else run the numbers on a day-to-day basis.

For more information about how you can protect your business from financial fraud or embezzlement, visit fswfunding.com.

Entrepreneurs

Entrepreneurs: Three Key Things To Consider Before Starting Your Business

Three key things for entrepreneurs to consider before starting their own business


The benefit of a challenging economy has been the inspiration for new business. As individuals find themselves out of a job they may have held for decades, they are no longer taking their talents elsewhere. Instead they are choosing to create their own jobs; and in the process, jobs for others.

On a recent visit to the W.P. Carey School of Business at Arizona State University, I had the honor of meeting a group of enthusiastic future entrepreneurs. Growing up during a time of uncertainty has inspired these students to explore the possibilities of starting their own businesses.

Whether you are a college student with a great idea or a professional seeking to take control of your fate, there are three key things for entrepreneurs to consider before starting your own business and venturing into the world of entrepreneurship.

Do something you’re passionate about

Being in control does not mean more free time. Starting your own business will consume the majority of your time and energy. But if you are passionate about what you do, it won’t feel like work. And when you love what you do, you are more likely to be successful. Think about what you know, what you like and where you may be able to fill a need or provide a benefit to others. This line of thinking most often leads to great ideas that can ultimately become great companies.

The right person for the job

Entrepreneurs wear many hats, especially during the start-up phase. In the beginning, you may be the receptionist, janitor, most valuable employee and CEO — often simultaneously. At a certain point, though, you will be ready to hire full-time employees or need to contract expert help. Running a small operation makes it essential to surround yourself with strong people that fill your weaknesses. While you may be a very knowledgeable about your industry, it does not mean you understand how to execute marketing, public relations or finance.

When hiring, take the time to find people with the right experiences and qualifications to fit your needs. Also, consider personalities, work environments and schedules. As you begin building your team, you want to do your best to find people that you can work well with and will help grow the organization. Finally, consider the qualifications of the team as you reach out to secure potential investors.

Understand the numbers

Entrepreneurs tend to be great idea people or visionaries, but successful entrepreneurs know and understand the financial side of things. If you are still in school and think you may want to launch your own business someday, consider majoring in accounting. If you graduated already, consider taking a few accounting courses. If the thought of accounting repels you, partner with someone or hire someone who understands accounting to serve as a trusted financial adviser. Knowing the numbers and how they are calculated can help to eliminate the risk of fraud. It will also boost your credibility when talking to potential investors because they will realize you know the ins and outs of your company.

Starting a new business is a risk, but the rewards can be great. Taking charge of your own destiny and being your own boss can be empowering and challenging. In the end, having passion for what you do, the determination to make it happen and the dedication to see it through will be what sets you apart from others.

For more information about becoming an entrepreneur, visit fswfunding.com.

Business Credit Score

Protect Your Business Credit Score, Improve Business Policies

Most people know that how you manage your personal finances directly impacts your credit, but many don’t realize that proper management of your business financials is significant for protecting your company credit standing and ultimately a company’s growth and success. Just as a poor credit score can make it difficult for you to get a home or auto loan, it can influence the decision on a business loan or even the opportunity to lease office space. Maintaining a good credit score can be difficult for startups and small businesses that rely on payment for products or services.

Fortunately, there are ways to protect your company’s credit. At the core of it all, companies need to focus on receiving payments on time and keeping a reasonable amount of cash on hand to cover expenses. Enlisting staff support and making them aware of how to handle billing and payment inquiries and proper collection procedures can have a direct and positive impact on the company’s credit scores.

Create and enforce business policies

If you don’t have internal policies in place already, consider developing specific business practices that promote prompt and timely payments from your customers or vendors. Work with staff members and even key customers to eliminate issues in your organization that may adversely impact cash flow, including limiting the way your business takes payments.

When customers are consistently paying late or not paying altogether, consider automating the identification of delinquent accounts based on a formula of the customer’s credit rating, payment histories and buying patterns. This will allow you to manage the company’s accounts receivable investment more effectively.

In difficult situations, credit lines and payments can be worked out collaboratively with the customer to achieve the objectives of both parties. This may require creativity on the part of the credit manager and use of security, documentary and other credit management tools. Credit policy should be a tool used to expand company revenues as well as the customer relationship.

Provide proper training

Provide training across all departments that interact with clients or customers to ensure understanding of your company’s policies and objectives. Ensure all members of your organization provide a consistent message to the outside world, and anyone working in a customer service role knows how to answer questions about payment, deduction, dispute or credit-related problem. This can help eliminate payment delays by a customer waiting on callbacks and emails from the accounts receivable department.

When to start collecting

Use a credit and payment scoring model that triggers workflow actions. The scores should reflect credit risk and industry payment data, as well as your own experience with a customer to estimate a time for your company to begin collection action.

Be sure that collection performance goals are written down and that your staff are held accountable for their results. The goals should be in sync with those that drive senior levels of management but focus on more targeted metrics to draw team concentration to what’s important.

Partnering with outside agencies

Don’t shy from using collection outsourcing companies or agencies. While they will charge for their services, the alternative may be lower collection rates, higher borrowing and bad debt write-offs. This prioritization must be by employee as well, as some are better suited for volume collections as opposed to complex collections.

If your business is experiencing an unacceptably high level of bad debt, perhaps your credit processes are inadequate to the task. Another possibility is credit insurance, although a credit insurer will also require that you implement effective credit controls and policies. If you have tried improving your business with the steps suggested above, you may find it more beneficial to try turnkey solutions, including credit and collection outsourcing or even factoring.

For more information about how to improve your credit score and your chances at attaining a business loan, visit fswfunding.com.

Attracting Investors

How Can You Make Your Business More Appealing To Potential Investors?

The reality is more and more companies are competing for a limited supply of funding, so much like in the dating scene you want to appear attractive and engaging. Whether your business is seeking financial support from a bank, a private investor or a venture capitalist group, it is crucial that you make the right impression from the onset. When you are approaching bankers for funding, this includes putting together all the necessary documentation for a loan package, but when you are seeking investors the approach is slightly different.

In addition to the financial documents you’ll need to gather, there are other things you can do to make your business more appealing to potential investors.

Update the business plan

The business plan provides detailed descriptions of the way your company works. By developing instructional materials and documenting information on the “how to” for the operation, investors can get a strong sense of the company and how it operates. The creation of a company manual should include everything from detailed major operation information and key vendors to an organizational chart of employees and the small day-to-day tasks.

Gather financial figures

Investors are called investors for a reason. They are looking to invest their money in a business, not just give it away. Business owners need to make sure all financial information is up-to-date and ready share. This includes current and projected sales figures as well as what the company expects to need for operating costs and marketing.

Understand your financials

Just having the financial information isn’t enough. Be prepared to justify and explain where every penny comes from and where it goes. Investors will want to know what their investment will be going toward.

Reasonable compensation

Make sure the owner’s salary and compensation is reasonable. If the salary is too low, the investor will be concerned that a replacement will cause a serious cash flow issue. If the salary is too high, the investor will feel they are funding the owner’s lifestyle. This also goes hand-in-hand with making sure that you have the most competitive price for goods and services you are buying. You don’t want to overpay for goods that can be negotiated for a lower price.

Create a marketing plan

More often than not, simply opening the doors to your business does not drive traffic. A marketing plan will show how you plan on increasing awareness and traffic to your business. For the marketing plan, you’ll need to describe what you’re doing and the results, as well as the return on investment.

Develop a strong team

Most investors will want to meet with the key players at any organization. They will be looking to see that the management and key employees are professional, qualified and the right person for the job. This is also the time when the potential investor will get a real feel for the company, the flow of communication and the chemistry between the potential investor and the employees.

Beware of online profiles and posts

Investors will do a thorough due diligence of the owners and the key players. With the technology available, that also means researching the company on social media sites. Make sure that your company Facebook and Twitter pages are active and engaging toward the individual audiences. It is equally as important to look at the personal profiles of owners and employees. This may mean deleting inappropriate posts and comments or adjusting the privacy settings.

Go into the transaction with a realistic value of the company

If you undervalue, you will give up too much of the company for nothing. If you over value the company it can kill the deal. Hire an expert to get a real valuation — it will be worth the money spent.

Partnering with investors can be a great way to give your company the financial boost it needs. For many small companies, it may also be the best alternative to helping the business develop and succeed. Like any relationship, finding the right investor for your company can be challenging, but the better prepared you are, the greater chance for finding the best match.

For more information on how to make your business more appealing to potential investors, visit fswfunding.com.

Selling the Company

Planning Ahead: Steps To Selling The Company

With the new year, entrepreneurs and business owners are looking ahead and putting plans in place for the coming year and beyond. For most the focus is on increasing sales and revenues to grow the business, for some it is looking to take things in a new direction, and for others it may be stepping away from the business entirely and selling the company. Regardless of the objective, planning is essential.

If a business owner is interested in actually selling the company, there are a number of key steps that need to be taken to help ensure success.

Take your time when selling the company

Planning for the sale of a business should begin at least one year in advance. It can take this long to get financial information and documentation pulled together to allow the owner to find the best buyer for the business, that is a match financially and has the right professional experience to step in and take over. When a buyer is found and the deal is finalized, it is also important to allow time for the transition.

Find the right people for the job

To find a buyer, you may want to consider consulting a reputable business broker. A broker can help navigate the steps of preparing and selling the company. Also, tap into your connections to ask around and get advice from trusted sources such as an accountant, banker and attorney. You may be an expert in your industry, but these professionals have handled transactions like this numerous times and often know what to look for. Consider asking people in your business network for referrals and while brokers can be helpful, avoid professional brokers that ask for large upfront deposits.

Succession planning

When selling the company, the business owner may stay on for a period of time as a consultant or contractor. Either way, at some point they will be leaving, and it is crucial to put together a management team that can run the company without the owner. This process can also take time.

Do not assume that relying on longtime employees and managers is enough. In some cases, a manager may have been on staff a long time, but they are still not as involved in the entire business process as the owner and may not know a great deal of the business operations. Planning ahead will eliminate the need for the seller to stay on long after the business is sold and allow time to train and promote someone from within or to hire a qualified person from outside the business.

Document an operations manual

In addition to developing the right management team, developing instructional materials and documenting information on the “how to” for the operation is vital to a successful transition. The creation of a company manual should include everything from detailed major operation information and key vendors to an organizational chart of employees and the small day-to-day tasks. This gives a real value for the company by providing the potential buyer with a base for operating the business.

Make your company desirable to buyers

First impressions are important. Think of how you would react to your business if it was your first time walking in or seeing the behind-the-scenes operations. Making necessary upgrades, documenting procedures and listing business statistics, such as operation costs, yearly sales increases and customer growth, gives a potential buyer the information they need upfront.

Transferring the products

If the company sells a service, most contracts are month-to-month so customers can leave anytime. This means the buyer will devalue the cash flow stream. If you can patent or trademark services and products, this will add value to the company, allowing the seller to command a higher price. If possible, do not take a seller carry-back note. This means the sales price will be paid over a time period and may be based on the future profitability of the company. Less cash upfront is better than more cash over a longer and uncertain period of time.

When selling, it is important to be realistic. According to data from BizBuySell.com, more small businesses were sold in 2010 than 2009, but were sold for less.

Whether it is a business-to-consumer or business-to-business model you are trying to sell, planning ahead is vital. Reviewing the business structure, its operations and securing a reputable broker positions the seller best. In other words, planning to sell the company you have spent countless hours building will ultimately make it more desirable to buyers.

The only question now is, once the business is sold what will you do next?

For more information, visit fswfunding.com.

 

Review Operation Procedures, Expenses

Run Your Business Effectively: Evaluate Operating Procedures, Expenses

Run Your Business Effectively: Evaluate Operating Procedures, Expenses

Managing expenses effectively is a vital part to running any business. With the new year approaching, what better way to celebrate than to make sure your business is operating as smoothly as possible.

Operating procedures are often the first thing a customer or vendor encounters when interacting with a company. As a business owner or manager, reviewing operations can improve customer relations and help contain costs.

As part of the review, operating expenses and lending relationships should also be evaluated because practices are continuously changing, and what may have worked for your company in the past may not be the best option now.

Evaluating operating procedures

Effective communications

Making sure that your staff members are communicating with one another sounds obvious, but it is important to check that the communication between all levels of management and employees is working well and everyone is on the same page.

Breakdowns in communication can lead to quality and customer service issues that can result in increased material and labor costs, not to mention dissatisfied customers.

Improve floor or space plan

Does your facility’s floor plan allow for efficient movement of material and employee safety? Consider utilizing Six Sigma analysis, a business management strategy originally developed by Motorola, but is now widely used in many industries.  An outside consultant specializing in the field can be well worth the fee, frequently paying for themselves through the costs savings they implement.

Update electronics

IT systems must be in place to provide timely, accurate reporting for management to make decisions. Aging equipment can also slow down productivity and efficiency. If your budget allows, consider making new electronic purchases before the end of the year. This can be good for taxes and help get the year off to a good start. Also, moving toward a paperless office can help reduce supply and storage costs and increase productivity.

Review operating expenses

Check insurance coverage and rates

As with any type of insurance, it is important to make sure that the company is getting what it’s paying for. Review insurance policies for acceptable coverage and negotiate better rates without giving up the protection that your company needs.

Negotiate better terms on rent

With the number of vacant buildings around, landlords may be more willing to accept less to keep the building occupied and generate income. You may also find that by shopping around, you can get a larger space for less money.

Look into employee benefits

Benefits can be a significant cash expense, so make sure the benefits are adequate for the location and industry of the business. If necessary, have the employees share some of the cost.

Hire the experts

A good CPA can provide tax advice to save cash. You should consider hiring competent outside professionals because they can save you a significant amount of money in the long run.

Eliminate unnecessary costs

Labor is one of, if not the largest, cash expense item. Review job responsibilities; overtime costs may be avoided by hiring additional staff. During a particularly busy season, temporary staffing can be used to fill a need at lower wages without benefits. Outside consultants can also provide high level, expert skills without incurring salary costs.

Are your marketing dollars being spent wisely?

While it is common to cut marketing dollars to curb costs, this is a short-sighted strategy as marketing is an investment in the company’s long-term growth. Good marketing should generate qualified leads, help to develop business growth and strengthen your brand name. It should also be strategic and consistent.

Re-evaluate lending relationships

Find a lender to suit your needs

Does your lender provide support and flexibility to meet your cash needs? What worked for your business in the past may not work for your company now. You may find it more helpful to shop around with other lenders for better rates and terms — or, in some cases, other loan options, such as factoring or asset-based loans.

Review loan documents

Do you have a contract that requires you to stay in the relationship for a period of time and pay an exit fee if you leave early? If you have more than one loan with a lender, chances are the loan docs have cross default language. Cross default means a lender will tie your loans together, and it is a provision in a loan agreement or other debt obligation stating that the borrower defaults if he/she goes into default on any other obligation.

By reviewing current operating procedures and expenses, you can find ways to save money while increasing efficiency and customer satisfaction. Although you might not think your business has any inconsistencies, there are many moving parts in any organization, and it is important to revisit your current practices.

For more information about how to run your business effectively, evaluate your operating procedures, expenses and more, visit fswfunding.com.

 

Small Business Association, SBA Loans

SBA Loans 101: Funding Small Business Expansion

Funding expansion of small business creates new jobs: SBA Loans 101

All the talk about the American Job Act has many thinking about how crucial the creation of jobs is to an economic turnaround. The reality is a majority of new jobs will not be a result of hiring by large corporations or government; new jobs are going to come from the growth of small business.

According to the U.S. Census Bureau, 95 percent of all businesses in Arizona are small businesses with less than 100 employees. These businesses employ 32 percent of the state’s workforce.

In most cases, small businesses must expand in order to create more jobs. For small business owners, expansion requires funding. While bank loans can be difficult for a small business to secure, a loan may be a more appealing option than finding investors or financial partners that may want a percentage of the company and input on how decisions are made.

A Small Business Association (SBA) loan or SBA loan is an option to consider. SBA loans are issued through banks to specifically help small businesses with their growth, including hiring new employees, adding more equipment and making other necessary changes. The questions then are how much cash SBA loans provide, and what does it take to qualify?

While the government-backed guarantee portion of SBA loans increased from $2 million to $5 million in 2010, protecting banks even more in the event that the borrower defaults, it is still difficult for small businesses to receive an SBA loan.

In order to qualify for an SBA loan from your bank, your business must be a for-profit business, have a sufficient amount of owner equity invested in the business and have already used other financial resources first, including personal assets.

You may also need to determine what type of SBA loan you may need. There are three specific categories:

•    The 7(a) Loan Program includes financial help for businesses with special requirements. For example, funds are available for loans to businesses that handle exports to foreign countries, businesses that operate in rural areas, and for other very specific purposes.

•    The Microloan Program provides small, short-term loans to small business concerns and certain types of not-for-profit child-care centers. The maximum loan amount is $50,000, but the average microloan is about $13,000.

•    The CDC/504 loan program is a long-term financing tool, designed to encourage economic development within a community. The 504 program accomplishes this by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

When applying for an SBA loan, it is important to remember that bankers, now more than ever, will be looking closely at the documents submitted. When you are preparing your loan application for your banker, you typically have to include:

•    An overview of the business
•    A description on the purpose of the loan request, and how it will be used
•    A plan to repay the loan
•    Collateral in the event that you cannot repay the loan
•    Personal financial statements for the last three years
•    Business financial statements for the last three years

Understanding what lenders are looking for is important regardless of what solution you may seek to finance the expansion of your small business. Working closely with the lender to make sure you are supplying the correct materials will save both parties time and energy in the process and hopefully help to secure the funding needed.

For more information about SBA loans, visit sba.gov.

[stextbox id="grey"]Robyn Barrett is founder and managing member of FSW Funding, formerly Factors Southwest LLC, specializing in factoring financing for small to mid-size companies. For more information, visit www.fswfunding.com.[/stextbox]