Archive for November 2009
There Are 4 Reasons To Secure Capital For Your Business
November 13th, 2009
Can You List The Four Reasons Why Someone Would Need To Secure Capital?
There are 4 and only 4 reasons to secure capital for a business. Each reason or purpose for business financing will impact the type of lender or investor to approach as well as the manner in which you approach them.
The 4 reasons for seeking more capital for a business are as follows:
Start Up. At the commencement of a business entity or operation, funds may be required for working capital, fixed assets, intangible assets, leaseholds, inventory, and so on.
Growth. An existing business looking to expand may require capital to increase its capacity as well as the working capital required to fund a larger volume of activity.
Acquisition. When one business acquires another, it must purchase either the shares or the assets of the target business with a combination of cash and external capital from debt or equity sources.
Debt Consolidation and/or Re-organization. In times of business downturn that create financial losses, capital must be injected into the company from debt or equity sources to cover the costs of operation and allow the company to continue. Another scenario would be when the term structure of the debt outstanding does not match up against useful life of the assets securing it. In these cases, a debt restructuring will take place to balance out the balance sheet. A third example would be when outstanding debt exceeds the leverage against equity allowed by the lender, requiring a debt reduction and/or an infusion of investor or shareholder equity.
Each of the reasons to secure capital or apply for business financing have their own lending and investing criteria. A business manager or owner seeking incremental capital would be well advised to gain a greater understanding of what is required for each and work towards identifying lenders and/or investors that are relevant before proceeding too far with any inquires to secure business capital.
We will get into more of the specific for each of these uses of funds in future posts.
Business FinancingIf Business Finance Is The Ying, What is The Yang?
November 12th, 2009
Business Financing Is the Ying?
When I was working inside the last multi national meat grinder that employed me, I had the unique opportunity during the time I was there to sit on both sides of the corporate fence, first as a CFO and second as a director of strategy.
The two sides I’m speaking to is marketing and finance. So in keeping with the title of this post, if business finance and financing is the Ying of business then Marketing, business development, and sales are the Yang.
And if you look closely at virtually any of the fortune 500 companies, they are all organized around these two sides, Marketing and Finance.
If its not completely obvious, the Ying and Yang analogy has everything to do with the totally different ends of the spectrum that marketing and finance occupy.
Marketing and Finance people don’t even tend to get along as the former tends to be aggressive, even to a fault at times, and the later tends to be conservative, even to a fault at times. Even if these two sides don’t have an ongoing hate for each other, they’re not highly likely to become the god parents for each others kids.
But.. And its a big but, a business (any business) cannot achieve any type of sustainable long term success without marketing and finance being in balance.
This well established business structure is designed to create conflict and push from both sides so that optimal results can be achieved that otherwise wouldn’t if one had power over the other.
For many small and medium sized businesses, the primary focus, as it should be, is marketing, because without customers, nothing else really matters. So the yang tends to be strong, but what about the ying?
Unfortunately, finance takes a major league back seat in most businesses which tends to cause considerable imbalance, and suboptimal results over time.
Business finance has an important role to play and somehow it needs to be worked into the mix for companies whose size does not support a full blown corporate structure.
Basic things like budgeting, a financing strategy, cost control and measurement are important to any business and need to be covered off somehow in order to allow a business to fulfill its potential.
As an example, what I really notice more than anything else in this regard with small and medium sized business is that over 80% (my numbers) of business financing activities are unplanned events, do not adhere to any type of financing strategy for the business, and are difficult to get into place in the time required.
Because of the lack of business finance focus, finance related events are crisis managed when they occur and then immediately put off to the side until the next crisis occurs.
It doesn’t have to be that way, but it will likely be that way without an understanding of why marketing and finance need to balance off against each other.
For business owners and managers, it can very well mean sitting on both sides of the proverbial fence at times to achieve some amount of balance. And for those that do, they develop a competitive advantage that can lead to both growth and survival.
Business FinancingWhat, How & When Do You Assess Financial Performance?
November 11th, 2009
Do You Proactively Assess The Financial Performance Of Your Business?
Its 6 months after the year end, and the accountant has just completed your financial statements for a period of time that ended 6 months ago.
And even then, the financial statements provide mostly financial accounting information and very little management accounting information. So performance assessment, while available, is already dated and incomplete in terms of useful information that you can use to manage your business with.
For any small or medium sized business, assessment and measurement of performance activities typically do not take place in any meaningful way.
Why? Its the typical reasons of not enough time or not a priority and so on. So measurement is more based on money in the bank account or level of credit being utilized at any given point of time.
Ok, so maybe we can agree that there is room for improvement here and that better understanding of current financial performance of any business entity is of value in helping to profitably operate a business. I don’t think any of the above is a stretch.
So what do you measure and how do you go about it?
In terms of what, there are numerous things to consider here which will depend on the specifics of each business, but in general the primary financial metrics are assessment of actual revenues and costs against budgets or projections.
Now while typical management accounting can be performed in house or through an accounting firm, the numbers by themselves only tell part of the story.
The benefit in review and assessment is to be critical of what you see and to relate financial performance back to your strategy, the market place you operate in, the initiatives you’ve undertaken, proposed future opportunities, and so on.
To get the most out of a financial performance assessment, many business owners will bring in an outside party periodically to sit down and go over the financial performance reports with the business owner and managers to provide an unbiased opinion of the business enterprise and its current performance.
The third party needs to be someone who understands strategic planning, operational implementation and execution as well as financial measurement. By default, the external business accountant tends to fill this role and in some cases, can can considerable value. However, in many situations, accountants do have enough experience in strategy and operations to provide real value in these exercises regardless of how much they claim to know about management accounting.
Basically third party input can be very helpful, provided its from a knowledgeable source.
When To Assess
In my opinion, the minimum should be at least once a year, which in many cases is too long an interval. Semi annual or quarterly assessments will yield more actionable results versus annual financial performance assessments that are still more historical in nature due to the amount of time being covered.
With everything going on in a business, it IS hard in most cases to create this type of assessment discipline. But then you have to decide if you want to know if you’re heading for a cliff in time to make a course correction, or if you would rather just hope there are no cliffs ahead of you that can’t be easily seen.
If you’re business would like to improve this process and get solid third party input, send me an email and we can discuss it further.
Business FinancingThe Balance Between Borrowing Money and Saving Taxes
November 10th, 2009
Are You Saving Taxes And Destroying Your Borrowing Potential At The Same Time?
Business finance covers a lot of ground including accounting, taxation, foreign exchange, business analysis, and business financing to name the main groupings.
And while all these areas fall under the same umbrella, they don’t necessarily work in harmony, especially when some of these activities are outsourced to a third party accounting practice.
For small and medium sized businesses, a common example of this is the impact of annual financial statements and business tax returns on a businesses ability to borrow money.
Many business lenders follow fairly rigid criteria related to financial ratios including balance sheet leverage and payment coverage. These ratios and others can be directly impacted by the decisions business owners and managers make with their accountants with respect to tax strategies.
Most business owners and managers don’t necessarily understand the connection between taxation and financing and in some cases, believe it or not, neither does their accountant. The primary goal is to reduce taxes and therefore improve cash flow.
There is nothing wrong with this approach as long as you don’t require business financing to operate your business. If you do, then here’s a couple of things to be mindful of.
First, if you have a senior financing facility in place with a debt lender, there are likely financial covenants in place that require you to main certain ongoing levels of balance sheet leverage and income profitability that are relative to the amount you’re borrowing. Aggressive tax savings strategies can put you off side of these covenants which at the worst will get your loans called in and at the least will increase your cost of borrowing.
Second, if you try to secure new business financing capital with financial statements that are over leveraged and/or do not show enough debt servicing ability, there’s a very good chance that funding will not be available, or if it is, it will come at a higher cost.
Bottom line, there is a balance between minimizing business taxes and maximizing borrowing capacity. Failure to maintain or keep track of this balance can be very costly in the long run.
Business FinancingHow To Cut To The Chase When Securing Capital – Part II
November 6th, 2009
Here is The Next Installment in How To Increase Your Odds Of Securing Capital From The Outset
In the last installment, we discussed the importance of starting off your initial meeting with a prospective lender or investor by cutting to the chase and quantifying exactly what you’re looking for in terms of financing and what it will be used for.
Once you’ve given the lender or investor enough information to initially qualify their potential interest in the deal, you’re either going to get a quick No, or they’re ready to hear more.
Focusing on the later, you now want to continue your presentation.
The second area the lender or investor wants to understand is your future projected financials (cash flow, income statement, balance sheet) and the related assumptions that drive the numbers.
As an example, virtually everything in the business can be associated with a time frame and cost, so the financial statements become a powerful means to convey the business story you’re trying to tell.
The quantification of market size, competitors, market share, price, margin, operating costs, and so on, all impact the financial statements directly or indirectly.
And lets face it, this whole process is all about money and making more of it, so its important to show your potential source of capital funding how they will get their money back, over what time, and the potential return they can expect.
When you can quickly show how you have quantified all the relevant information into income, balance sheet, and cash flow, it gives the lenders and investors something concrete to wrap their heads around while proactively answering a lot of the questions they will have before they even ask them.
This information can be highly summarized. Its just important that its covered off to maximize the interest level of those involved.
Too often, the business owner or entrepreneur is so completely focused on their sales pitch of what they’re trying to accomplish that the underlying financials are either glossed over, or not really addressed at all.
Remember that the more you can relate what you have to present back to dollars and cents, well quantified and supported assumptions, and realistic time lines, the more seriously you’re likely to be taken.
There is definitely a balance to be had between the marketing side of a presentation and financial projections. Just make sure you know your numbers cold so that where ever the discussion goes, you will have the answer on the tip of your tongue.
Business FinancingCut To The Chase When Securing Capital For Your Business
November 3rd, 2009
Be Direct And Specific When Trying To Secure Business Financing
Before you speak to a debt financier or equity investor about securing capital, you should have gone through the process of pre-qualifying them to some extent to make sure they are relevant to your business financing requirements.
When you go to speak to a source of business capital, its their turn to qualify you and the sooner you allow this to take place, the faster you’ll get their serious attention.
Too often, business owners and managers start off their initial discussion with lenders or investors with a long winded explanation of their business opportunity or business potential, trying to impress the capital provider with what they view is the best approach to securing capital.
Instead of creating a good first impression, they are more likely to put the capital provider to sleep as the provider impatiently waits for the business owner to disclose the pertinent initial information they require to perform their initial assessment of the business financing opportunity.
Seeking business capital is a marketing exercise and like any marketing approach, the goal is to provide the target audience with the information they are interested, not the information you feel they should be interested in.
So here’s the best way to get off on the right foot with a debt or equity financier. This approach may also get you a fast No as your audience will be able to qualify you faster, but at least you won’t be wasting your time pitching a lost cause.
Start off by stating exactly how much capital you’re looking for, why its required, and how exactly it will be applied in your business. While this may seem obvious, its rarely the beginning point of business owner presenting to a lender or investor. The primary reason being that human nature seems to think that if a compelling enough business case can be created right off the bat, then the amount of funds requested and the application will be secondary in nature.
In reality, by not being able to immediately describe in financial terms what capital you seek and why, you’re more likely to leave the impression that you don’t have a buttoned down plan of action that has been summarized in financial detail, regardless of the raw potential of the proposed investment.
When you lead with a detailed summary of your financial requirements, you’re not only allowing the capital provider to see if you fit into their current criteria, but you’re demonstrating to them that you have gotten a well thought out plan of action that can be accurately described in terms of numbers.
This is a great way to get serious attention from a debt or equity provider who are inundated with dreamers and entrepreneurs either weak at or uninterested in the underlining financials and corresponding stewardship that goes hand in hand with gaining access to someone elses money.
Once you’ve established what you want and why, the lender or investor will be able to make their initial assessment and either give you a fast no that you would have gotten anyway, or start moving forward in their seats with a higher level of interest.
We will address the next phase of the your initial discussion in tomorrow’s post.
Business Financing