Archive for the ‘Business Finance’ Category

“When Putting Together a Business Finance Application, Make Sure You Including The Following Elements…”

When I was working in a large U.S. multinational, anytime I was drawn on the carpet to report on the business for whatever reason (the good, the bad, and the ugly), the boys and girls in charge of the ivory tower always wanted to know three things:

Where is the business at right now?

How did we get here?

What are you going to do next to either take things to the next level or fix the existing problem?

If there was any fancy graphs or charts that drew their attention away from the above, I was always quickly pulled back into the world of what was important to them, and needed to focus in on answering these questions before any other form of communication was going to take place.

While perhaps not exactly the same with business lenders, you should be taking a similar approach with your business financing application.

The first question, where is the business right now, is answered by an up to date balance sheet and interim income statement. The balance sheet will be supported by an aged accounts payable and accounts receivable, and a fixed asset ledger.

The second question, how did you get here, is answered by three to five years of historical financial statements prepared by an outside accounting firm.

The third question, where are we going, is answered by detailed financial projections including at least 12 months of monthly cash flow projections, two years of overall cash flow projections, two years projection income statements and balance sheets that reconcile to the cash flow projection and the current financial position. The projections will need to include detailed assumptions that explain how every (every) number is created and what its based on.

While this would appear intuitive on the surface to most, there are two key areas where the information is lacking.

First, Business Finance applications do not connect the different areas together. There can be significant in-congruence between past and present, and between present and future. Its extremely important that the story being told by the financial statements (and the narrative report that should be included to minimize assumptions and off base interpretations) is congruent, well balanced, and flows from one period to the other without being disjointed or inconsistent.

Too often, business owners provide all the information, but don’t reconcile the collective package to make sure the story being told is tight and accurate and seamless from beginning to end.

Second, most business finance applications do a very poor job documenting the assumptions in the projections and providing good logic and support for all the numbers being projected. Past, present, and future are all important elements to every applications … equally important. Unfortunately for many business owners, the glossing over of the projections can result in declines or less than optimal terms.

If you need help answering these questions when seeking business financing, give me a call and we’ll go through your business profile from beginning to end together.

Click Here To Speak To Business Financing Specialist Brent Finlay

Technorati Tags: application for business financing, application for business lending, application for business loan, application for business loans, applying for business finance, applying for business financing, business finance application, business financing application

While it is absolutely true that any type of long term, scalable business venture will utilize financial leverage to provide the necessary capital to operate as well as reduce the weight average cost of capital of the owners, leverage comes with costs and challenges that cannot always be directly quantified.

To depart into finance 101 for a second, when the after tax cost of debt is lower than the opportunity cost of equity, it only makes sense to utilize debt to bring down the overall or weighted cost of capital necessary to run a business.

Even if the business is debt free, operating strictly on its own cash reserves, the argument can be made that debt financing would allow the owner or owners to withdraw capital in order to investment in additional profit centers which in turn will make more money.

In theory it all sounds good and in practice, debt financing, especially at today’s rates, make a great deal of sense to take advantage of.

In practice, while leverage is almost always going to be necessary for some point in time, the ongoing management of third party debt or investment should not be underestimated either.

Put another way, any time someone else gives you money for a fee or return, they are someday going to want the money back. And while financing commitments and agreements may seem to place a certain amount of stability as to when money has to be repaid or refinanced, things can also change in a hurry, leaving the business scrambling for alternative sources of capital.

In the current recession, this sort of stuff happens everyday and its one of the more common calls I get from potential clients.

While each story is unique, the basic gist is that everything was rolling merrily along with the business when all of a sudden, for no reason, out of the blue, a source of third party Business Financing called their loans, cut back on credit lines, increased their rates, etc.

Most people believe this type of problem only happens to businesses that are scrambling for survival and/or are offside with their loan covenants.

Not true.

When the economy is on a nice growth trend, the unexpected is less likely to happen, but still can happen with no advanced warning. In more turbulent times, all bets are off with respect to financing stability for anyone leveraging their balance sheet.

So if leverage is going to be necessary, then management of same is also going to be required.

And prudent management would include things like 1) always keeping your commercial financing profile up to date and in order, 2) periodically assessing your alternatives in the market, 3) developing an emergency refinancing strategy that can be implemented quickly.

An alternative approach most commonly utilized is to do nothing and deal with things as they happen. And during the past few decades, this approach has worked pretty well for most businesses. When things do go a rye there can be some short term scrambling to develop an alternative course of action, but the outcome is rarely ever fatal.

It will be interesting to see how the passive approach works going forward. Capital markets are upside down globally. Each major financial incident sends shock waves through the market, potentially delivering financial leverage disarray to your door.

Ongoing management of leverage does take effort and consumes resources. In today’s capital markets its also becoming more of a necessary risk management activity that every business needs to consider.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: business finance leverage, business financial leverage, Business Financing, business financing leverage, financial leverage

We are now in a time when there are no real predictable rules with respect to Business Financing and capital procurement, creating a greater need for business finance contingency planning.

There are two basic types of contingency planning business owners and managers need to be consider these days.

The first has to do with existing loans and debts on the balance sheet.  Its not uncommon these days for lenders to cut back the limits on lines of credit and trade suppliers to reduce credit lines.  So even if the economy in general is not providing a negative impact on the profitability of your business, the business Cash Flow Management process can be turned upside down by things completely out of control of the business manager or owner.

Demand loans for equipment can also be called at any time without a formal reason or negative repayment action on the part of the business.  This provides a stronger case for term loan products that do not provide the lender with such broad and subjective repayment options.

And in cases where a business has become late on payments or offside with debt facility covenants, it can’t be assumed that the lender is going to work with the owner or manager even if the cash flows are minor and expected to be rectified in the short term.

For existing debt or credit reliance, the business needs to develop contingency plans that will identify alternative sources of credit that can be secured and the related cost.  This has to be continually explored on a regular basis as alternative financing options will change as time goes by as well.  And the process can’t start when you have a financing problem as it can take more time than you may have before the business is negatively impacted.

For new business financing, the contingency plan that I would recommend is to start the process sooner even to the point when any new strategic direction is being contemplated.  The typical planning approach is to do what’s best for the business and then look for the money that’s required to administer the plan when required.  But the probability of finding and locating the desired capital has gone down on average, so it makes a great deal more sense to scope out the capital markets first and then adjust the strategic plan accordingly if required.  This is far more strategic than just assuming funding will appear when required.

Business Finance contingency planning needs to take on a greater importance with all businesses that are serious about their ability to survive the current recession and profit into the future.

Click Here To Speak To Business Finance Specialist Brent Finlay

Technorati Tags: Business Finance, business finance contingency planning, Business Financing

With all the changes that have taken place in the capital markets over the last 18 months, there is now a need to change the way that requests for capital are positioned with lenders and investors.

In the recent past, applications were primarily based on historical financial statements and a decent attempt at cash flow projections to support the request for additional or new business capital coming into the business.

But things have changed whereby there is a much greater demand by lenders and investors for the business owner and manager to put forth commercial financing requests that are more thoroughly supported by source documentation and spend more time on risk management than forward thinking marketing strategies.

From a lender point of view, we have moved into a commercial lending era of loan security, lender mitigation, and business risk management.  While there still is money available in the market for businesses to acquire, there is a great deal more work involved in convincing someone that you’ve thought through all the major risks that could impact the business going forward and have a plan to mitigate the risks either in a proactive or reactive sense.

In the past, a lot of the details which have always been important to a business financing deal were glossed over by lenders or investors due to the strength of the economy and the unlikelihood of many types of risk to be of an issue or concern to many business owners.  This saved on the due diligence process and was supported by decades of portfolio analysis that identified what areas of risk a lender or investor needed to focus on the most.

With the impact of the current deep running recession, most of that logic is thrown out the window as its a little more of an every man for himself type of world where the business owner now has to actually think about all the things that could go wrong in advance of asking for money.

In my opinion, it the financing world had taken more of this type of security and risk first approach years ago, the current recession would not have run so deep.  But in better economic times, everyone wants to get in on the lucrative capital financing markets so lenders develop more aggressive portfolios to get their share of the growing pie.

But things are different now.  Lenders and investors have made the necessary adjustments, which are akin to their survival as viable business organizations.

Unfortunately, for the most part, business owners have not adjusted the way they manage their business from a financial risk point of view and as a result their Business Financing positioning when asking for new capital can be way off the mark.

Its really a return to good solid business fundamentals that we are seeing in the market.  Over the long run, this should be a good thing.  In the short run, it looks more like pain and confusion to those trying to locate and secure business capital.

Click Here To Speak With Business Finance Specialist Brent Finlay

Technorati Tags: business capital, Business Finance, Business Financing, business financing positioning, commercial finance, commercial financing

Here Are Some Business Finance Priorities To Consider For the Coming Year

As 2009 draws to a close 2 days from now, we need to start focusing on the year ahead.

Here are my Business Finance priorities for 2010. They may be a bit different from business to business, but all should apply to any small or medium sized business that is operating as a going concern.

Priority #1. If you rely on external capital or investor capital to operate or grow your business, make sure that you spend time every quarter assessing your available sources of Business Financing in the market place. Regardless of what you’ve been hearing, the recession and its related effects are far from over. There are going to be more bank failures and more unpredictable lender policy shifts as everyone continues to ride out the storm in 2010. Even if you are in solid financial shape with your sources of capital, they themselves may not be doing as well and could drag you into cash flow issues you didn’t expect and could not predict. So make sure you always have your options up to date.

While this is perhaps a bit paranoid, the reality is that sourcing replacement capital can be very time consuming and untimely, so its better to keep up to date with the market than ignore it altogether. Spending some time in this regard 3 or 4 times a year may also uncover competitive financing opportunities that you can take advantage of which you would not otherwise be aware of.

Priority #2. Set one or two goals to improve your cash flow management. This can range from negotiating better supplier terms to following up more often with customers that are slow to pay their account. While you can’t save you’re way to prosperity, an analysis of company expenditures may uncover some areas where costs could be reduced or eliminated. Depending on the size of your business, doing this type of exercise just once a year can potentially pay for all your external accounting and finance related services.

Priority #3. Do some work on your Business Exit Strategy. Even if you don’t plan or expect to exit the business for several years, there is no time like the present to start figuring out what a potential exit will look like, what needs to be done in the business to increase the value of a future sale, and what areas of the business records, systems, contracts, etc., need to be upgraded or improved so that the business can work towards being in a more “sell-able position”. When the day comes that a buyer and his advisers want to perform their pre-closing due diligence, you want this process to support your selling price and not uncover negatives that create price discounts or even kill a good deal altogether.

Spending some time each year on an exit strategy also helps make sure that what you’re doing in the business today is aligned with increasing enterprise value for time of exit. If the current strategy does not support this, you may be working at generating returns today that work against maximizing the value of your future business sale.

These priorities really do apply to all businesses in some way or another. Consider how each may be used to reduce your risks and improve your returns in the coming year.

Technorati Tags: Business Finance, Business Financing, cash flow management. exit strategy, exit plan

Business Finance Goal Review For 2009 and 2010

If you’ve spent any amount of time on this blog, you’ll here me talk repeatedly about what I call the 80/20 of Business Finance which comes down to three things”

• Securing the capital the business requires when it requires it.
• Managing the cash flow of the business to meet operational needs and minimize costs.
• Continually working towards the exit strategy of the business and in the process making sure everything the business undertakes supports and enhances the long term value of the enterprise.

So in 2009, how did you do?

As a business manager and owner, did you stay at a strategic level and manage the finance elements of the business through these three focus areas.

Has the business improved in each of these areas over the course of the last 12 months?  What about what lies ahead in 2010?

The December year end is a time for celebration in many parts of the world and for many businesses, its also a time of year end planning, next year planning, and overall performance measurement.

Just remember that to have the financial success your seeking, the business finance side of the business needs to be managed and kept in balance with the marketing side.

And to me, there is no better place to start increasing your returns and future probability of success than through getting more focused on the three things mentioned above.

Finance doesn’t have to be hard, but it does have to be directed. Leaving all the Business Financing decisions up to the bean counters is just asking for trouble.

The key is to identify the metrics of the business that everything summarizes into so that you can quickly understand the overall health of the patient without knowing the inner workings of each moving part.

I had a Brazilian boss for a year and a half during my time working for a large multinational company.  Whether it was because he was Brazilian or a type triple AAA personality, I’m not sure, but he thought he knew everything about everything.   As a marketing person by nature, finance was something he needed to learn to do his job.

So every month, we would sit down and I would produce one piece of paper with all the key metrics of the business, all the things we needed to measure to make sure that the three core elements of finance I have mentioned were intact and functioning properly.

We would sit there and debate each item… why this was up and why this was down.  His goal was to show me in less than an hour each month that he knew more about our financial position than I did, and my goal was to survive the interogation.

But the process did serve a purpose.  At least once a month, even at a high level, he took the time to zero in on business finance and see if everything was in balance and if it wasn’t, to identify the actions required to get things to where they needed to be.

My boss wasn’t the finance expert, I was (of course I never told him that).  And he didn’t have to be.  He needed to manage the overall business and stay at a strategic level.  And that’s exactly what he did.

Technorati Tags: Business Finance, Business Financing, exit strategy, managing cashflow, securing capital

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.

Technorati Tags: Business Finance, Business Financing

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.

Technorati Tags: Business Finance, financial assessment, financial performance

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.

Technorati Tags: borrowing money, Business Finance, Business Financing, Debt Financing, equity investor

We left off the last part talking about business owners and managers needing to focus on the three core business finance objectives and tie them back to the overall objectives of the organization.

Before getting into a deeper discussion about each of three core business finance objectives, lets briefly return to the initial discussion that business finance is hard to understand.

Yes, it is hard to understand finance as much of it tends to be based on some pretty heavy and involved math, conditions, and principles.

Yes, finance is an essential part of society and commerce.

No, it is not important to become a finance expert.

But to become an effective business manager and own or run a successful business, then you have to be able to put finance and finance providers to work for in a manner in which you know what’s really going on.

That’s where the following three core business finance objectives come in:

- Secure Capital
- Manage Cash Flow
- Cash Out

And if you haven’t already guessed, these objectives are the entire focus of this blog and all future posts.

All finance related functions and activities can be listed under one or more of these three objectives or categories.

This is effectively a point of interface between the managers and owners of a business and the various finance personnel or professionals they have to work with.

The focus here is develop a “common set of finance objectives” that both finance and non-finance trained individuals can understand and work towards together.

Lets look at each on of the core business finance objectives in more detail.

Secure Capital.  Virtually any business, at some time, will require some amount of capital to operate.  There can be rare exceptions, but indeed they would be rare.  An organization that has clear goals will have to further expand goals into strategies and tasks that are assigned dates in a time line and costs to complete.  The collective value required from all costs is capital it needs to secure.

This objective is an offshoot of budgeting and accountants, connects to banking and bankers, investors, and so on.

Manage Cash Flow.  Every activity, action, or decision of a  business has two things assigned to it:  time and cost.  When is going to happen, when did it happen, when will it be completed.  What will it cost, what has it cost so far, what is it expected to cost, and so on.

Cash flow is the life blood of any business.  Without a positive cash flow over time, there basically is no business.  So everything that happens, past present, and future is summarized into cash flow management, providing a dashboard of results to whoever is driving the business bus.

Finance functions like taxation, foreign exchange, accounts payable, accounts receivable, purchasing and inventory, capital expenditures and so on, all impact cash flow.  Summarizing all these activities into Cash Flow Management reporting and providing organizational goals and objectives for overall financial performance provide the basis for all these activities to be managed and measured… without being a business finance expert.

The key is to provide end goal direction in terms that everyone can understand.  The finance people seldom understand the intricacies of marketing, sales, and operations no better than non finance people understand finance.

The same is even more true with outside advisers like accountants and bankers and tax specialists who actually tend to know very very little about the inner workings of their clients’ organizations.

But these outside advisers can still provide tremendous value to a business if they are properly directed via the three core business finance objectives.  Without this direction, many business managers and owners simply leave the decision making up to the advisers which in many cases is dangerous to deadly.

The last core business finance objective, “Cash Out”, may sound simple and straight forward, but its importance can’t be overstated.

We’ve all heard how you need to work with the end in mind.  Its all about working towards a longer term goal or objective, right?  Well I use the term “Cash Out”  to signify the ultimate end of the business.

People are in business, primarily, to develop a cash flow, build assets, and build enterprise value for some day in the future when the business will be sold or transitioned to others for an optimal price.

The “cash out” objective is like the rudder on the ship, where when the end game changes for whatever reason, the entire enterprise needs to be shifted to accommodate the change in final destination.  Because the long run of business is ever changing, and truly organic in nature, short term linear courses are plotted to operate in the short term (otherwise you couldn’t operate at all) and as time goes by and more information is known, or impactful things come to light, or trends develop, or whatever that can influence what you do and how you do it in the market place.

Then a course correction is made.

The course correction is about making the adjustments required to continue on a path to optimal enterprise value that will someday be completely financially realized in some sort of exit.  It is inevitable.

As companies grow and fragment into different operating centers, each may take on a life of its own and work towards different ends.  But the most successful companies that consider the synergies among the pieces, will further wind up all these outcomes into one master exit plan to further guide the ship or perhaps fleet.

The point here is to always have a clear picture of where you’re headed and how you plan to get there.  Over time, you will refine the picture and continually bring unclear things into focus.  This provides the basis for all experts and functions, finance and others, to line up their efforts towards helping the enterprise achieve its goals.

The coordination of organizational activities across functional lines is nothing new.  I’ve just gone a bit further and simplified the collective process into the three business finance objectives:

Secure Capital
Manage Cash Flow
Cash Out

While much of the coordination and optimal use of Business Finance practices evolved out of big company structures and thinking, the principles apply to small and medium sized businesses as well.

Regardless of size, you need to have a strong handle on these three core objectives and by doing so, you can make sure business finance is working for you and likely providing you with a competitive advantage over those who either view this as too much work or are giving themselves a headache trying to understand everything about business finance (and we now know that would be a very poor use of time)

More to come in the next installments