I recently was listening to a podcast of the Frank Peters show focusing on Angel Investing. The guest on his show, Permjot Valia, is an early stage investor. He has an interesting perspective on the start-up and Angel investing worlds.
He had a very interesting philosophy with regards to what financial metrics are most important in a start-up. Often entrepreneurs manage their entire business around the profit and loss statement. Permjot recommends managing from a cash flow perspective.
Here's his philosophy in summary:
- Focusing on Revenue = Insanity
- Focusing on Profit = Sanity
- Focusing on Cash Flow = Reality
Here's a good article from Entreprenuer that started with this question...
Q: Can you give me some tips on managing the cash flow of my new business?
Thursday, December 11, 2008
Friday, December 5, 2008
VATORTV VENTURE CAPITAL STATUS!
Here's a good video from Vator.tv about the current status of transactions in the Venture Capital world.
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Thursday, December 4, 2008
AVOID THESE SELLING ERRORS!
I was just talking with a few folks here at Start-Up Smart about this article to take a random and unscientific survey. Of the half dozen people that I spoke with all of them said they have been on both sides of the "table" that is outlined below...
This article below comes from Aaron with SmartDraw.com.
How Not to Make a Marketing Presentation
Recently, one of my coworkers slid a handout from a marketing presentation he had attended across my desk and asked me what I thought of the material. This company was trying to sell us something that would increase our revenue, cut our costs, etc… the typical promises in every business-to-business pitch. This company was trying to sell us on some new advertising opportunities, specifically, and we receive at least a dozen proposals of this sort per week.
The marketing materials were very polished and it was clear that the salespeople from this company had done their homework on the nature of our business—well, most of their homework anyway. The pitch was very detailed; it told us exactly what we were paying for and outlined how we would potentially benefit from this company’s services. It was, in my book, one of the best-presented pitches I’ve ever seen. But it contained a handful of fatal errors that forced me and others to say “no thanks.”
Error #1: Make Your Customers Feel like Soviet Space Dogs
The first mistake this company made was not including any testimonials from other customers who tried this service and had a good experience. The proposal in this instance was extraordinarily expensive, and the company didn’t do much to assuage our concerns over the price tag by way of sharing the hopefully positive experiences of other customers.
No customer wants to feel like a guinea pig or a Soviet space dog. They want to know that other customers who’ve tried your product or service have achieved positive results and satisfaction. If you fail to provide that kind of reassurance over the course of your presentation, it leaves each potential customer feeling exposed. No amount of good presentation skills or masterfully-designed PowerPoint® slides will be able to overcome the lack of assurance left by not including any meaningful, specific testimonial information.
Error #2: Don’t Stand By Your Product
This article below comes from Aaron with SmartDraw.com.
How Not to Make a Marketing Presentation
Recently, one of my coworkers slid a handout from a marketing presentation he had attended across my desk and asked me what I thought of the material. This company was trying to sell us something that would increase our revenue, cut our costs, etc… the typical promises in every business-to-business pitch. This company was trying to sell us on some new advertising opportunities, specifically, and we receive at least a dozen proposals of this sort per week.
The marketing materials were very polished and it was clear that the salespeople from this company had done their homework on the nature of our business—well, most of their homework anyway. The pitch was very detailed; it told us exactly what we were paying for and outlined how we would potentially benefit from this company’s services. It was, in my book, one of the best-presented pitches I’ve ever seen. But it contained a handful of fatal errors that forced me and others to say “no thanks.”
Error #1: Make Your Customers Feel like Soviet Space Dogs
The first mistake this company made was not including any testimonials from other customers who tried this service and had a good experience. The proposal in this instance was extraordinarily expensive, and the company didn’t do much to assuage our concerns over the price tag by way of sharing the hopefully positive experiences of other customers.
No customer wants to feel like a guinea pig or a Soviet space dog. They want to know that other customers who’ve tried your product or service have achieved positive results and satisfaction. If you fail to provide that kind of reassurance over the course of your presentation, it leaves each potential customer feeling exposed. No amount of good presentation skills or masterfully-designed PowerPoint® slides will be able to overcome the lack of assurance left by not including any meaningful, specific testimonial information.
Error #2: Don’t Stand By Your Product
If a customer asks you “so, if we agree to spend all of this money on your product, what will you do if it doesn’t deliver everything that you’ve promised?” during the course of a marketing or sales presentation, you should probably avoid all of the following responses:
- “We can’t guarantee that it will work, but we’re pretty sure that it will work!”
- “Well, it may not work out the first time; you might actually have to use the service a couple of times before you get the results that you’re looking for. But we’re sure that we can deliver them eventually.”
- “Well we won’t be able to refund your money, but we will be able to help you figure out how to use the service better down the road!”
The little handout I read made it clear that we had to pay for the service upfront and all of the risk was on us. When faced with a risky or expensive proposal, customers want to know that there’s a degree of shared risk between both the vendor and the buyer; it helps ease whatever concerns customers may have about purchasing your product, knowing they won’t absorb the full damage if the product or service doesn't pan out.
There are a number of ways to let customers get a taste of whether or not your product will work for them, and it’s an easier sell when you can offer them a guarantee or a trial of some kind. Telling your prospects to essentially roll the dice on you, however, is the last thing you should do—unless you’re presenting to tourists in Las Vegas.
Customers want to feel safe and confident when they commit to a purchase—especially large ones. And this company, despite their professional-looking slide deck and knowledge of how our company works, actually made us feel more uncomfortable about committing to a large advertising purchase. This is because they did nothing to mitigate our concerns about the risks.
This presentation didn’t fail because of bad design aesthetics or because it looked unprofessional; the presentation failed because it lacked the critical substance of testimonials and risk-sharing opportunities. Presentation can’t mend the gaps created by lack of substance.
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Tuesday, December 2, 2008
LEAVE ME A MESSAGE...BEEP!
As entrepreneurs, we wear a lot of hats. One of those hats is to fill the role of a Sales Person. As sales people, we leave a lot of voicemail messages in our endless pursuit to turn potential customers into revenue streams and build client relationships. When leaving voicemails for a prospect or a customer, you can dramatically increase your chances of a return call by putting yourself in their shoes. In other words leave a message that speaks to their perspective.
One of the most common mistakes sales people make when leaving messages for potential customers is talking too much about themselves and their company. BLAH BLAH BLAH. If you consider what your prospect might be thinking when they listen to your message, you want to avoid thoughts like, "So what?" or "How will that help me?"
Using a valid business reason is an effective way to craft a compelling reason for your client or prospective client to call you back. Your potential customers are as busy as you are, so messages longer than 20 seconds will start to decrease your chance of a call back right out of the gate.
Criteria for a good message:
- Impacts what your recipient wants to accomplish.
- Sets the call as a high priority.
- States "what’s in it for me" to the recipient.
- Is clear, concise, and complete.
Wednesday, November 26, 2008
PRIORITIZE YOUR VENDORS!
In bad economic times most of the emphasis and attention is on failing companies. However, here's an interesting article about prioritizing debt for companies that are healthy. Start-ups and growth companies that can display positive operating cash flow and continue to maximize that cash flow can certainly position themselves to take market share in a down economy. While most company executives are immobilized, the saavy executive with a high tolerance for pain can create competitive advantage.
Here is a great article by Jane Hodges with some tips on how to prioritize your debt:
The scenario: A company’s cash flow is pinched, but the stack of bills to lenders and creditors is piling up fast.
The tactic: Steal a page from the Chapter 11 handbook: Follow the “absolute priority rule” and pay off debts in order of importance.
In a recession, sluggish demand and slower-paying customers can put a serious squeeze on cash flow, making it tough to keep paying the most important bills. One of the most important tactics finance managers need to follow in a serious market slump, says Sheila Smith, financial advisory services principal and national leader of restructuring at Deloitte, is to plot out the timing of major expenses, such as renewals of credit lines, bond-debt servicing fees, and balloon payments on debt. Look at which ones are due in the next three, six, or nine months, Smith says, and then stockpile reserves to fund them. In the normal course of business, this might be easy to do without deciding which of those is or isn’t critical to business. But in a deep financial crisis, prioritizing can help companies save and prepare.
If a company can’t pay all its suppliers or partners on time, or if it has multiple suppliers across several categories (three office-supply accounts, two travel agencies, etc.), then managers need to create a hierarchy that dictates which accounts get cash first, second, third, and so on. By never paying priority vendors late and exercising more liberty with second-tier partners, the company can assure that its most important business functions are under control and preserve short-term cash flow.
Prioritizing debt is a trick that healthy companies can learn from bankrupt ones. In a bankruptcy, a company follows the so-called “absolute priority rule,” in which the company pays off debts in a clearly delineated hierarchy. Outside of bankruptcy the hierarchy is not predetermined, but companies can still use a priority-setting process to establish a smart strategy for who, what, where, and when they’re spending money, Smith says. For example, an aviation company definitely needs to pay a cockpit-door manufacturer on time. But the same firm may have hundreds of light bulb vendors to choose from, so paying one late has few consequences other than changing vendor.
Smith gives another example: A company that works with three overnight mail vendors might want to choose one as the “critical” or most important vendor who always gets paid on time, then designate the other two vendors as “B” and “C” priorities who can get paid later in the billing cycle.
Caution: Prioritizing vendors, suppliers, and debtors can lead to less negotiating power if these parties wise up to their ranking. Lower-priority vendors may decide not to work as cooperatively down the line. On the flip side, companies can try using prioritization as a launch point for negotiation with priority partners — i.e., “We’ll ship 70 percent of our overnight volume with your company if you shed 15 percent of the fee.”
Here is a great article by Jane Hodges with some tips on how to prioritize your debt:
The scenario: A company’s cash flow is pinched, but the stack of bills to lenders and creditors is piling up fast.
The tactic: Steal a page from the Chapter 11 handbook: Follow the “absolute priority rule” and pay off debts in order of importance.
In a recession, sluggish demand and slower-paying customers can put a serious squeeze on cash flow, making it tough to keep paying the most important bills. One of the most important tactics finance managers need to follow in a serious market slump, says Sheila Smith, financial advisory services principal and national leader of restructuring at Deloitte, is to plot out the timing of major expenses, such as renewals of credit lines, bond-debt servicing fees, and balloon payments on debt. Look at which ones are due in the next three, six, or nine months, Smith says, and then stockpile reserves to fund them. In the normal course of business, this might be easy to do without deciding which of those is or isn’t critical to business. But in a deep financial crisis, prioritizing can help companies save and prepare.
If a company can’t pay all its suppliers or partners on time, or if it has multiple suppliers across several categories (three office-supply accounts, two travel agencies, etc.), then managers need to create a hierarchy that dictates which accounts get cash first, second, third, and so on. By never paying priority vendors late and exercising more liberty with second-tier partners, the company can assure that its most important business functions are under control and preserve short-term cash flow.
Prioritizing debt is a trick that healthy companies can learn from bankrupt ones. In a bankruptcy, a company follows the so-called “absolute priority rule,” in which the company pays off debts in a clearly delineated hierarchy. Outside of bankruptcy the hierarchy is not predetermined, but companies can still use a priority-setting process to establish a smart strategy for who, what, where, and when they’re spending money, Smith says. For example, an aviation company definitely needs to pay a cockpit-door manufacturer on time. But the same firm may have hundreds of light bulb vendors to choose from, so paying one late has few consequences other than changing vendor.
Smith gives another example: A company that works with three overnight mail vendors might want to choose one as the “critical” or most important vendor who always gets paid on time, then designate the other two vendors as “B” and “C” priorities who can get paid later in the billing cycle.
Caution: Prioritizing vendors, suppliers, and debtors can lead to less negotiating power if these parties wise up to their ranking. Lower-priority vendors may decide not to work as cooperatively down the line. On the flip side, companies can try using prioritization as a launch point for negotiation with priority partners — i.e., “We’ll ship 70 percent of our overnight volume with your company if you shed 15 percent of the fee.”
Thursday, November 20, 2008
SHORT, BUT SWEET!
As most of you know, I am a big believer in keeping your business plan and presentation to investors brief and focused. Here is a snippit from a blog post by David Hornik on VentureBlog. David is blogging about an article he recently read in Wired about securing venture capital funding.
"ONCE INVITED" to present your plan (to VC), remember that brevity is a virtue: Use no more than 30 PowerPoint slides, and keep your presentation under 45 minutes." (Wired article)
(David's response) Yikes. 30 slides. Unless you are Lawrence Lessig, I don't think the words "30 slides" and "brevity" can possibly be used in the same sentence. I completely agree that you should aim to keep your presentation to about 45 minutes. If a VC gets excited about what you're working on, they'll spend more time with you in future meetings. But, as with entertainment, you are way better off leaving them begging for more. Get in. Pitch. Get out. There is no way that should take anywhere near 30 slides. I've blogged here before about the 6 -- yes, 6 -- slides you need to pitch your business. Even if you feel that 6 slides is too spartan, don't confuse quantity for quality. The fewer the slides and the more discussion the better.
(My response) Folks...I can't stress this enough. Resist the urge to take a presentation with a pile of slides. Simply put...don't do it. The goal of the presentation is to get their attention. Once you have their attention THEN you go into the details. Most Angels and VCs have their own process for going into the "details" of your idea.
"ONCE INVITED" to present your plan (to VC), remember that brevity is a virtue: Use no more than 30 PowerPoint slides, and keep your presentation under 45 minutes." (Wired article)
(David's response) Yikes. 30 slides. Unless you are Lawrence Lessig, I don't think the words "30 slides" and "brevity" can possibly be used in the same sentence. I completely agree that you should aim to keep your presentation to about 45 minutes. If a VC gets excited about what you're working on, they'll spend more time with you in future meetings. But, as with entertainment, you are way better off leaving them begging for more. Get in. Pitch. Get out. There is no way that should take anywhere near 30 slides. I've blogged here before about the 6 -- yes, 6 -- slides you need to pitch your business. Even if you feel that 6 slides is too spartan, don't confuse quantity for quality. The fewer the slides and the more discussion the better.
(My response) Folks...I can't stress this enough. Resist the urge to take a presentation with a pile of slides. Simply put...don't do it. The goal of the presentation is to get their attention. Once you have their attention THEN you go into the details. Most Angels and VCs have their own process for going into the "details" of your idea.
Tuesday, November 11, 2008
TAKE YOU DOWN...DOWN TO CHINA TOWN!
As most of you know, I run a boutique firm that specializes in helping entrepreneurs define their start-up idea or business and be able to explain it to potential partners, employees, vendors, investors, bankers, etc. Without a doubt the most common element that our clients overlook is their EXIT STRATEGY...more specifically a COLLECTIVE EXIT STRATEGY. This is the process where all founders, partners, investors, etc. have a clear understanding of how each will exit the business and hopefully capture ROI through a liquidity event.
Here are some common exit strategies:
1. Sell the business to another party such as a competitor, strategic partner, or other business of some type
2. Take the company to the public markets
3. Don't exit and keep the business as a cash flow or life-style business
At any rate, whatever your intended plan is to exit the company you would be well advised to have detailed and thorough discussions with all shareholders prior to launching the business. Also, discuss these strategies with an attorney that specializes in exit strategies. It's well worth the expense.
Here is a great video that is brief but highlights some key points when considering an exit strategy. It's from our friends at FundFindr.tv.
Here are some common exit strategies:
1. Sell the business to another party such as a competitor, strategic partner, or other business of some type
2. Take the company to the public markets
3. Don't exit and keep the business as a cash flow or life-style business
At any rate, whatever your intended plan is to exit the company you would be well advised to have detailed and thorough discussions with all shareholders prior to launching the business. Also, discuss these strategies with an attorney that specializes in exit strategies. It's well worth the expense.
Here is a great video that is brief but highlights some key points when considering an exit strategy. It's from our friends at FundFindr.tv.
Friday, November 7, 2008
CRAZY CREDIT CATASROPHY!
Yo...I ran across this interesting blog post from a member of Start-Up Nation. Of course your's truly posted a comment, but I would like to hear from others on what they would do with their business if access to credit vanished.
This used to be one of those "what if" questions. Not anymore.I've learned of a recent report from economist Peter Schiff that indicates that for the first time in decades, credit card companies cannot find debt buyers. You won't hear this widely talked about on television. People do NOT want to hear this stuff.For years credit card companies would extend credit to businesses and individuals, bundle them up and sell them off to investors, domestic and abroad. Places like China, Japan, Germany, etc.. A lot of this had to do with counting on a strong dollar. But, just recently, these credit card companies/banks have found nobody willing to take on this debt. Without buyers the card companies are left holding all of the risk and with the economy in trouble, these companies are faced with two choices-- tighten up, or shut it down. Some of you may have already felt this.We were worried about the Mortgage bailout but that is just a small fraction of the bailout that would be required to cover credit debt. How much? Nobody seems to know the exact number, but it is in the hundreds of trillions of dollars! A global recession could cause the credit industry to grind to a halt and it's highly unlikely that any bailout package could keep this from happening.I believe that we will still have a modest level of credit but it won't resemble anything that we have become accustom to over the last 25 years. I remember a time when my parents got by with two credit cards... a Shell gas card, and Sears Department Store. As I remember, those companies were so strict about issuing these cards that just having one of them indicated that you were likely to be a dependable payer....responsible/ worthy of credit. My, how times have changed.
Question:How would you modify your current business or alter your your business plans if credit was to all but disappear?
This used to be one of those "what if" questions. Not anymore.I've learned of a recent report from economist Peter Schiff that indicates that for the first time in decades, credit card companies cannot find debt buyers. You won't hear this widely talked about on television. People do NOT want to hear this stuff.For years credit card companies would extend credit to businesses and individuals, bundle them up and sell them off to investors, domestic and abroad. Places like China, Japan, Germany, etc.. A lot of this had to do with counting on a strong dollar. But, just recently, these credit card companies/banks have found nobody willing to take on this debt. Without buyers the card companies are left holding all of the risk and with the economy in trouble, these companies are faced with two choices-- tighten up, or shut it down. Some of you may have already felt this.We were worried about the Mortgage bailout but that is just a small fraction of the bailout that would be required to cover credit debt. How much? Nobody seems to know the exact number, but it is in the hundreds of trillions of dollars! A global recession could cause the credit industry to grind to a halt and it's highly unlikely that any bailout package could keep this from happening.I believe that we will still have a modest level of credit but it won't resemble anything that we have become accustom to over the last 25 years. I remember a time when my parents got by with two credit cards... a Shell gas card, and Sears Department Store. As I remember, those companies were so strict about issuing these cards that just having one of them indicated that you were likely to be a dependable payer....responsible/ worthy of credit. My, how times have changed.
Question:How would you modify your current business or alter your your business plans if credit was to all but disappear?
Tuesday, November 4, 2008
READ THIS FIRST!
Well it's election day and I'm sure we are all distracted. However, I just read through this blog post from Rob James. It's a good one and he breaks down the 8 things he wishes he had been told prior to starting his business. I especially like his paragraph about business planning.
Here's a sneak peak...
3. Have a model, not a planOk, this is a bit of a ‘bum steer’. You do need a plan, but a fully documented business plan that is 100 pages long is so, um dotcom. Nobody reads those things, and at this stage, your business is changing by the day, if not the hour. The reason you have a business plan is to show that you have thought through all the issues. Good sessions in front of the whiteboard, and scribbling in paper gets the same result. You may want to have a 2 pager, but I generally find that whenever someone asks for one, I will rewrite from scratch anyway. But I can’t stress enough how important a model is. A model is just your spreadsheet plan of how you are going to make money. Not only is it good for any potential investors, but it is good for you. Because in your grand plan, you may have not worked out how to make money out of this idea yet. Well, if you don’t figure this out, who do you think is going to do it for you? The investors? Keep dreaming cowboy! Firstly, I speak to a lot of Angel Investors, Private Equity and VC’s and they are constantly frustrated by how many people come to them this way, and its a waste of time. If the VC does see the money potential, do you think they are going to disclose it to you? Of course not! They have to think of their investors. So they will try and get into the deal for as little as possible, and then they will make money from it. The model is also going to be good for you. After putting it together, you might see that you are not going to be cashflow positive for 24 months, can you last that long? How will you last that long? Or you might see that to realise a profitable business, you need 10 Million registered users, is that realistic? Believe me, you will live and die by your model - work on it often and don’t be scared to change it!
Read more here...
Here's a sneak peak...
3. Have a model, not a planOk, this is a bit of a ‘bum steer’. You do need a plan, but a fully documented business plan that is 100 pages long is so, um dotcom. Nobody reads those things, and at this stage, your business is changing by the day, if not the hour. The reason you have a business plan is to show that you have thought through all the issues. Good sessions in front of the whiteboard, and scribbling in paper gets the same result. You may want to have a 2 pager, but I generally find that whenever someone asks for one, I will rewrite from scratch anyway. But I can’t stress enough how important a model is. A model is just your spreadsheet plan of how you are going to make money. Not only is it good for any potential investors, but it is good for you. Because in your grand plan, you may have not worked out how to make money out of this idea yet. Well, if you don’t figure this out, who do you think is going to do it for you? The investors? Keep dreaming cowboy! Firstly, I speak to a lot of Angel Investors, Private Equity and VC’s and they are constantly frustrated by how many people come to them this way, and its a waste of time. If the VC does see the money potential, do you think they are going to disclose it to you? Of course not! They have to think of their investors. So they will try and get into the deal for as little as possible, and then they will make money from it. The model is also going to be good for you. After putting it together, you might see that you are not going to be cashflow positive for 24 months, can you last that long? How will you last that long? Or you might see that to realise a profitable business, you need 10 Million registered users, is that realistic? Believe me, you will live and die by your model - work on it often and don’t be scared to change it!
Read more here...
Monday, November 3, 2008
GUY KAWASAKI - THE IMPORTANCE OF TWITTER!
Guy Kawasaki is a well-known author, entrepreneur and the Founder of Garage.com and Alltop. He discusses how he uses Twitter to drive interest in Alltop.
Monday, October 27, 2008
LOAN OPTIONS - IS THE MONEY FLOWING?
Here is a good Q&A posted on the the USA Today Small Business page that highlights where to find business loans in today's nutty climate.
By Steve Strauss for USA TODAY
Q: Steve, it is no secret that credit and money are still tight, but what is a secret is where small business should go now. My line of credit has dried up last month and I am at a loss. What are our options? — Michael
A: The good news is that there still are options out there, it's just that if you want to find the money to start or expand your business, you may need to look in new places and be more creative.
The era of 'easy credit' is over, that's for sure.
In fact, according to Senator John Kerry, the chairman of the Senate Committee on Small Business and Entrepreneurship, in a letter to President Bush on this subject, the country's largest source of long-term small business capital, the SBA 7(a) loan program, has fallen by nearly 50% compared with the same period last year.
That's the very bad news.
So what do you do if you need capital for your business right now? Here are some options:
Bank loans: With many large banks now partially owned by the government (say what?!), with so-called toxic loans still on the books, and with the credit crunch not nearly uncrunched, you will find big banks are not the friends to small business that they once were.
But small banks still are, and that's where to go now. Community banks are still making loans. They are still offering lines of credit. They still say yes. Why? There are a few reasons:
• Small regional banks have always been run conservatively, so few have bad loans on the books.
• Many are local institutions, with deep roots and significant assets.
• Regional and community banks have proven to be better lenders, and so still have assets to lend.
Credit unions: Similarly, credit unions may also be a good place to go for a loan right now. Like local banks, credit unions are not exposed to the same risks that big banks are. As such, local credit unions have seen their portfolio of small business loans increase.
SBA loans: Small Business Administration loans have been a traditional source of small business lending, but that is drying up for various reasons: Cut backs by the Bush administration and increased fees have been the most common reasons. To exacerbate things, since SBA loans are, by their very nature, government-backed, and as the government is now busy backing banks with $700 billion elsewhere, things may get even tighter.
I wouldn't expect things to ease up on the SBA front until a new administration takes over in January.
State and local governments: There are no shortage of local government programs and agencies that may offer you financial assistance. For instance, check out local Economic Development Centers.
Credit cards: Credit cards have also been a traditional way for small businesses to fund the dream, and that remains true. However, because far too many small business owners get in over their heads with credit cards, a word of caution is in order. Just don't use them if you can't pay them back.
And if you do use them, be sure to transfer your balances onto the card with the lowest interest rates, and then pay off as much as you can as soon as you can. Using new cards with introductory artificially-low teasers rates is also a good way to keep borrowing costs down.
Other financing: Manufacturers and suppliers might offer a line of credit, or even inventory on consignment. They want to keep your business.
Also, check to see what sort of financing your business "partners" may offer. For example, Microsoft (a company I do some work with) offers technology funding to small businesses. Their "Total Solution Financing" helps small and midsized businesses finance their technology purchases with fixed-rate loans, and they do something similar with software licensing. You may have business partners that you work with who have programs of which you are unaware. Ask.
Bottom line: Time to get creative with your financing.
Today's Tip: Here's one final idea: Check out something called peer-to-peer lending. This form of private lending is increasing in popularity. Private lenders compete for your loans. Check out, for example, www.Prosper.com.
By Steve Strauss for USA TODAY
Q: Steve, it is no secret that credit and money are still tight, but what is a secret is where small business should go now. My line of credit has dried up last month and I am at a loss. What are our options? — Michael
A: The good news is that there still are options out there, it's just that if you want to find the money to start or expand your business, you may need to look in new places and be more creative.
The era of 'easy credit' is over, that's for sure.
In fact, according to Senator John Kerry, the chairman of the Senate Committee on Small Business and Entrepreneurship, in a letter to President Bush on this subject, the country's largest source of long-term small business capital, the SBA 7(a) loan program, has fallen by nearly 50% compared with the same period last year.
That's the very bad news.
So what do you do if you need capital for your business right now? Here are some options:
Bank loans: With many large banks now partially owned by the government (say what?!), with so-called toxic loans still on the books, and with the credit crunch not nearly uncrunched, you will find big banks are not the friends to small business that they once were.
But small banks still are, and that's where to go now. Community banks are still making loans. They are still offering lines of credit. They still say yes. Why? There are a few reasons:
• Small regional banks have always been run conservatively, so few have bad loans on the books.
• Many are local institutions, with deep roots and significant assets.
• Regional and community banks have proven to be better lenders, and so still have assets to lend.
Credit unions: Similarly, credit unions may also be a good place to go for a loan right now. Like local banks, credit unions are not exposed to the same risks that big banks are. As such, local credit unions have seen their portfolio of small business loans increase.
SBA loans: Small Business Administration loans have been a traditional source of small business lending, but that is drying up for various reasons: Cut backs by the Bush administration and increased fees have been the most common reasons. To exacerbate things, since SBA loans are, by their very nature, government-backed, and as the government is now busy backing banks with $700 billion elsewhere, things may get even tighter.
I wouldn't expect things to ease up on the SBA front until a new administration takes over in January.
State and local governments: There are no shortage of local government programs and agencies that may offer you financial assistance. For instance, check out local Economic Development Centers.
Credit cards: Credit cards have also been a traditional way for small businesses to fund the dream, and that remains true. However, because far too many small business owners get in over their heads with credit cards, a word of caution is in order. Just don't use them if you can't pay them back.
And if you do use them, be sure to transfer your balances onto the card with the lowest interest rates, and then pay off as much as you can as soon as you can. Using new cards with introductory artificially-low teasers rates is also a good way to keep borrowing costs down.
Other financing: Manufacturers and suppliers might offer a line of credit, or even inventory on consignment. They want to keep your business.
Also, check to see what sort of financing your business "partners" may offer. For example, Microsoft (a company I do some work with) offers technology funding to small businesses. Their "Total Solution Financing" helps small and midsized businesses finance their technology purchases with fixed-rate loans, and they do something similar with software licensing. You may have business partners that you work with who have programs of which you are unaware. Ask.
Bottom line: Time to get creative with your financing.
Today's Tip: Here's one final idea: Check out something called peer-to-peer lending. This form of private lending is increasing in popularity. Private lenders compete for your loans. Check out, for example, www.Prosper.com.
Thursday, October 23, 2008
YEP, MORE ANGEL INVESTING NEWS!
Here is a continuation of yesterday's post. Deal flow for pure start-ups is definitely slowing and capital is shifting to less risky areas...but I'm bettin' you didn't me to tell you that.
Here's an interesting article from Reuters.
CHICAGO (Reuters.com) — Fiberstar Inc., a small company that converts orange juice pulp into a line of food ingredients and other products, is no longer a start-up. Founded a decade ago, it now has a customer base of loyal multinationals and annual revenue in excess of $5 million.
At this point, the company might seem an unlikely candidate for funding from angels, the private investors who back start-up ventures with typical commitments of less than $1 million.
But that’s exactly who Minneapolis-based Fiberstar, which in the past has relied exclusively on angel investors for private equity, is going after to help raise up to $10 million for working capital and new production facilities to keep up with increasing global demand.
“Our goal is to continue to raise funding from angel investors and angel groups,” says Dale Lindquist, Fiberstar’s president and chief executive. “We’ve respected the investment that they’ve made and as management we’re trying to protect it.”
“It’s very unusual for a company to go as far as we have working solely with angels,” he adds.
It’s becoming less unusual, says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. Investing in more established companies is just one of several signs that angel investors are seeking a higher degree of comfort as they look for safer bets in a volatile economic climate, he says.
“The angels are doing post-seed - more later-stage work than they normally would,” says Sohl, noting that venture capital groups, which frequently fund private companies higher up in the development food chain, have also boosted their investment thresholds in recent months.
In a highly unpredictable economy, when credit markets are tight and traditional sources of capital such as bank debt have dried up or become increasingly difficult to obtain, angel investors are taking on more prominence as a source of alternative financing.
Total angel funding during the first half of 2008 has been surprisingly steady, rising 2.1 percent to $12.4 billion, compared to the same period in 2007, according to first half data released by the center earlier this month.
Sohl points out that the numbers also show that angels, who typically take preferred stock or other equity in exchange for their investment, are exhibiting increasingly cautious behavior.
The total number of deals funded in the first six months - some 23,100 according to data collected by the center - has fallen 3.8 percent. Meanwhile, the average size of each deal is up 8 percent, and along with it, the number of investors behind it. The center notes that the total number of angels participating in the first half grew 2.l percent to some 143,000, investing either individually or as part of angel groups. Fiberstar, the food and beverage company, has 152 angel investors.
“What this is telling us is that the angels are spreading out their risk a little more,” says Sohl.
Marianne Hudson, executive director for the Lenexa, Kansas-based Angel Capital Association, notes that she saw this trend begin to take hold last year. Her organization, comprised of more than 170 angel groups, saw average deal size in 2007 rise 10 percent to $266,000. At the same time, Hudson, whose members self-report their investing results annually, saw the average number of investors per deal rise to 55 from 44.
And while Hudson expects that trend to continue in the current economy, she sees another important signal of skittishness among her member groups: the increased use of loosely formed syndicates to jointly fund deals.
“We are seeing more and more angel investor groups co-invest with each other,” she says. “The angels are minimizing their risk.”
Angels will clearly remain an active source of capital as the economy worsens, say these and other experts on alternative sources of financing. Data show an increased appetite for sectors such as software, health care, manufacturing, green technology and other energy-related concerns.
But for start-ups and later-stage private companies alike, the latest numbers signal what will also likely be a very competitive field for a limited supply of investment capital.
“There’s more demand for us - we can pick and choose,” says Knox Massey, executive director of the Atlanta Technology Angels. “Somebody out there is not going to get funded.”
By Deborah L. Cohen(Deborah Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com)
Here's an interesting article from Reuters.
CHICAGO (Reuters.com) — Fiberstar Inc., a small company that converts orange juice pulp into a line of food ingredients and other products, is no longer a start-up. Founded a decade ago, it now has a customer base of loyal multinationals and annual revenue in excess of $5 million.
At this point, the company might seem an unlikely candidate for funding from angels, the private investors who back start-up ventures with typical commitments of less than $1 million.
But that’s exactly who Minneapolis-based Fiberstar, which in the past has relied exclusively on angel investors for private equity, is going after to help raise up to $10 million for working capital and new production facilities to keep up with increasing global demand.
“Our goal is to continue to raise funding from angel investors and angel groups,” says Dale Lindquist, Fiberstar’s president and chief executive. “We’ve respected the investment that they’ve made and as management we’re trying to protect it.”
“It’s very unusual for a company to go as far as we have working solely with angels,” he adds.
It’s becoming less unusual, says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. Investing in more established companies is just one of several signs that angel investors are seeking a higher degree of comfort as they look for safer bets in a volatile economic climate, he says.
“The angels are doing post-seed - more later-stage work than they normally would,” says Sohl, noting that venture capital groups, which frequently fund private companies higher up in the development food chain, have also boosted their investment thresholds in recent months.
In a highly unpredictable economy, when credit markets are tight and traditional sources of capital such as bank debt have dried up or become increasingly difficult to obtain, angel investors are taking on more prominence as a source of alternative financing.
Total angel funding during the first half of 2008 has been surprisingly steady, rising 2.1 percent to $12.4 billion, compared to the same period in 2007, according to first half data released by the center earlier this month.
Sohl points out that the numbers also show that angels, who typically take preferred stock or other equity in exchange for their investment, are exhibiting increasingly cautious behavior.
The total number of deals funded in the first six months - some 23,100 according to data collected by the center - has fallen 3.8 percent. Meanwhile, the average size of each deal is up 8 percent, and along with it, the number of investors behind it. The center notes that the total number of angels participating in the first half grew 2.l percent to some 143,000, investing either individually or as part of angel groups. Fiberstar, the food and beverage company, has 152 angel investors.
“What this is telling us is that the angels are spreading out their risk a little more,” says Sohl.
Marianne Hudson, executive director for the Lenexa, Kansas-based Angel Capital Association, notes that she saw this trend begin to take hold last year. Her organization, comprised of more than 170 angel groups, saw average deal size in 2007 rise 10 percent to $266,000. At the same time, Hudson, whose members self-report their investing results annually, saw the average number of investors per deal rise to 55 from 44.
And while Hudson expects that trend to continue in the current economy, she sees another important signal of skittishness among her member groups: the increased use of loosely formed syndicates to jointly fund deals.
“We are seeing more and more angel investor groups co-invest with each other,” she says. “The angels are minimizing their risk.”
Angels will clearly remain an active source of capital as the economy worsens, say these and other experts on alternative sources of financing. Data show an increased appetite for sectors such as software, health care, manufacturing, green technology and other energy-related concerns.
But for start-ups and later-stage private companies alike, the latest numbers signal what will also likely be a very competitive field for a limited supply of investment capital.
“There’s more demand for us - we can pick and choose,” says Knox Massey, executive director of the Atlanta Technology Angels. “Somebody out there is not going to get funded.”
By Deborah L. Cohen(Deborah Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com)
Wednesday, October 22, 2008
WHERE HAVE ALL THE ANGELS GONE?
Here is a link to very recent article from Inc. magazine. Although the credit markets are beginning to budge some we have seen a dramatic decrease in SBA Loans. At the same time, this article highlights some interesting Angel Investing data points.
Inc. Article
What are you seeing out there? Are funding transactions still taking place?
Inc. Article
What are you seeing out there? Are funding transactions still taking place?
Friday, October 10, 2008
Wednesday, August 13, 2008
ALLOW IT TO HAPPEN!
Yes, it's been a while since my last post. I frankly haven't had much to say because I've been preoccupied with our country's energy crisis. I have been actively reading other blogs, news clips, and You Tube videos for a start-up topic that grabs me. Then I ran across this very short article on Vator.tv. Frankly, this article's topic is slightly boring and perhaps unsexy. It's written by a well known author, Seth Godin, and it's about Patience. At the same time, it is absolutely true and very important for entrepreneurs to ponder.
Read the article here.
Be patient and allow your business to take shape.
Read the article here.
Be patient and allow your business to take shape.
Friday, July 18, 2008
TEACHING KIDS ABOUT MOOLAH AND BIZ!
Most of our clients aren't just entrepreneurs. Many of them are parents and they want to teach their kids about money and business. Here is a great article from the Start-Up Nation Blog about this topic:
Also, here are some great websites for teaching your kids about money, negotiation, sales, and business in general:
Wednesday, June 25, 2008
GET BETTER AT NEGOTIATING! (PART 2)
Know Your Stuff
You need to learn as much about the other person's situation. This is a particularly important negotiation tactic for sales people. Ask your prospect more questions about their purchase. Learn what is important to them as well as their needs and wants. Develop the habit of asking questions such as;
"What prompted you to consider a purchase like this?"
"Who else have you been talking with about your needs?"
"What has your experience with them been like?"
"What time frames are you working with?"
"What is most important to you about this?"
It is also important to learn as much about your competitors as possible. This will help you defeat possible price objections and prevent someone from using your competitor as leverage.
You need to learn as much about the other person's situation. This is a particularly important negotiation tactic for sales people. Ask your prospect more questions about their purchase. Learn what is important to them as well as their needs and wants. Develop the habit of asking questions such as;
"What prompted you to consider a purchase like this?"
"Who else have you been talking with about your needs?"
"What has your experience with them been like?"
"What time frames are you working with?"
"What is most important to you about this?"
It is also important to learn as much about your competitors as possible. This will help you defeat possible price objections and prevent someone from using your competitor as leverage.
BATNA
BATNA stands for best alternative to a negotiated agreement. This is an important negotiating theory that you should understand. Click here for a good description of it.
Monday, June 16, 2008
GET BETTER AT NEGOTIATING! (PART 1)
Negotiation is a skill that is very important for many reasons. For your start-up it can mean the difference in margin percentage on a sale, or the additional service you may need from a vendor or supplier. As an entrepreneur, don't underestimate the power of negotiating.
Practice, Practice, Practice:
Many people lack confidence when it comes to negotiating. You can develop this confidence by negotiating more often. Ask for discounts from your suppliers and vendors. As a consumer, develop the habit of asking for a price break when you buy from a retail store. Here are a few questions or statements you can use to practice your negotiation skills:
- "You'll have to do better than that."
- What kind of discount are you offering today?"
- "That's a bit too expensive." Wait for their response afterwards.
It's ok to flinch! - Be pleasant and persistent but not demanding. Condition yourself to negotiate at every opportunity will help you become more comfortable, confident and successful.
Be Prepared to Walk Away:
When you're the one selling, remember, tt is generally better to walk away from a sale rather than to give away the farm. This is particularly tough to do when you are in the midst of a sales slump or slow sales period. But, remember there will always be someone to sell to.
Friday, June 13, 2008
ENTREPRENEUR TO LEADER
Here is a special post that you can also find at our Start-It-Up Cafe Cast. This audio cast touches on the unique leadership aspects that are required of an entrepreneur. Listen Up...
Wednesday, June 11, 2008
2 KOOL 4 SKOOL!
In my last post I briefly discussed the importance of evangelizing your start-up. There's a great web tool that may come in handy and help you create some buzz. It's called Zentation. It's essentially a free (for the basic service) service that allows you to upload a Power Point presentation and easily sync it with video of you talking about it.
Here's some suggested uses:
- Create a marketing message
- Explain the features and benefits of your product idea
- Pitch your business to investors
- Create a message about your company that's geared toward recruiting
- Train your customers on how to use your product or service
- Etc....
Tuesday, June 3, 2008
EVANGELIZE!
When starting your business one of the most important things you can do is to create buzz. Creating buzz starts the minute you decide to start the business. Don't wait until your product is ready or your business plan is written. Start evengelizing NOW!!
My mantra when starting a new business is this: "TALK TO A LOT OF PEOPLE...EVERYDAY."
Here's a good article about creating a pitch for investors: Guy Kawasaki
Here's a great video reference for presenting: Steve Jobs
Here's a useful tool for pitching your business online: VisualCV
Friday, May 30, 2008
HAMMER YOUR CUSTOMERS!
There was an excellent book written in the 90's called The Discipline of Market Leaders. This book discusses the importance of choosing your customers wisely. This is very important for an entrepreneur to consider. We generally get so excited about the prospect of passing the wallet test that we take a customer that is just flat out not worth it. This generally happens because the value proposition that we are offering isn't in alignment with the one the customer is looking for.
For example: if your business is set-up to sell hammers at a low cost and you have a customer who wants your sales person to spend an hour with them talking about the features of each hammer, then guess what? Your margins are negative! You need to sell to customers who are looking for the lowest price. This customer group probably already knows about the features of each hammer and just wants to find the one they need fast and cheaply.
Here's a great article about firing your customer.
For example: if your business is set-up to sell hammers at a low cost and you have a customer who wants your sales person to spend an hour with them talking about the features of each hammer, then guess what? Your margins are negative! You need to sell to customers who are looking for the lowest price. This customer group probably already knows about the features of each hammer and just wants to find the one they need fast and cheaply.
Here's a great article about firing your customer.
Thursday, May 29, 2008
STAY CONNECTED!
Staying connected to helpful resources is a vital for any business person but increasingly urgent when you are a start-up. Here's a quick list of websites that may be helpful...
Try one of these sites:
Biznik: This site emphasizes collaboration and encourages members to attend local Biznik networking events.
Go BIG: Members range from entrepreneurs to investors to freelancers looking for work. It's free to sign up.
Vator.TV: This site is excellent for learning what other entrepreneurs are up to as well as for pitching your idea.
PartnerUp: Partner-Up's members include entrepreneurs and investors, as well as consultants, board members and other professionals.
Spoke: An online database featuring more than 900,000 companies for business networking or sales prospects --J.P.
PartnerUp: Partner-Up's members include entrepreneurs and investors, as well as consultants, board members and other professionals.
Spoke: An online database featuring more than 900,000 companies for business networking or sales prospects --J.P.
Start-Up Nation: This site has it all! You can participate in discussions with other entrepreneurs, listen to podcasts, or find vendors.
Saturday, May 10, 2008
START YOUR BIZ 10 MINUTES AT A TIME!
Being an entrepreneur can be daunting. Here's a common scenario:
Bob Smith was just downsized after 15 years at XYZ Inc. He now has the chance to start his own business just like he has always wanted to do. Bob was quite successful in his sales position so he is feeling confident that he can take on the world. However, after a couple of weeks of entrepreneurship Bob finds that he is overwhelmed with things to do in his business. These are things such as filing an LLC., setting up an accounting system, obtaining a business license, setting up email addresses, bank accounts, merchant accounts, partnering with vendors, building a website, finding a retail space, oh...shall I go on? So, what should Bob do? Give up and go work for the Man?
Here are two quick tips for Bob:
TIP #1 Take it step by step! If starting a new project seems overwhelming, think small. Cornelia Flannery, co-author of Take 10! How to Achieve Your "Someday" Dreams in 10 Minutes a Day, advises entrepreneurs to start with a clear vision and then break tasks down to the basics. Ask yourself what you can do in the next 10 minutes that will move your business forward, says Flannery. Every step you take is one step closer.
TIP #2 - Make a SMART list of tasks that you can accomplish in less than 7 minutes, perhaps on a sticky pad on your desk. These are tasks that you can take action on in between scheduled meetings, phone calls, etc. For example, if you have a conference call scheduled at 1pm and your previous meeting ends at 12:45pm then you have 15 minutes in which you can putter around or you can tackle one of the items from your SMART list.
Tuesday, May 6, 2008
A HIGH TOLERANCE FOR PAIN!
You've probably seen a news clip about the new Brazilian airline called Azul. This is the current project that David Neeleman the Founder and former CEO of JetBlue is working on. David is a very successful entrepreneur and apparently has developed a much needed high pain tolerance. If you remember JetBlue took a beating a few years ago when it left hundreds of passengers stranded on the tarmac due to an ice storm.
So, here's a guy who obviously has made some money and probably doesn't need the massive headache associated with starting a new airline. Why does an entrepreneur subject themselves to this type of experience? With crude oil at all-time highs it's not an easy time to enter into the airline travel space. So, what is it that drives this type of entrepreneur? Why not just sleep on a bed of nails, walk barefoot over hot coals, or put on your old Milli Vanilli cassette? (come on...I know you had one!)
What is it that drives us?
Thursday, May 1, 2008
ITZ TIM 2 MUV 2 BIZ 2.O
I've rattled on a few times about the importance of moving your start-up from business 1.0 to business 2.0. In fact, I've even hosted a whole audio-cast on this subject and had a well respected guest speaker that rattled on about it as well. The basic gist is this...run your business like a business and not like a hobby. To do this you need to get some help. This help doesn't have to be in the form of employees. Those may come later. It may come in the form of some good tools.
So, I've decided that I will periodically introduce a tool that I think will benefit my fellow entrepreneurs. My first tool is called GnuCash. Guess what? IT'S FREE!!! Woohoo! Oh, I guess I should explain what it is before getting too excited about it being FREE! Woohoo!
GnuCash is a solid small business accounting application. It is very intuitive, which is perfect for those of us that don't like numbers. IT'S FREE!! Here are a few quick features:
So, I've decided that I will periodically introduce a tool that I think will benefit my fellow entrepreneurs. My first tool is called GnuCash. Guess what? IT'S FREE!!! Woohoo! Oh, I guess I should explain what it is before getting too excited about it being FREE! Woohoo!
GnuCash is a solid small business accounting application. It is very intuitive, which is perfect for those of us that don't like numbers. IT'S FREE!! Here are a few quick features:
- Double Entry System - which means it ensures your "books balance"
- Reporting System - It has customizable reports and graphs for your P&L, Balance Sheet, Cash Flow Statement
- Multiple Currencies
- Small Biz Accounting Features - Vendor tracking, invoicing, bill payment, taxes, etc.
- General Ledger
- Check Printing
- The list goes on...
Here's the bad news...we entrepreneurs no longer have an excuse for poorly managed financials.
Did I mention that it is FREE!!!
Tuesday, April 29, 2008
2 TYPES OF CHANGE - HOW IT IMPACTS YOU!
Most entrepreneurs love it when things change. That's what makes us entrepreneurs, right? If we didn't love change we would still be working for "the Man" doing our best to keep things status quo. Actually, to be more accurate, entrepreneurs love influencing change or having some level of control over how to react to change when it hits the business or industry.
There are two ways to classify change:
Cyclical Change: Neck ties get wider and then skinnier and then wider again. Hair styles get longer then shorter then longer again. 80's metal hair bands should be cycling back around soon...right? Anyway, I bet you get the idea. Essentially, things come into favor then go out of favor and then come back again.
Structural Change: Here's an example...the IBM Selectric typewriter. Is it coming back? I don't think so. How about the horse? Is the horse going to replace the automobile? I don't think so unless aliens attack us and use their advanced weaponry to render all of our machines inoperable. We've had a structural change that has impacted businesses in the past 15 years. It's called the internet.
My Point: It's important to be thinking how change impacts your start-up. What if you are working on a product or service that will be obsolete in the next few years. Paying attention to the different types of change that may be shaping your industry can improve the sustainability of your business.
Action Plan: Make a list of as many changes as you can in at least the following areas -
- Technology - what technology changes and new innovations will impact your customers, vendors, etc?
- Economic - what economic changes are shaping your industry? For example, how is the weak dollar going to impact your customers, vendors, etc?
- Demographic - what changes are shaping your customers buying habits? For example, if your customers are closing in on retirement then how will this impact their purchasing habits?
Monday, April 28, 2008
WHAT'S YOUR SOLUTION?
In my previous and magically well-written post we discussed the importance of clarifying the "problem" that your customer has that you intend to solve. This can also be stated as the customer pain that you are alleviating. This is a very important piece when starting your business. Your business plan should contain a clear description of not only the the problem that your customer has but also the solution that you are offering.
Gaining some intense clarity around these two important elements of your start-up will ensure that you are not just a solution looking for a problem. If you've spent some time identifying your specific customer's pain then you will have less trouble selling your solution and ultimately have more success in passing the wallet test.
As entrepreneurs we tend to get overly excited and often overly attached to our great ideas. When this happens it is easy to focus on the technical aspects of our product or service without enough focus on what the customer's problem truly is. However, if you think about it, our great ideas aren't really so great if there isn't a customer with a problem or pain that our business can alleviate.
Additionally, investors, partners, and vendors will be much more excited about the size of the problem than with the elegance of your solution.
Tuesday, April 22, 2008
WHAT'S YOUR PROBLEM?!?!
Actually, this post is less about "your" problem and more about your "customer's" problem. When starting your business, you need to begin by answering some basic blocking and tackling elements...aka...fundamentals.
Today, let's discuss FUNDAMENTAL NUMERO UNO...
THE PROBLEM: You need to clearly identify the problem that your customer has or the pain they have that you can alleviate.
For Instance:
Problem: I'm a coffee drinker but I hate truck stop or convenient store coffee.
Problem: I spend all day dialing phone numbers.
Problem: My weapon doesn't load fast enough.
Problem: I can't carry everything I need when I go out.
Problem: I'm tired of getting out of bed to turn off the TV and lights.
Problem: I'm tired of waiting in line for rides at Disney Land.
Problem: It's a hassle to try to return items I've purchased on the internet.
Problem: I have to go inside the restaurant to get the food.
Action Plan: Yes, whip out the trusty sheet of blank paper and jot down what your customers problem is or the specific pain they have that you can alleviate.
Stay Tuned: In the next post we'll address the "solution" you provide your customer.
Friday, April 18, 2008
6 POWERFUL WAYS TO MANAGE CASH FLOW! (part 2 of 2)
4. Increasing Sales. One would think that increasing sales would lead to increased cash flow. However, if you invoice your customers for a large portion of your sales, when sales increase, your accounts receivable increase, not your cash. At the same time, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after the invoice, a substantial increase in sales can quickly deplete your firm's cash reserves. So, yes, increasing sales can help to improve cash-on-hand. However, this will be dependent on how well you manage your receivables. (additional tip: we have many clients who have used PayPal or Google Checkout to improve their cash position)
5. Managing Payables. A key strategy in managing cash is to shoot for bringing cash into the business as quickly as possible, then hold onto your cash as long as you can by managing your payables. That means, quite simply, take as long as you're allowed-without incurring late fees or interest charges-to pay your company's bills. Remember that a bad credit history can stifle your business, so you need to protect yours. Know which vendors you need to pay first. Better yet, negotiate with some of your vendors to extend to your payment terms. Also, you have to balance this with the necessity to have solid relationships with your vendors. You want to manage your payables but you also want to have a partnership with your vendors.
6. Investing Spare Cash. If your cash flow has become stable and predictable, you can consider investing your excess cash. This is also applicable if you raise a large sum from angel investors or venture capitalists and you will not need to spend it all quickly. You can earn additional interest income, as well as have the necessary cash to dip into during tough times. Can I interest you in some swamp-land in Florida?
Here's a recent audio cast from our Start-It-Up Cafe Cast on managing your books: http://startitupcafecast.blogspot.com/2008/03/get-your-books-in-order.html
5. Managing Payables. A key strategy in managing cash is to shoot for bringing cash into the business as quickly as possible, then hold onto your cash as long as you can by managing your payables. That means, quite simply, take as long as you're allowed-without incurring late fees or interest charges-to pay your company's bills. Remember that a bad credit history can stifle your business, so you need to protect yours. Know which vendors you need to pay first. Better yet, negotiate with some of your vendors to extend to your payment terms. Also, you have to balance this with the necessity to have solid relationships with your vendors. You want to manage your payables but you also want to have a partnership with your vendors.
6. Investing Spare Cash. If your cash flow has become stable and predictable, you can consider investing your excess cash. This is also applicable if you raise a large sum from angel investors or venture capitalists and you will not need to spend it all quickly. You can earn additional interest income, as well as have the necessary cash to dip into during tough times. Can I interest you in some swamp-land in Florida?
Here's a recent audio cast from our Start-It-Up Cafe Cast on managing your books: http://startitupcafecast.blogspot.com/2008/03/get-your-books-in-order.html
Thursday, April 17, 2008
6 POWERFUL WAYS TO MANAGE CASH FLOW! (part 1 of 2)
The Importance of Good Cash Management:
Cash flow is the lifeblood of your start-up businesses. Cash comes from sales, collections of account receivables, and the sale of assets as well as loans and credit lines. On the other hand, cash flows out to meet all expenses and debt obligations of the business. The goal of good cash flow management is to have enough cash on hand at those important times such as when it's time to pay employees. This is a simple concept, yet in practice, it eludes even the biggest operations. So long as more money seems to be coming into the business than going out, many entrepreneurs do not give cash management a second thought. This leaves them vulnerable to a quick and painful death.
Learning good cash flow techniques ensures that the company always has enough cash to meet its obligations. Adequate cash helps obtain whatever funds are required from external sources at the right time, in the right form, and on the best possible terms. A shortage of cash flow could result in the loss of valuable trade discounts or, in extreme circumstances, financial embarrassment and bankruptcy.
Your start-up can increase cash-on-hand in a number of ways:
1. Collecting Receivables: Start-ups can improve their cash position simply by making certain that their billing, collections, and payables systems are operating as efficiently as possible. If this means getting help...then get help any way you can. Small businesses do not have the luxury of large accounting and collection departments of big corporations. More so if you are a home-based entrepreneur working alone. First, get your customers to pay you as soon as possible! To the extent possible, adopt the business practice of requiring up-front deposits when making sales. However, if the account payment is a receivable, then make sure that you actively manage its collection by billing promptly, aggressively following-up on overdue invoices, and quickly collecting on overdue accounts. You stand to lose revenues if your collection policies are not aggressive. The longer your customer's balance goes unpaid, the less likely it is that you will receive the full amount. Then you have to consider hitman alternatives starting with limbs. (Did I say that outloud?) (Legal disclaimer: I was joking.)
2. Tightening Credit Requirements: If you think that you offer the best product or service relative to your competitor, you can obtain the best possible credit conditions. I know this is a tough one for start-ups because you just want to close deals. But, be sure to tell your potential customers upfront about your credit terms - before you provide your product or service. To improve your cash flow position, you can be more stringent in your credit terms, requiring more customers to pay cash for their purchases. This will increase the cash-on-hand and allow you to sleep at night. However, there are trade-offs to tightening credit in the short and in the long run. Looser credit allows more customers the opportunity to purchase your products or services. But, this can lead to spending more time chasing down bad-debt. Another way is to get as much information from the client as you can in the form of a "customer agreement." The more information you have about the customer or client, the easier it is to take their first born in the event the person rescinds on the payment.
3. Short-Term Loans and Credit Lines: Loans from various financial institutions are often necessary for covering short-term cash flow problems. Revolving credit lines and equity loans are types of credit used in this situation. Don't be afraid to use them, with care.
Wednesday, April 16, 2008
AN EASY TIP FOR CONNECTING WITH CUSTOMERS!
Here's a quick and easy tip for enhancing your ability to connect with a customer, investor, or employee. Consider the individual's natural "pace." What this means is that some people are tend to be more fast-paced and some more moderate or slow-paced.
Recognize them by:
Fast-Paced
- they talk fast
- walk fast
- make lots of hand gestures
- think and make decisions fast
- outgoing and direct
Slow-Paced
- they talk more slowly
- move slower
- more reserved
- they think things through thoroughly so it seems they think slowly
- less animated in their gestures
This is an important tip for entrepreneurs as you try to build your business. You will need to try to "match" the pace of the individual that you are communicating with. For example, if you are talking with an important new customer or investor and they seem to be more slow-paced then you should consider slowing your pace down to match theirs. If you don't then you may risk not connecting with them as effectively as you could have. A slower paced individual might be thinking about a concept or sentence that you said 2 minutes earlier and because you're more fast-paced you are too busy yapping to realize. The opposite is true also. If you're more slow-paced, naturally, then consider lifting your pace to match the individual who may be annoyed that you're not rattling off the important key points at mach speed.
Friday, April 11, 2008
FRONTIER AIRLINES...WHAT THE @#%$!
Some of you may have never even heard of Frontier Airlines. They are a carrier based out of Denver, Colorado. I personally love this little airline that could. However, today they became the 4th carrier in as many weeks to file Bankruptcy protection. Although, on the positive side, they will still be maintaining operations until they can get a grip. Good for me since I am on one of their flights tomorrow morning.
At any rate, this news prompted me to blab about the greatness this airline possesses in a few critical areas. One of these key areas is CUSTOMER EXPERIENCE. This airline simply provides a superior traveling experience. The planes are new and include, leather seats, satellite TV, and a generally acceptable and fun-loving staff. Note: "generally acceptable" equates to superior in this business.
My Point: It's hard to make a best practice case out of a Bankrupt business. However, I'm taking a stab at it anyway. They have done a great job of dialing-in the customer experience. This is an element of any business that we entrepreneurs must continue to focus on and revisit on a regular basis. If nothing else, Frontier Airlines serves as a reminder to me to continuously improve the experience my customers have.
At any rate, this news prompted me to blab about the greatness this airline possesses in a few critical areas. One of these key areas is CUSTOMER EXPERIENCE. This airline simply provides a superior traveling experience. The planes are new and include, leather seats, satellite TV, and a generally acceptable and fun-loving staff. Note: "generally acceptable" equates to superior in this business.
My Point: It's hard to make a best practice case out of a Bankrupt business. However, I'm taking a stab at it anyway. They have done a great job of dialing-in the customer experience. This is an element of any business that we entrepreneurs must continue to focus on and revisit on a regular basis. If nothing else, Frontier Airlines serves as a reminder to me to continuously improve the experience my customers have.
Wednesday, April 9, 2008
WHY ARE YOU AN ENTREPRENEUR?
A recent report by the U.S. Small Business Administration looked at 685 businesses.
MOTIVATIONS FOR STARTING A BUSINESS: Women are more likely than men to start businesses to achieve a work-family balance. Women also more often listed a desire for self-fulfillment and job satisfaction as reasons for starting a business and wanted to be challenged personally and have self-determination. They also are more likely to start a business to gain the recognition of others. Men are more likely to start a business to make money or build a company.
My Advice: Be sure you are starting a business for reasons that are close to your heart. Whether it's to spend more time with family or to build something using your creativity. Remember building a business and being an entrepreneur is very different than being an investor in a business. They are two different animals!
I was involved with a franchise start-up a few years ago. I had several partners at the time and the business had a very successful launch and is still doing very well today. However, it wasn't the type of business that interested me very much. I believed in the concept but there was no passionate involvement from me. I wound up having disagreements with my partners, which is very normal, but the business became more of an investment for me where I ended up cashing out early. Had I been more emotionally attached to the idea then I probably would have put more effort into making the partnership work.
So, what are the reasons for starting your business?
MOTIVATIONS FOR STARTING A BUSINESS: Women are more likely than men to start businesses to achieve a work-family balance. Women also more often listed a desire for self-fulfillment and job satisfaction as reasons for starting a business and wanted to be challenged personally and have self-determination. They also are more likely to start a business to gain the recognition of others. Men are more likely to start a business to make money or build a company.
My Advice: Be sure you are starting a business for reasons that are close to your heart. Whether it's to spend more time with family or to build something using your creativity. Remember building a business and being an entrepreneur is very different than being an investor in a business. They are two different animals!
I was involved with a franchise start-up a few years ago. I had several partners at the time and the business had a very successful launch and is still doing very well today. However, it wasn't the type of business that interested me very much. I believed in the concept but there was no passionate involvement from me. I wound up having disagreements with my partners, which is very normal, but the business became more of an investment for me where I ended up cashing out early. Had I been more emotionally attached to the idea then I probably would have put more effort into making the partnership work.
So, what are the reasons for starting your business?
Tuesday, April 8, 2008
PUT YOUR SHOES HERE! (A SNAPSHOT OF A WINNING BUSINESS)
I'm on my way to New York City this week. Love that place...not. Actually, NYC is a great place to visit...well...you know the rest.
Anyway, as I was going through the security gate today in Denver, I approached the area where you remove your shoes and place your belongings on the x-ray belt thingy. I grabbed one of those bins to place my laptop and shoes in and there on the bottom was an ADVERTISEMENT. Wow, where else will they think to put an ad? At any rate, the ad was for a company called Zappos.com.
I know this company pretty well and have studied their business model a good bit. This is a company that entered into the over-crowded footwear market and has gone from $0 in sales to $1 billion in just ten years. It's not because they invented some fancy new shoe but rather they simply provide a way to buy shoes that is hassle-free, convenient, and low-cost. Their slogan is "powered by service." If you ever have to call them for any reason then you will experience the difference first-hand. Their customer service team is trained to make your life easier and they have the uncanny ability to befriend you in 2 minutes flat.
My Point: For those entrepreneurs out there that are concerned about too many competitors...don't be! Try positioning your business around delivering a superior type of value. If customers want it fast then be the fastest. If they want customization then spend time fully understanding their needs. If they want innovation then give them the latest and greatest.
A Common Trap: Don't try to be all things to all people. Find out how you can differentiate your product or service and focus your efforts on that. Zappos.com doesn't spend time or money on innovation or bells and whistles. They create an easy to navigate webstore that makes the shoe buying experience hassle free and fast.
Friday, April 4, 2008
5 CRITERIA FOR SETTING GOALS
All to often when I ask entrepreneurs if they have clearly written goals they say "not written, but in my head." Having thought about your personal and professional goals is great but writing them down is even better. Why? Writing them down makes them more tangible and links to the brain visually and kinestetically.
I've been fortunate to know some of the best athletes in the world that live in my hometown of Boulder, Colorado. Boulder is the kind of town where you can throw a rock and hit two or three Olympians at once (not that I've tried this). I've also been fortunate to know quite a successful entrepreneurs, CEOs, and investors. Many of them share a similar phenomenon and that is clarity of their objectives.
Here is a time-tested method for clarifying goals. It's called SMART goals:
I've been fortunate to know some of the best athletes in the world that live in my hometown of Boulder, Colorado. Boulder is the kind of town where you can throw a rock and hit two or three Olympians at once (not that I've tried this). I've also been fortunate to know quite a successful entrepreneurs, CEOs, and investors. Many of them share a similar phenomenon and that is clarity of their objectives.
Here is a time-tested method for clarifying goals. It's called SMART goals:
- S = Specific: Your personal goals and the goals for your business need to be clear-cut and unambiguous. For example, if your goal is to start a business then you might write down something like this, "I am going to start a my own business in the fast-food industry." To be even more specific try stating, "I am starting my own organic burrito fast-food company."
- M = Measurable: The more specific you are about your business goals the more easily they can be measured. There needs to be some type of measurement or metric involved in goal-setting, or how will you know if you've reached them, or how will your partners and employees know? For example, "I will reach $1000 in organic burrito sales."
- A = Attainable: Goals must be realistic and attainable by you and your employees. The best goals require you to stretch a bit to achieve them, but they aren't extreme. That is, the goals are neither out of reach nor below standard performance. Goals that are set too high or too low become meaningless, and guaranteed you will naturally come to ignore them.
- R = Relevant: You, your partners, and employees have a laundry list of activities that you can choose to perform every single day. You will also have a number of different things that you could choose as goals. However, the essence of business success in choosing what not to do. Pick goals that are relevant to improving your business and that make you different from your competition. For example, if you differentiate by delivering speedy service then set goals that are relevant to that. I'm consistently amazed at the number of organizations and entrepreneurs that set goals that don't differentiate, they set them because they were considered a best-practice. This becomes particularly important if you are pitching your business to an investor. Your objectives/goals should make you distinct.
- T - Timed: Attach an expected date in which you would like to have achieved the goal. For example, "I will generate $1000 in burrito sales by October 1." I heard a smart business person say once that the difference between a goal and a wish is that a goal has an expected date of delivery.
I use the SMART criteria as do most of our clients. We think it's the best way to ensure that you are setting goals that will ultimately put cash in your wallet.
Thursday, April 3, 2008
THE ONE THING YOU MUST HAVE!
The pros of starting a business far out weigh the cons. However, to be successful you had better be ready to endure hell and high water because, at times, you will have both.
So, what's the ONE THING you must have?
So, what's the ONE THING you must have?
Wednesday, April 2, 2008
EXIT...STAGE LEFT!
When starting a business the first thing you should do is consider your life goals and objectives. As a part of this consideration you need to dial in what you ultimately want from your business. This is referred to as an Exit Strategy.
Here are some possible exits:
- Sell your business to a competitor or another company that wants to enter your space
- Take your company public (IPO)
- Sell your business to another entrepreneur
- Sell your business to your partner
- Sell it to your employees
- Keep it as a lifestyle or cashflow business until you keel over
Give this some thought if you haven't already. Knowing how you want to exit the business will help shape many of the decisions you make early on. For example, it will largely determine how your accountant structures your financial statements and how much EBITA you show. Your exit may also shape what entity you use to set up your business, such as an LLC versus a C-corp. It may also influence operating decisions, such as strategic partners, distribution channels, etc.
Additionally, if you have partners (partner = headache) then it is increasingly important that you have alignmnet on how and when you both want to exit the business.
mmmm...coffee...
Does anyone have a story about how they exited their business?
Tuesday, April 1, 2008
3 RULES FOR DELIVERING A SUPERIOR CUSTOMER EXPERIENCE!
"80 percent of companies believe they deliver a superior customer experience, but only 8 percent of their customers agree." - Bain & Company
A good friend of mine was recently traveling back home on a United Airlines flight. She was sitting at the gate with her fully-loaded, 100% caffeinated coffee beverage, feeling weak and weary from her week's work. All of a sudden, like a trained ninja, a United rep appeared with a sign that he stuck on the board that read... ... ... ... CANCELLED. He then spun around like a ballerina and stated, "I'm going to lunch now." For those of you that are stunned, like I was, this meant she would not be going home any time soon.
Her story prompted some serious thinking from me. So I sat down with my fully-loaded, 100% caffeinated coffee beverage and began to ponder how this type of customer experience, if not dealt with, could mame, if not kill, a start-up. I have been working with entrepreneurial clients for years using The Three Rules of Market Leaders, which I will post about at some other time. However, I have tweaked them some to fit our current topic more directly.
Here they are:
1. Design your offerings and experiences (aka: value proposition) for the right customers. In other words, choose your customers wisely and narrow your focus down to that group, specifically.
2. Build your operations so that you and your employees focus on activities that deliver those offerings and experiences in a superior way. In other words, don't create a marketing message that states we offer the best service if a customer can't get answers to questions without a hassle. Seems obvious, huh? I thought so too, but isn't United's tagline, "fly the friendly skies?" Apparently, it's not that obvious.
3. Continuously develop your capabilities to please your chosen customers again and again. In other words, learn from your experience, read books (and blogs), talk with your team about how to improve the customer's experience, and "shop" your competition to see what they are doing so that you can position yourself differently.
By the way, if you're writing a business plan then this should all be emphasized in there. I know it seems counterintuitive but investors like focus.
What else can we do to ensure we deliver a superior customer experience?
Monday, March 31, 2008
AUNTIE EM, AUNTIE EM...IT'S A RECESSION!
Does the possibility of a recession have you skeered stiff? Here's a tip: You can be the deer...or you can be the headlights. Seriously, I don't know if we'll actually see two consecutive quarters of negative GDP growth, but regardless of whether we officially have a recession or not there are a few things that you should be thinking about.
One thing in particular to consider is hiring talent. For those of you that have a need or have been considering hiring some staffers, now may be a good time. In down periods, the big corporate monsters tend to downsize to control costs in a ridiculous effort to create shareholder value (the "ridiculous" comment was my subjective opinion...actually this entire blog is my subjective opinion now that I think about it). This may present an opportunity for you to pick-up some talent that may not have been so readily available in recent past. This talent may be in the form of a new employee or it may be a new partner.
Here's an example: We were recently working with an entrepreneur who had started a fitness club. He had built a nice business and was ready to expand and open a second location. He needed some additional capital and had updated his business plan to approach a bank for an SBA loan. During this time he was contacted by a friend and former colleague to have lunch. While at lunch his friend told him that he was recently laid-off due to a slowing economy and he was taking some time to re-evaluate his career. To make a long story short, the two ended up discussing the fitness club expansion and wound up partnering on location number two. The friend had cash and loved the idea of ending his tenure working for the "man." (Oddly enough, the fitness industry is generally sheltered from mild recessions)
Another example came to us a few weeks ago when a client told me he was just able to lure a top web-designer from her corporate position. She made the leap even though the pay was less because the idea caught her attention and her current company was in trouble.
My point: Use the current state of the economy as leverage in any way that you can. During recessionary times it's increasingly important to keep an open mind and utilize that entrepreneurial creativity to its max!
By the way, on our next Cafe Cast, we will be interviewing David Hansen with Plummer and Hansen. He is an expert on small business HR practices and we'll be discussing "People as an Asset."
What else can an entrepreneur do to capitalize on the doom and gloom of a recession?
Friday, March 28, 2008
THE IMPORTANCE OF BUSINESS HOURS
It is very important for an entrepreneur to establish standard hours of operation. Many start-ups are run out of the founder's house (garage) at first and may not have offices or a store front. For this particular group, having discpilined business hours is vital. Credibility is hard to drum-up, especially if a potential customer is calling you in the middle of the day and you're catching "z's" cause you were up until 4am setting up your merchant account, filing for an LLC, and reading start-up blogs. Now, I realize that oftentimes we entrepreneurs have things to do that require us to be out of the office. So, the key is to leverage technology and other methods to create a virtual presence during those times.
Tips to ensuring an appropriate presence:
- Use a live answering service. These are reasonably priced now-a-days and it raises your credibility to customers, potential partners, and investors.
- Upgrade your voicemail. There are services that will send you an email message (to your handheld if necessary) when you just received a voicemail on your work-line.
- Set your autoresponder on your email when you are out of the office. When a customer emails you they get a quick reply stating something like, "We are currently out of the office and on-sight with a client. We will reply to you by 8am tomorrow morning."
- Hire a temp, cousin, sister, etc. to reply to customers with quick answers, if possible. For example, we have a client who trained his niece on how to answer "frequently asked questions." She was trustworthy and did a great job. The customer thought she was a project manager.
- or DON'T EVER LEAVE!
Thursday, March 27, 2008
BARTERING, OLD WEST STYLE!
One of the 5 Deadly Sins that Entrepreneurs make is to try to do it alone. We make this mistake for many reasons, but mostly because we're cash strapped and trying to save every nickel. There are several ways to get some help without using capital. One of them is the old fashioned bartering system. I know many entrepreneurs who have mastered this skill.
Let me give you an example:
We know an entrepreneur who has just opened a fitness franchise with the goal of opening several in the next few years. He has created a budget in his business plan and is doing his best to stick to it to ensure he has a solid amount of working capital. He also knows the importance of managing his accounting books. So, he worked out a deal with a CPA firm to offer them free memberships in exchange for monthly book-keeping services.
We also know another entrepreneur who sells unique sporting goods products. She has worked out deals with several vendors, including attorneys, to exchange their services for products.
Action Plan:
- Make a list (yes, pencil and paper) of the services you need for your start-up.
- Start communicating to your network that you have a need for these services, and begin acquiring some trusted vendor contacts.
- Now it's time to use those schmoozing skills that every entrepreneur must have.
- Develop a relationship with each vendor so that you know what their business and personal needs are.
- Create value for your vendors by connecting them with potential customers that you may know.
- If you have a product or service that they might use then don't hesitate to ask. I love the saying..."don't ask, don't get."
I bet you can work out some great win/win exchanges that will save you cash!
Tuesday, March 25, 2008
CONSUMER CONFIDENCE BAD? NICHE YOUR WAY TO SUCCESS!
Today's consumer confidence index sank to silly levels, which essentially means that people aren't buyin' diddly squat. Crude oil at 100 smackers doesn't paint a rosy picture either. So, what does an entrepreneur do? Work on your blocking and tackling that's what. "Business fundamentals" is the name of the game in this recessionary economy, and leading your efforts should be the concept of choosing your customers. Recently, I interviewed a marketing specialist, Melani Ward, on our Start-It-Up Cafe Cast. She outlined the importance of focusing on a very specific type of customer, including some of these elements:
- age
- gender
- income level
- location
- behaviors
- interests
- hobbies
- careers
- etc.
Basically, she is encouraging entrepreneurs to drill down and get crystal clear on who your customer is, what they do, where they hang out, and so on. The more you can hone-in on your customer the more clear your marketing message will be. With today's abysmal economy, the consumer is on high alert and getting your product to pass the "wallet test" is increasingly challenging. By choosing your customer you will not only improve on your key messaging but you will also be able to deliver superior value to that person. Don't try to be all things to all people or you risk being lost in the noise.
Action plan: Whip out the pencil and paper. (By the way, if you read a few of my posts you will probably begin to notice the power of pencil and paper.) Jot down some characteristics of your customer. Be detailed! For example, there is new battle being waged in the coffee wars between Starbucks and Dunkin Donuts. Both are crystal clear on who their customer is and what type of value he or she is looking for. Make a list that really describes the individual that has a need for your product or service. What is the problem they have that you can solve?
Monday, March 24, 2008
BUSINESS PLAN, SCHMIZZNESS PLAN!
"Badges!" "We don't need no stinkin badges!" Business plan...we don't need no stinkin...
I've had countless people ask me if they need a business plan to start their business. My answer is, no. You don't need a business plan to start your business, especially if you have the following:
- a high tolerance for pain
- a strong desire to fix something ten times when it could have only taken one or two iterations
- a love for winging-it
- a belief that starting a business is too easy and you would like to make it more of a challenge
- a passion for working with partners, vendors, and employees that all have their own idea of who the customer and competition is
(Oops, was that overly sarcastic?)
Oftentimes an entrepreneur's argument for not having a plan is their market, industry, and customer behaviors change and shift too fast. They state that creativity, vision, and innovation are what drive a new start-up. Agreed, however, a solid dose of logic, rationale, and methodology wouldn't hurt either. A business plan should house all of the above. A recent blog by Matt Winn highlights the need for both both types of focus.
I won't ramble about all of the reasons why you should have a plan. You can access Susan Wu's thoughts on business plans to see some reason's why. However, I will give you a quick "in the trenches" example of how they can help:
Recently, we were working with an entrepreneur who was selling her product direct to customers on the internet, as well as at trade and event shows. We convinced her that it was time to move her idea from Business 1.0 to Business 2.0. We started with following the process of writing a simplified business plan, which inspired her to think through many tough questions. After researching, questioning, and "penciling out" some numbers in a spreadsheet, she realized that she needed to improve her inventory turns (velocity) to really maximize her profits. This prompted her to consider the larger distrubution vehicle of selling her product through existing retailers. She initially didn't think this was a good idea because the margins were smaller, but after working through her plan she realized the volume more than made up for the smaller margins. In her case, the business plan removed a ton of dangerous guesswork.
My point: have a business plan.
Friday, March 21, 2008
3.5 REASONS FOR USING CONTRACTORS TO HELP LAUNCH YOUR BUSINESS
In a recent post, I highlighted 5 deadly sins that entrepreneurs make, and one in particular was titled "Don't Go-It Alone!" . I know this is a tough one because start-ups are almost always cash-strapped, and the thought of hiring an employee just doesn't make sense, yet.
Generally, it makes more sense to bring in a contractor/consultant when you don’t have enough steady work to justify a permanent position.
Here are the top three reasons to hire contractors instead of employees:
- You have specific task that requires a specific skill-set: Even though you would never admit it, as an entrepreneur you may not have a specific skill and you don't have time to learn it. Here is an example: You bring in an person to assemble a piece of machinery that you purchased to produce inventory. Or, you need an IT expert to set up a new server and an office network.
- The task is short-term: The specific job at hand will take a few weeks or months to complete. Here is an example: You need extra techies on hand for the launch of your website.
- The workload fluctuates: The flow of work is not consistent enough to warrant creating a permanent staff position. Examples: You need an accountant who can put in 180 hours a month during tax season but only 50 hours in June, or you bring in a landscaper to plant in front of your shop every spring, but there’s very little for her to do in fall and winter.
Now, you might be thinking that these are obvious. However, here is Reason number .5 ...
- I've made the mistake of having multiple tasks to accomplish such as launching a new website, merchandising the front of a store, managing taxes, building equipment, etc. So, what did I do? I hired an employee to help me. Bad idea, because the employee wasn't very good at anything except the taxes, so everything else was mediocre...at best. Additionally, I started with a motivated employee and turned them into a demotivated employee. Why, because people generally don't like to work in a position where they are only good at 10% of it.
To wrap up: I suggest using independent contractors as frequently as you can until you feel that your business is ready for employees. My rule of thumb is if a person can spend at least 60% of their time doing work they enjoy, then go ahead and hire'em. Otherwise, bring on the contractors!
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