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Finding a Coconut in the Jungle of Small Business Financing

One thing I keep telling my clients is that even in this economic jungle we are in, there are pockets food caches hidden for those who are more creative. Take receivables financing, for example. In the old days, one way a business financed their cash flow was to factor their receivables. In other words, run them through an account that was collateral for a bridge loan. The end result, the company received (somewhat) immediate cash for a large chunk of its receivable. In other words, they used a reduced amount of future cash to finance current business.

Sounds familiar? Look at our US Government; they’re experts at it.

A recent new technique in a CFO Magazine article, Fast Cash for Small Business by Alix Stuart has gained popularity. It is called The Receivables Exchange. A small business can transfer only a portion of their receivables to this exchange which auctions them off. The company receives 91%-96% of the receivable’s value in less than a week. This method of financing is much more streamlined than factoring.

So, is that good for your company?

That depends.

First, your financial people will have to run the numbers to make sure you are not mortgaging yourself into bankruptcy, especially if you only have a 6% net profit ratio.

Second, what is your strategy? Where is your company going? Plan out beyond the loan and see where you want to go and if this financial tactic gets you there, or pulls you off target.

Third, are you just getting a bridge loan to meet payroll? Why? You may be borrowing to cover up poor financial planning. The receivable financing may only be a band-aid for a hemorrhage, and we all know how bad a hemorrhage can be in a jungle.

Small Business: The Cinderella to their Global Step-Sister Corporations

Kenny Johnson, a friend of mine, sent me an interesting Cobert Report interview. On the show, Steven Cobert drilled Jeffrey Leonard, the author of Do Small Business A Favor which appeared in the Washington Monthly. Steven Cobert and Mr. Leonard jostled for the upper hand on whether President Obama should give a helping hand to small businesses in collecting receivables from big corporations. Mr. Leonard presented evidence that the big corporations were “borrowing” from small businesses by floating their receivables.

There are some tactics that small business can use in minimizing this risk, but before getting to that, I wanted to make a political observation. Mr. Leonard’s position to help small business does not fall on deft ears, however, I doubt that he will receive anything more than sympathy. In an era where a substantial part of the electorate are clamoring for a smaller government, the idea of President Obama maneuvering the US government into business affairs, is Utopian. The political atmosphere, fuelled by the Tea Party movement and the Koch bothers’ millions, has created a subjective anti-government movement among the electorate. In other words, the polls show that government intervention into the lives of individuals is only welcome if they promote that individuals interests. Otherwise, the consensus will be that government is bad, and overreaching. So, it is with Mr. Leonard’s position. Small business trade groups will continue to fight government regulation unless it benefits their specific interests.

However, putting the politics aside, what can we learn from this delemia and how can we fix the problem. Here are some of my questions and recommendations:

Is a disproportionate share of your business locked into one major client? For example, is 20% or more of your income coming from one customer?
Is your business strategy dependent on one customer employee representative?
Are you drawing on your business credit line to stay in business because your major customer is not paying you within 30-45 days?
Are you afraid to call your major customer for payment for fear of losing them?
Are you dependent on one of your sales people for the majority of your business?

If you, as a small business owner, answer ‘yes’ to any of these, you need to alter your business strategy. When starting a business, it is hard to not be dependent on a couple of big clients, unless you are a volume-type business. The time to alter your strategy is now, and not when your big clients fires you. So, what do you do?

May I suggest Good to Great by Jim Collins. The book compares companies that took a leap to greatness. Some of these points can be translated even to the smaller company, like building a team first, then deciding where to go.
Another good book, more applicable to small business, is The E-Myth Revisited. This book demonstrates that a small business cannot grow when owners run the small business by themselves.
These books can create a good foundation, but the small business success is not just the strategy, but the implementation. Once you set a course on how to grow your business beyond a major customer, you must work the strategy for a long time. You cannot take your eye off the horizon for one week.
There are many blog articles on our site on tips to creating and implimenting a good small business strategy. One thing you cannot depend on, is the US government helping you.

Don’t Embrace the Dark Side of the Force, Luke

Now, I’m not saying that you will have your hand cut off, or that some big, ugly, helmeted guy with asthma will claim to be your father, but bad things can bite you in the end if you choose to cheat. Take J C Penny, for example, The New York Times article The Dirty Little Secrets of Search byDavid Segal talks about J C Penny’s unusual rise to the top of the search engines using “Black hat” optimization. Among those tactics were thousands of links by hundreds of global sites.

This is a good example of character. Occasionally, I have to lightly lecture a client on character and the value of doing things right. Some people like to reduce their taxes by the following means:

Defer income by putting checks in their drawer for a month, or so in December.
Run personal expenses through a business.
Write off expenses that should clearly be capitalized, or charged to another company.
Pay their employees “under the table.”

I am a strong advocate of counselling clients on how to save taxes. But that doesn’t mean tax fraud. Clients don’t realize that when they cheat on taxes they rob themselves of the very information that can tell them how their business is thriving or failing. A business owner cannot make that determination without the proper data. In addition, when a business owner tries to qualify for a bank loan, they may not. So, in reality, a business owner who tries to cheat his way through taxes may injure him/herself far more in other areas.

Likewise, in the J C Penny situation (regardless of their denial of any interest) of cheating on search engines, they will become branded in the internet. Many people who read that article, or this one, may skip over their site after understanding that they haven’t practice ethically.

Now, don’t get me wrong. There is nothing wrong with “white hat” social networking consultants social bookmarking your site. This can be done by employees, consultants, fans, vendors, and family. But, when you take the social bookmarking and linking to an extreme, it destroys the purpose of what the Google algorithms were designed to do, show popularity.

The conclusion is that character counts not only in personal lives, but business lives. To violate this rule is like mixing yeast in bread. It starts off real pretty, but when left unattended, it grows ugly.

As Homer Simpson says,”Doe!” 6 Mistakes to Avoid in a Recovering Economy after Noah’s Ark

I came across this an article by Katie Morell regarding 6 Mistakes to Avoid During a Recovery. The article offered some good advice, but it reminded me of playing golf as a teenager at Valencia Golf Course, California. The course was famous for its lakes. Almost every difficult hole had a large lake in it, the most troubling was a large par 3 that was surrounded by sand traps and then by a lake. I imagined that it would have been the site that Noah saw after stepping off the ark with his 1 iron–lots of water, little green. In the same way, this article focuses on the “Thou Shall Not…” and not “Thou Should…”

Marking up merchandise: The article cautions about over-charging or even charging retail during these times. I look at that as a fall back position. The most important concept is whether clients understand the value you are bringing to the table. Usually I am successful at that, but sometimes I have not conveyed that to a client. I fault myself for that.
Hiring like crazy: Jim Collins, in his book Good to Great , states that great companies build their team first, and then decided where to go with them. This may sound like a contradiction to the Morell article, but there is a reconciliation. Morell isn’t saying not to hire people, but do it wisely. I know of too many businesses (restaurants in particular) that have built an unnecessary entourage of people because they will expect to need them in six months. The problem, is that they end up laying people off in three months expending the capital in the short run that they needed. This is usually an ego problem. Always start with a skeleton crew. The stress you will feel being understaffed pales by comparison to being overstaffed and stressing about who to lay-off next. Outsourcing can bridge the gap.
Jumping into advertising: This is an easy one. Look at our article in social networking. There has been no better time in history to getting the word out, at an insanely cheap cost.
Flying solo: Alliances are always a good tactic. But, a problem that may arise is relying too much on one client or alliance. Start with one, but immediately look for others.
Cutting out customer service: Invest in your most valuable asset, the people themselves.
Staying heads down: Joining professional groups is a good thing, but make sure they benefit you, your employees, or your company. Trade groups may be good in keeping up with your industry trends, but do nothing in meeting potential alliances or customers.

So, keep a positive attitude, be creative, and spend wisely.

Empower Your List(Or How to keep the mud out of your face when you’re spinning your wheels)

Have you ever asked, “What did I accomplished today?”

I came across an article, How to do more in less time. The article had some good advice for small business owners on how to be productive. These tips could be valuable, but the starting point, like in all projects is to have an attainable goal. I have found that a small business owner can accomplish a lot if he/she just make a list the night before of what they want to accomplish. Now, in some small businesses, that may not be too easy if the business is ver volital. For example, if you provide a service, your client’s schedules can alter your own schedule. That is ok, you are the business owner, remember? Put it on the list. Are you going to do some social networking pushing your small business? Put it on the list? Are you cutting payroll? Put it on the list. Then, reorganize your list by priority.

The secret is to create a list of attainable goals and cross them out as you do them. At the end of the day, you will feel more like a small business owner, and not a small business slave, because you will have taken charge of your own time.

Don’t waste time on a business social network, but enter it on the list. Choose something concise that you would like to do on your social network(like write an article). In doing this, you have a deliverable that will benefit your small business down the line.

In my small business (CPA firm), I have been writing these articles for about nine months. I list this chore twice a week, no excuses, no inefficiencies. I just get it done. I don’t have an ROI because that is irrelevant. I provide information and build relationships. That is all part of being in a small business. If I did not list it, then the relationships would never be built or nourished. Small businesses, even e-businesses are built on relationships, and we all know that if you don’t have time for your relationships(even the important ones), you will not have any relationships.

Lastly, as a small business owner, you must know that your list must progress to higher levels. For example, later this month, we will be launching our monthly blog videos under our new banner THE LA CPA. It will be similar to these articles, but will have a visual and audio component. The result will be to more information, better information, in less time for our readers.

So, as a small business owner, or any kind of business person, create your list, execute your list, and then evolve your list. You will find more control of your time and life.

What’s in a Business Name? I Bet You Remember ACME from the Roadrunner Cartoons?

Business names can play a role in your strategy. I bet you remember the Wile E. Coyote’s supplier, ACME. The name said EVERYTHING, because they sold everything. What a great strategy that would have been for a product placement. What would have been the result if the cartoon’s producer’s created a mail order ACME with a Home Depot strategy back in 1960?

So, brand names and strategy should be inseparable.

I came across the article Capitalizing on a Business Name which expressed some valuable tips. The article displayed five different branding strategies: Familial, logical, thematic, localized, and random. I will not reiterate the strategies, or definitions of each; You can read that for yourself. Instead, I suggest you expand to other areas than branding.

First: When thinking of your name, go to your tag-line. “Nike” the strategy doesn’t say very much until it is joined with “Just do it.”

Second: Focus on your audience on what they want. If you are just another novelty store, a lousy name and tagline would be Odds and Ends, Just another novelty store. The name and tag-line reduces you to a commodity. From a business strategy point of view, a commodity is a service, or product, that is distinguished from other similar services or goods by price only. In other words, the only thing you can do with a commodity is lower your price. You don’t want your business strategy to be there. It is no wonder that commodity comes from the same root as commode(should I say more.)

Third: After distinguishing yourself in name, tag-line, and product (or service), use the available web resources to get these out. Your strategy should be consistent, deliberate, and within your budget.

Fourth: Establish a growth strategy. For many, that is a death trap. So many entrepreneurs know how to produce their product or service, but not how to grow the company and manage the production. A lack of strategy, here, will cripple all of the work you did in steps one through three.

Fifth: Create benchmarks and metrics that track your strategy. Each step I mentioned above should be able to be measured in some way. Otherwise, your business name strategy, tag line strategy, production strategy, and growth strategy will be ideas that don’t speak to you.

Strategy: Local Connections? Then Why Do We Need The Web?

Just as Dorothy said, “There is no place like home.” But Dorothy didn’t have a facebook account. So, is that still true? Do we have to nurture local relationships in order to conduct our personal and business strategies, or can we just “talk” on the social networks?

I came across this local arts article that argued that every part of the world, and in our cities, have their own art personality. The article pointed out that with cover bands and reality TV, we can pretty much watch and hear the same thing regardless of which part of the country we are in.

The article makes a point, but only on the surface. For example, I co-founded a local non-profit in Manhattan Beach, CA, that promotes local arts, music, dance, and literature back in 2009. The strategy is showing promise as we exhibit local artists and their wares. But, the interesting thing is the local connections have been made both on the web, and the old fashioned way. Patch.com has promoted our events, in addition to the local newspaper, The Beach Reporter. Our organization is using the web as a new way to connect with the locals, yet it is nourished through personal contact. The resulting strategy has been a technology handshake. Businesses, especially businesses located in the cities, need this combination strategy if you plan to pursue something other that e-commerce.

For example, if you do not use the web, you will lose the ability to capture clients in the the long tail (see my previous article). I landed a Los Angeles client because her mother in Canada found me through Google. Our relationship has developed to where I am her business confidant in a new business venture. Likewise, if you just take in clients off the web and do not meet anyone, you will not nurture relationships and strategic alliances in your own neighborhood. I am in daily contact with business strategic alliances that I know from different areas of my life. When people know you, they have a better chance of trusting you.

With all of this said, though, you must strategize. Where are you now, where do you want to be, and how are you going to get there? Then do it. Strategy that is just academic, does nothing but kill time. You must put shoe leather on it, but use both conventional and web-based connections in order to have two shoes.

The strategy has to be a two-pronged approach in the current age.

Healthcare Reform: If It Walks Like a Duck and Quacks Like a Duck…We’ll Call it a Toad

I just returned from a great informative panel on healthcare reform presented the by the LA chapter of the Association of Strategic Planning. I was surprised to learn that many large and smaller companies are trying to use the independent contractor designation to reduce healthcare benefits for employees. I wrote about a similar topic in the National Healthcare Reform Magazine back in August. My article warned employers about the misclassification of an employee, and how it could sabotage their tax credit.

What I didn’t think of, were companies intentionally trying to circumvent the tax laws in order to save healthcare insurance. This can be very risky. The IRS is no stranger to businesses trying to reclassify employees as independent contractors in order to save payroll taxes. The rules are complex and employee definitions differ from state to state. However, I tell clients that if you tell your “contractor” how to do his/her job, you run the risk of the person being classified as an employee(thunbnail definition.)

Now, I can imagine these companies trying to align themselves with the Fedex case where the U S District Court ruled the drivers as independent contractors instead of employees. But now the risks involved in this aggressive stance is not only healthcare insurance penalties, but payroll taxes, and workers’ compensation issues(not to mention labor law issues.)

Be very careful when classifying those who work for you. A tax professional may be your best friend in keeping you out of “fowl” play.

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Business Plans: Some Tips to Financing Your Own Business (or How to Waterski)

When I was nine years old, I learned to water ski. My uncle and aunt (Jim and Eva Smith) owned a boat. My cousins were already skiing on two skis, so in Lake Isabella, California, my time had come. My uncle did some “dry runs” on the sand (in order for me to experience the “feel”) by pulling me up, by hand, with a ski rope. Then came time for the boat. Nothing could have prepared me for a high horse power outboard motor. My first half dozen attempts were “face-plants.” The next half dozen were “butt-plants.” I was getting discouraged and embarrassed. But my uncle didn’t flinch. He said he had all day and would stick with me until I got up. And finally, around the fifteenth attempt, I made it. Oh, not for long, for at least 50 yards. What a feeling. After that, I moved into the groove over the years, and eventually graduated to one ski, carving my temporary signature outside the boat’s wake like the others.

The AMEX forum article How to Raise Capital For Your Business reminded me of this experience. Our firm is frequently approached by entrepreneurs to prepare a business plan for their investors. The article breaks out the type of investors for a business plan and at what stage they may enter into your future.

Friends, families, and fools: The initial idea stage, the label says the rest.
Vendor financing: Acquire the product, sell it, then pay for it. You’ll need to create a strategic relationship with vendors who believe in you, and sell on consignment. This is done in the art world
Bootstrap: Well, if you have the money to risk, but it is always better to risk other’s money.
Venture capitalists: For others to invest, you have to show, in your business plan, that you have risked your own resources. Also, you will impress them if you manage some level of success on such meager self-financing. Never present a business plan that pays yourself back before the investors.
Partner: If there is another business who could be a stakeholder, they may want to risk a little with you.

In order to develop a credible business plan, you must be conservative and have some foundation for your numbers. One such idea is to use another business (or business plan) that is similar, and mirror its sales and profit. Usually, that is hard to come by, so you would have to make some assumptions in your business plan notes. Tell investors what your break-even point is, show them your first year’s monthly cash flow, and most of all, show them when and how much they will get paid.

In my water skiing overature, I had all the components of a new business plan:

I invested my own time and humility.
I was determined to succeed.
My uncle believed in me and invested his time and boat in my dream.
I didn’t have unreasonable expectations.
My uncle understood his investment in me, and the time needed to reach success.

Business plans are just a start, not a finished product. But, if you have all the business plan components, your credibility and investor comfort level rise.

When Standard Business Principles are Not a Clear Strategy

The standard business principles that your grandpa taught you 30 years ago, may not all apply to in today’s Internet environment. Take the Indie Connect Magazine article 10 Business Principles. Some of these principles may be stale in today’s business strategy. Here are some examples:

The Law of Supply and Demand The article explained that if there nobody wants your product or service, you can’t sell it to them. This may be fine for the corner fruit stand, but not when you have a world at your fingertips…In the old school of business, you were restricted to a geographic location by your resources. Today, at the time I am writing this blog, there has been over 2 1/2 billion google searches (See World Metersat the time you are reading this.) This means that if you develop a proper Internet strategy, you can attract a substantial market somewherein the world. Demand can be misleading in the Internet, because of the sheer numbers of individuals that are available to find you. You can almost sell anything to anyone, even if the demand seems absent.
You Spend Money to Make Money I can’t think of another principle that has been shattered by the Internet. 30 years ago, a local business person may have placed $1,000s of dollars of Yellow Pages ads in different cities to get the attention of hundreds of people. Today, if you spend mor time than money in establishing your product on the Internet, you can be successful. The one who wisely spends money in these slim economic ties, will be the one who will go the length.
Every industry has its own set of ‘best practices’ Yes, but these best practices may be a crutch that forces you to swim in a red ocean instead of a blue ocean where competition becomes irrelevant. You become a commodity. (See Blue Ocean Strategy article). To be successful, you have to examine what your customer is looking for from the industry, not what your industry is delivering to the customer. Sometimes, they can be very different.

Read the other priciples listed in the article, but look at them through the eyes of one in the 21st century.