Category Archives for Business Finance

Have You Made Adjustments To Your Business Financing Positioning?

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

Business Finance Priorites For 2010

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.

Business Finance | Year End Reflection

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.

If Business Finance Is The Ying, What is The Yang?

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.

What, How & When Do You Assess Financial Performance?

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.

The Balance Between Borrowing Money and Saving Taxes

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.

Why Is Business Finance Hard To Understand – Part III

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

Click Here To Speak Directly To Business Financing Specialist Brent Finlay

Business Finance

Why Is Business Finance Hard To Understand – Part II

In part I, we started into the discussion of why business finance tends to be difficult to understand for most people, even though its relevant to everyone to some degree.  Now, let me get into how this relates to you as a business owner or business manager.

I left off talking about the apparent communication gap between finance tacticians and the rest of the world.

I also mentioned how when you’re in business for yourself or managing business for others, you can be very much at the mercy of your advisers when it comes to matters of finance.

Does this mean you shouldn’t utilize advisers?  No, I’m definitely not saying that.  Experts in various financing disciplines can be absolutely critical to your business success.

So, lets summarize what we know so far.

–  Business finance can be hard to understand, comprehend, and apply.
–  Its an essential part of any business venture
–  Leaving too much decision making up to your advisers can be dangerous.
– There is a long standing communication gap between finance experts and  everyone else.
–  99.9% of the world have a very limited understanding of finance, how it works, and how they can more effectively utilize it to increase their wealth.

From a business ownership/management point of view, there should be a strong motivation to correct this trend, and I think there is, but few people understand how and continue to muddle through what already doesn’t work very well.

So what’s the solution?

Like anything else in business, the owners and managers of any business need to control and direct the forces of the business to be successful.  When it comes to finance, its hardly practical to advise or expect non financial managers to develop a deep understanding of business finance in order to get greater value.

Most Entrepreneurs will have a primary focus on marketing, which they should as marketing is the #1 most important activity in a business.  But finance is #2 , and is the counter balance for marketing.  Look at any large scale business and see how they’re organized – marketing on one side, finance on the other.

So the answer is not to become expert at something you may not be good at or have an aptitude for (basically going against your wiring).

The answer lies in your approach and commitment to maintaining the necessary chi like balance between #1 and #2.

Can I have a drum roll please.

The secret to optimizing the finance component of your business is to connect all finance activities  into the three core business finance objectives that apply to any and all businesses regardless of size, structure, or country of origin and then make sure they are congruent and supportive of the overall business objectives of the organization.

Wow, that’s a mouth full.  And hardly more enlightening at this point.

But stay with me as all will be explained in the next segment.

I will reveal these three core business finance objectives in part III and further explain how they relate to the broader organizational objectives (and show you that its not even that hard to do once its been explained in a little more detail).

Click Here To Speak Directly To Business Finance Specialist Brent Finlay


Why Is Business Finance So Hard To Understand? Part I

“Let’s Discuss Some Of The Challenges That Come With Trying To Figure Out How Business Financing Works”

Have you ever got a sharp pain behind your eye or gone instantly into a comma from trying to make sense of almost any information written on business finance or any finance application for that matter?

I have.

And I’m a finance guy, or at least someone formally trained in finance, and I get the same headache.

So what’s the deal with this?  Is is really so hard to understand and does it have to be so unfun to read and digest?

In fairness to my fellow egg heads, there is a fair amount of complexity to the actual math associated with finance and finance theory. Add to that the business finance disciplines like taxation, accounting, treasury & foreign exchange and you end up with some really mind blowing stuff that 99.9% of people have no interest in whatsoever.

So why bother with it all?

Well, because its essential.   Essential to us both personally and commercially.

I mean we live and work and play in a society that is based on a capitalism model which requires money for exchange of goods and services which requires finance systems to operate.

And in the business world, every single business must have some proficiently in finance, or there won’t be much of a business, certainly not a very profitable one.

So, on the one hand, everyone needs to understand and apply finance to some degree.  But on the other hand, the technicians that understand the topic frankly suck at explaining what we need to know in relevant, applicable terms.

Thus, we have a knowledge gap which starts right in the public school system.  You can graduate from high school without being shown how to write a check, balance a bank statement, or receive any basic instruction on the responsible use of credit.

If you go to secondary school, you may or may not get exposed to a whole lot more, depending on what you take.  Even if you go into a business school, or even a business masters program, the amount of directly applicable information you may receive can be quite small.  You’ll learn a lot about finance theory and accounting practices, and taxation strategies, and you’ll be provided with lots of big company examples with lots of complex corporate examples that 99% of the people would never be exposed to in their life time.

Then, when you venture out on your own, you will follow one of three paths related to finance: 1) you will get an unrelated job and learn through trial and error how to get a mortgage, a car loan, a credit card, and a line of credit; 2) you will pick a finance related discipline and learn a great deal about that particular aspect of business finance, but still be dumb to most of the rest of the subject matter; 3) you go into business and live at the mercy of your advisers (accounts, tax specialists, bankers, brokers, lawyers) who will hopefully know what their doing for what you pay them and know how to apply their knowledge to your real world baby.

Basically, we live in a world where there is an enormous gap between the technical finance knowledge holders and the rest of us making up 99.9% of the population.

While there is no shortage of information available, most of it is just not all that useful to the average person of average intelligence who does not have any special interest in finance

If it sounds like the system is broken, it is.

So what’s the solution?

Stay tuned for more in part II

Click Here To Speak Directly To A Business Financing Specialist