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Combine Direct Mail With Social Web Marketing

June 30, 2010 by Frank Goley, Business Consultant

Direct Mail is now often seen as yesterday’s marketing as compared to email marketing and other marketing technology replacements. Also direct mail is seen as an expensive proposition since you need to mail out a lot of pieces to get a decent response. However, there are web marketing tools and platforms to combine with direct mail which make it much more cost effective on a per customer acquisition standpoint, as well as, increase the response rate.

Think about putting a web sales landing page URL on the direct mail piece which offers a Free product or service, or provides a great discount. Give each mail piece its individual code that the responder has to enter on the web page. This gives you an excellent way to track results and stay in contact with individual respondents.

Now here is how to take it up a notch. Put a Social Networking element in the web sales page by offering an incentive for the respondent to spread the good news through their Twitter, Facebook, My Space and other social networks. Maybe a double discount or two items for free will be a big enough incentive. Make sure to make it easy for the respondent to spread the viral social offer by putting automatic links to all the social networks.

Be sure to offer the social network recipients similar offers of free stuff or discounts so they continue to spread the great marketing offer to their friends and associates. Be sure to keep the code in place so you can track how deep one respondent can send your marketing message virally on the social networks. Also always ask for a name and email so all the respondents and their friends can ne re-marketed to in the future and sent a newsletter, etc.

What is the potential here? It is exponential. Say you send 1,000 direct mail pieces. You can leverage that to upwards of 3 times the people through social networking. That is 3,000 people for 1,000 mailers! You will also see your response rate go from the typical direct mail range of .5% – 2%, to pushing 20% – 30%. Wow! And your marketing cost is still pretty much the same provided you can handle the web marketing side in-house. That doesn’t count all the email addresses you have mined for future marketing, which in this scenario could amount to 500 – 600 email addresses!

Here’s an idea…If you market to consumers. Target prospect rich neighborhoods by putting the same offer as a Stick Um on a pizza delivery box. This way you get around the clutter of the mail and all the junk mail competition and go straight on the refrigerator of your target market. Throw in the social web viral marketing platform, and you have a killer, cost effective marketing campaign.

Think about all the possibilities!

Resource: Here are some Marketing Articles I have written which may be helpful for you…

Cost Effective Marketing Strategies (has a section on Direct Mail)

Profitable Online Marketing Methods and Strategies

Resource: Here is a Video on Understanding Social Media…

Posted in Business Internet Strategies, Business Marketing Strategies. Comment

Why Do Business Owners Fail at Business Planning?

June 29, 2010 by Frank Goley, Business Consultant

As a business consultant, I see many types of clients who get into the business planning process all motivated and ready to go, only to be deflated and unmotivated after the first couple of business plan sections. What is the difference of those who see it through and work hard everyday to complete the business planning process?

I think it is a host of things but here are some of the reasons why people fail at business planning from my perspective…

Not a Priority

Developing a business plan takes consistency. I recommend to clients to work on it two hours per day before their day starts. This way the business plan work gets done first, everyday. I find if clients try to work several hours at a time on a plan, they often get strung out and over loaded.

Hard Work

Getting all the details of a business down on paper is a lot of work, and it is work many business owners do not enjoy. Yet it is the most important tool a business owner can use to achieve success. Understand it can take 100-200 hours to effectively develop a business plan. For larger plans, it can be upwards of 300 hours. If you are working with a business consultant on the plan, split the work 50-50. Even then, it is a daunting task.

Don’t See the End Game

Admittedly many business owners don’t see the benefit of the business planning process until they are well in it, and some really don’t see the advantage until it is fully implemented and getting results. It is just a piece of paper, right? What difference can it make in my business? Great questions. Look at a business plan as a tool. If developed well and then used effectively, a business will enjoy the success of it. As importantly, a business plan sets up a tracking process for a company to really see how it is doing and having a platform to track and gauge strategy. Prior to the business plan, the business owner was just guessing and spending money and effort with out real direction and purpose.

Think Financial Forecasting is Impossible

I should probably put this at the top of this list! Developing financials is the last step in the business planning process. If the business plan process is properly designed and executed, then the financial assumptions and forecasts have been developed with in the process. So all the business owner needs to do is some number crunching. With the software programs out there today, any one can crunch the numbers to come up with a business financial. The question is whether the financial is realistic and not just cookie cutter. I like a business planning process that is progressive, starting with the Company and Management, next moving on to Products and Services, then Market Planning, and finally Strategic and Sales Planning. At the end of the strategic planning, all the assumptions necessary to produce solid financials are developed. It is all about a building block PROCESS!

Need some help and direction for your business planning? See my Business Plan Book for a proven planning process and great business planning tips.

Here’s a Video on Why Business Plans Are Important…Hope it helps!

Posted in Business Planning. Comment

How to Prepare a Business Loan Package for a Bank or Private Investor

June 28, 2010 by Frank Goley, Business Consultant

A Loan Package is typically used for Real Estate Development Projects and Acquisitions, but there are parts of the Loan Package which are applicable to the other types of Business and Commercial Loans.  If you are seeking a Loan from a Commercial Lender or Funding from a Venture Capital Firm, it is very important to present a well organized, detailed Loan Package.  The Loan Package gives the Loan Officer/ Venture Capitalist the necessary information to gauge the viability of your loan request, enabling them to provide you a specific loan term sheet and commitment.  All Lenders have different requirements, so customize your Loan Package to their parameters.

Organization Tips

Loan Packages are voluminous and paper intensive so it is very important that it is well organized with a detailed Table of Contents and alphabetical Tabs indicating different Sections, correlating to the Table of Contents.  This way the Loan Officer can easily find the necessary information in the Loan Package when analyzing and assessing your Loan Qualification and the resulting Terms. 

The Loan Package should be bound in paper form, as well as, scanned to a DVD Disk using Adobe Acrobat™  to suit the Lender’s particular preference.  Mail the Loan Officer a bound, paper copy along with the DVD.  This way the Lender can print out different sections for various Loan Committee members and decision makers.  The DVD should be well organized, with each Section of the Loan Package as a separate, labeled Folder, all presented in the order indicated in the Table of Contents.  The first Folder on the DVD should contain the Table of Contents indicating the Section Names with their applicable Tab Letter (the Alphabetical Tab Letter should appear in the name of the particular Section’s File).

Loan Summary

Preceding the Loan Package document is a Loan Summary, two to three pages in length, which summarizes the important parts of your Loan Request.  The Loan Summary is the first section in the Loan Package and can also be used as a stand alone document to generate and gauge interest in your project.  If used as a stand alone document, it should be accompanied by the Long Form Executive Summary.  The Loan Summary is to a Loan Package what an Executive Summary is to a Business Plan, a summary of the key aspects and facts of the overall Loan Package.  For this reason, the Loan Summary should be developed after the Loan Package is completed. 

Suggested Loan Summary Format

1.     Company Information

2.     Project Description

3.     Company / Project Principal’s Experience Summary

4.     Sources and Uses of Funds

5.     Requested Loan Terms

6.     Summary of Assets and Collateral

7.     Project Financial Summary

8.     Current Company / Project Financial Summary

Loan Package Format

1.     Table of Contents

2.     Loan Summary

3.     Company / Project Information, Contact Details and History

4.     Principals’ Backgrounds, Experience and Resumes

5.     Key Project Employees, Executives & Managers’ Experience and Responsibilities

6.     Company and Project Organizational Chart

7.     Company Registration

8.     Project Description

9.     Project Pictures and Renderings

10.   Key Roles & Relationships:  Company, Strategic Partners, Third Parties and Government

11.   Sources and Uses of Funds

12.   Company & Project Collateral, Assets, Liens and Loans

13.   Schedule of Real Estate

14.   Rent Roll

15.   Company and Principals’ Credit Standing and Credit Reports

16.   Principals’/ Company Financial Statements

17.   Company Balance Sheet

18.   Project Budget

19.   Company and Project Cash Flow Statements

20.   Pre-Sale Commitments

21.   Project Appraisals and Valuations

22.   Project Studies, Feasibility Studies, Business Plan, Consulting Studies and Engineering Studies

23.   Project Proposals and Contracts, Lease Agreements and Escrow Agreements

24.   Title Policies

25.   Annual Reports

26.   Tax Returns:  Personal and Business

27.   Project Strategic Plan and Time Line

28.   Project Construction Plans, Specifications, Drawings, Surveys and Maps

29.   Project Construction Cost Breakdown

30.   Construction Cash and Finance Disbursement Schedule

31.   Project Construction Cash Flow Statement

32.   Project and Company Advisors, Consultants, Contractors, Construction Team, Legal Firms, Accounting Firms and Engineering Firms

33.   Appendix

For more details on developing an effective Loan Package, please consult my Comprehensive Business Plan Guide and Workbook.

Posted in Business Finance. Comment

How to Prepare An Investment Overview to Obtain Venture Capital or Private Investment for Your Business

June 25, 2010 by Frank Goley, Business Consultant

The Investment Overview is used in conjunction with your Long Form Executive Summary to not just solicit interest from an Investor or Venture Capital Firm about your Business Opportunity, but also to give the Investor the necessary facts about your opportunity so it can be quickly qualified and vetted.  The Venture Capital Process can be lengthy, but by providing the right documentation (already prepared prior to your Funding Initiative) from the get-go, you will significantly shorten the VC process and garner the attention your deal deserves.  The Investment Overview should accompany your Long Version Executive Summary (basically a mini- business plan) so the Investment Group can gather more in depth information about your Company, Product, People and Competitive Edge.

An Investment Overview is very detailed, yet it should be brief and concise.  Your Executive Summary and Business Plan will provide the next levels of detail the Venture Capitalist requires.  You will find a suggested Investment Overview Template in this article, and we recommend you customize it to meet the specific terms, objectives and requirements of the Investment Firm you are targeting.  Venture Capital Firms readily provide their investment Criteria and Requirements so that prospective entrepreneurs can provide them the information necessary to determine the deal’s qualifications in view of their investment parameters.  This is probably the single most important document you will send to prospective investors, so ensure it is targeted, concise, complete and accurate, with no mistakes or sloppiness.  Develop the Investment Overview last, after you have completed your Business Plan, Executive Summary, and Loan Package.

Suggested Investment Overview Format    

  I.        Company

A.    Company Name

B.    Location

C.    Business Type and Industry

D.    Business Stage

E.    Business Form

F.    Business Formation Date

G.    Company and Venture Overview   

II.        Product and Service

A.    Product and Service Description

B.    How the Product and Service is Unique

C.    Proprietary Characteristics

D.    Patents, Trademarks and Service Marks  

III.        Experience

A.    Business History Summary

B.    Founders, Directors and Principals

C.    Managers and Key People

D.    Track Record

E.    Previous Venture Capital and Investment Deals

F.    Key Experience  

 IV.        Market and Competitive Edge

A.    Current and Projected Market Penetration

B.    Market Niche

C.    Competitive Edge   

V.        Financial Overview

A.    Investment to Date

B.    Principals’ Equity Contribution

C.    Company Net Worth

D.    Principals’ Net Worth

E.    Investment Required

F.    Terms

G.    Proposed Structure

H.    Exit Strategy

I.      Investment Stage

J.     Liquidity Options

K.    Valuation Pre and Post Investment

L.     Current and Projected Debt to Equity Ratio

M.   Current Ratio

N.    Acid Test Ratio

O.    Collateral

P.    Current Liens, Loans and Terms

Q.    Year to Date Profit (Loss)

R.    Projected 1^st to 3^rd Year Profit (Loss)

S.    Current and Projected Net Profit Margin (%)

T.     Appraised Values (and Methods)

U.    Return on Equity

V.    Return on Investment

W.   Management, Market, Technological and Investment  Risks

X.    Funds Disbursement Schedule  

VI.        Due Diligence Synopsis

A.    Litigation

B.    References 

VII.        Five Key Questions and Answers on this Deal

A.    Why is this a viable opportunity?

B.    Why I am doing this venture?

C.    Who I talked to in similar businesses?

D.    Have I tried out the Product or Service in the market?

E.    Has my Plan been reviewed and critiqued by Accountants, Attorneys, Bankers, Mentors, Consultants and other Professionals?

For more information on Venture Capital and Private Equity Finance Strategies, Funding Business Plans, Business Financials, Financial Projections, Financial Formats, and Financial Formulas and Calculation, please consult my Comprehensive Business Plan Guide and Workbook.

Some of my Business Finance Articles which you may find helpful…

Small Business FinanceBusiness Funding Sources

Business Funding Strategies

What Investors look for in a Business Investment

Posted in Business Finance. Comment

How to be Prepared for Investor Questions When you Present your Business Investment Opportunity

June 24, 2010 by Frank Goley, Business Consultant

By understanding what investors are looking for in a business opportunity and what their potential questions about an opportunity can be, will help you tremendously when looking to raise private equity finance and venture capital. I was in the private equity business for several years and learned a few things along the way in attracting private capital. Here are some of those crucial things I learned about investors along with some suggestions from a venture capitalist, which I agree to 100%.

Review your original Business Plan Questions for possible Investors Questions (please see my Business Plan Workbook for a list of Business Plan Questions).

Know your Product Development Plan, Marketing Plan and Strategic Plan cold.

Answer these Five Key Questions about the opportunity before the meeting:

§  Why is this a viable opportunity?

§  Why I am doing this venture?

§  Who I talked to in a similar business?

§  Have I tried out the Product or Service in the Market?

§  Has my Plan been critiqued by Accountants, Attorneys, Bankers, Consultants, Key Business Influences, Business Mentors and other Professionals?

From the VC Insider Section of the January ’09 Entrepreneur Magazine, Venture Capitalist, Brad Feld, has an Article, “Perfect your Pitch”, which lists eight common mistakes entrepreneurs make when pitching for Venture Capital:

§  Not Knowing Your Audience:  Understand the Venture Capitalist’ niche areas of investment.

§  Asking the VC to Sign an NDA:  And we quote Brad Feld directly on this one:  a Non-Disclosure Agreement “is a stupid idea perpetuated by lawyers.”  Most VCs won’t sign an NDA so why try? Present your Business Plan and supporting materials in a way that protects your interests. If a VC gets serious, then you can discuss Confidentiality issues at that time.

§  Sending a 74 page Business Plan in the mail:  Instead send a short email directly to the Venture Capitalist, personalized to him and his firm, introducing yourself and your Company.  Send him a 3 page Executive Summary and a 2 page Investment Overview if the VC shows an interest to your initial email.  The VC will let you know the steps and info needed from that point on.  For a detailed information on VC Funding, please see these articles:

·         Funding Sources for Your Business

·         How to Analyze Business Funding Sources and Strategies

§  Spamming 150 Venture Capitalists with a “Dear Sir” Email:  This is the kiss of death.  Don’t shop your deal; personalize your email; and do proper research, only targeting 1-3 strongly matched VCs at a time. 

§  Name-Dropping other Venture Capitalists:  This will result in an unsuccessful contact.  Let the VC lead, and he / she will ask you who else has looked at your deal, and who else maybe potentially interested.  VCs by their nature aren’t impressed with name dropping or pressure tactics.  However, it is good business to use other Venture Capital Firms to refer you to a VC which they feel will fit well with your opportunity.  The best referral you can get is VC to VC.  Please refer to my Business Planning Guide for tips on how to leverage a “no” from one VC into a “yes” from another.

§  Listing 27 Advisors but only one Co-Founder:  And I quote Mr. Feld again, “advisory boards, especially at the very early stages of a company, are generally useless”.  I can’t argue this point.  Strategically placed, highly engaged Advisors, numbering 3 to 5, is much more credible than having a bunch of well-known names that have little to do with your business.

§  Using the Wrong Materials at the Wrong Stages:  As a Business Consultant, I preach this to clients all the time.  It is important to have an “arsenal of presentation materials to go.  However, dumping it all on the Venture Capitalist with one big thud is rarely effective”, says Mr. Feld.  I completely agree. I suggest you have ready:

·         Executive Summary (one long version of 5-7 pages; one short version of 3 pages max)

·         Investment Overview 

·         Funding and Comprehensive Business Plans

·         Due Diligence Package

·         Product  / Service Demo

·         Power Point Presentation

·         Marketing Plan

·         Strategic Plan

·         Loan Package

§  While it is important to have all these before mentioned documents prepared and ready to go, you should always proceed slowly and provide the VC what he/she wants, when asked.  VC likes to have access initially (upon request) to a Demo or Power Point Presentation, reviewing it at his option and talking with the Entrepreneur, rather than being aggressively pitched. 

It is important to keep two key things in mind when sending VC information on your Company:

·         Let the VC lead and tell you what he or she prefers.

·         Customize all your materials to the particular VC’s objectives, background, history, track record, current portfolio, outlook, etc.

§  Thinking There are Rules that Apply to all Situations:  As Venture Capitalist, Brad Feld, says “…tune your approach to each Venture Capitalist.”  Research and a well developed Financial Strategy customized for each VC is critically important.

When researching Venture Capital Firms, be sure to find one that will bring valuable connections, experience and resources in your Industry.  Venture Capital isn’t just about investment of monies in your Company, but also a potential, valuable resource to tap for your Company’s Future Success.

Need help with your Funding Business Plan? Please see our Business Plan Packages…

Posted in Business Finance. Comment

What Private Investors Look For in a Business Investment Opportunity

June 23, 2010 by Frank Goley, Business Consultant

You have developed your Business Plan and Investment Overview, and now you are ready to approach Investors about funding your Company.  But before doing so, it is important to know what the Investor is looking for and understand the Investor’s perspective.  This post lists a host of variables an Investor considers when looking at a business investment opportunity, as well as, ways to make your investment opportunity more attractive.

Market Driven Company:  Market, Sales and Profits are more important than the Technical and Technological aspects.

·         Short payback Period.

·         User’s Benefit more important than Product Innovation.

·         More importance placed on Market-Driven verses Technology-Driven.

·         Market Penetration:  If an Investor is convinced by your Marketing Research and Penetration Strategy then he or she sees your Financial Projections as Realistic and Achievable.

Your Business Plan should show How and When Investors can Cash In (Exit Strategy).

Investors are typically satisfied when Ventures reach 50% of their Financial Goals.

In general, Investors are looking for a Return on Investment in the 40-60% range, dependent on Risk and other variable determinants.

Investors manage Risk by looking at the Management Team and Product Status.

·         A fully developed Product and proven Management Team should yield a Return on Investment in the 35-40% range.

·         Incomplete Products and Unproven Management Team should yield a Return on Investment of about 60%.

Investors calculate the Value of a Business at the Five Year Mark to determine what equity stake percentage will yield their expected Return.

·         Example Scenario:  Developed Company

o    Developed Company projected to yield a 35% Return on Investment per year.

o    Investors want 4.5 times their investment over five years.

o    In Five Years the Company has $20 Million in Revenue with a Net Profit of $1.5 Million.

o    Assume 10 times earnings:  Company would be worth $15 Million in Five Years.

o    Company wants $1 Million in Venture Capital, so the Company should grow to 4.5 Million in Five Years to satisfy Investors.

o    Company is worth $15 Million in Five Years, so Investors would require an Equity Stake of 33%, before Inflation.

·         Example Scenario:  Undeveloped Company

o    Return on Investment Outlook of 60%, you will need a Net Profit of $15 Million in Five Years.

Companies with an Accepted Product, in a Proven Market, with Competent and Experienced Management, win the Investment Funds at the Lowest Cost.

Traditionally, Investors Gauge Performance by looking at Financial Projections compared to Performance, but they more often look at Management’s Milestones (Strategic Plan), Achievement Success and Adaption as the Process to determine whether and how much to fund the next stage in a Company’s Growth.

The Entrepreneur (Founders) must be Reliable and Driven.  Entrepreneur has a Successful Track Record. Experience is Key.

The Entrepreneur should know his or her Money Needs at specific time intervals.  Set up a schedule to track Progress with the Venture Capitalist so it will coincide with your Funding Needs.

Entrepreneur needs to look at ways to Reduce and Mitigate an Investor’s Risk.

Demonstrate Credibility to an Investor by using a Network of Influential Mentors and Contacts.

Use a Combination of Debt & Equity Finance (see my Article on Financing a Small Business) with Investors.

·         Venture Capital Firm receives part of their funds in interest payments, which are Tax Deductible to them.

o    VC recovers Tax-Free Cash when the Loan Principal is repaid.

·         Convertible & Preferred Debt provides easy Liquidation.

Posted in Business Finance. Comment

How To Mix Business Capital Sources in a Cohesive Business Funding Strategy

June 22, 2010 by Frank Goley, Business Consultant

Understanding how to mix equity and debt, as well as, combine various business funding sources and capital is necessary in determining an effective business funding strategy. Putting together a cohesive funding strategy prior to your capital campaign is absolutely essential toward finding the right amount and type of business capital necessary to reach your business goals.

I.  The Relationship between Debt and Equity

Concept of Leverage:  Utilizing a Low Rate of Interest Debt Structure to leveraging into Investing the Loan Proceeds into an opportunity at a projected higher Rate of Return. Compare the relationship of using Debt verses Equity.  Variables would be the Interest on the Debt, the Effect of Taxes and the Economic Reality.  Equity and Debt should not be an either/ or proposition but a proper mix to meet your Financial Modeling Scenarios Goals.

– Calculate Return on Equity:   Earnings divided by Equity. Consider the effect of Harvesting the Asset in an upside & Downside market. So while a Debt structure, allows you to leverage Equity, in an Economic Downturn, the Loan Interest can cause the Equity Investment to lose money.

The Cost of Debt Finance:  Cost of Debt = Interest Rate x (1.00 – the Effective Income Tax Rate).

The Cost of Equity Capital:  Cost of Equity = Earnings Participation divided by Investment or Earnings per Share divided by Selling Prize per Share.

Comparing Equity and Debt Capital:

– Cost:  Equity Capital is more costly than Debt Capital, as the Investor is exposed to much Higher Risks than the Lender, and to justify the Risk, the Investor seeks a High Return.

– Investor Risk verses Lender Risk

·         Interest deducted from earnings prior to distribution to Investors.

·         Legal requirement to repay debt, not equity.

·         Lender has greater access to collateral and liquidity availability.

·         In the event of business failure, Lenders are paid before Investors.

– Risk:  Equity risk lies with the Investor, yet, Debt Capital Risks are high to the Company:

·         Interest penalties.

·         Repayment demand during low Cash Flow Period.

·         Collateral Claims.

·         Personal Guarantees.

·         Unsuccessful Re-Finance or Expensive Re-Finance Terms.

– Flexibility:

·         Equity Capital much more flexible and efficient.

·         Alternative Debt Sources (Hard Money, Bridge Loans, Factoring, etc.) are Expensive but offer Flexible Debt on a short term acquisition schedule for a short term period (i.e. Rent Money).

·         Equity can limit Debt and vice versa depending on Covenants and Agreement Terms.

·         When combining Equity and Debt, Equity can make Debt much more Flexible, Attainable and Economical.

– Control:

·         Equity has Board Seat and Share Ownership.

·         Hybrid Debt Products (Hard Money, Mezzanine Finance) can have an Ownership Component.

·         Debt can control a business with a high Loan to Value/ Cost, high interest rate and steep penalty/ default terms.

·         The proper Mix of Debt and Equity is the answer.

II.  Combining Capital Sources

Typical Mix Considerations

·         Internal Cash Generation:  Retained Earnings Maximization, Good Asset Management, Solid Cost Control, etc.

·         Trade Credit / Supplier Credit

·         Matching Principle:  Short-Term Debt for short term needs and Long-Term Debt for long-term needs.  Utilize the Current Ratio Formula.

·         Debt to Equity Mix:o    Founder and Angel Investor Contribution = 20%o    Long- Term Debt = 40%o    Short- Term Debt = 10%o    Equity Capital = 30%

o    Other successful mixes:

§  10-50-10-30

§  10-60-10-20

·         Debt Capacity = Acceptable Debt to Equity Ratio x Equity

o    A typical Acceptable Debt to Equity Ratio is 1.00.

o    The above Formula measures the proper level of Debt to Equity with the injection of additional Equity.

III.  Pulling It All Together in An Effective Business Funding Strategy

How to Develop an Effective Business Funding Strategy

·         Good Communication with Lenders and Investors:

o    Realistic, Well- Developed Facts and Figures.

o    Bridge the Gap with a Well Developed, Presented and Packaged:

§  Business Plan 

§  Loan Package

§  Executive Summary

§  Investment Overview

·         Understanding Business Plan Development Relationships:  Company Experience & Track Record = > Product Development => Marketing Analysis & Plan => Strategic & Sales Plan = REALISTIC Financial Projections & Forecasts.

·         Integrate your Funding Structure & Strategy into your Cash Flow Statement, showing the effects of different Capital Structures based upon your Strategic Plan Findings. The Cash Flow Statement shows the Banker how your Loan will be repaid and the Investor how much and when Investment Proceeds will be accumulated and disbursed, all based on Realistic, Believable numbers via a solid Business Plan Development Process (see above Flow Chart).

·         An Effective Funding Strategy begins with an effective Business Plan Process which incorporates excellent Financial Analysis and runs various Financial Model outcomes via Cash Flow Statement Development and Analysis.

·         Understanding the right mix of Financial Instruments, is key when modeling your Cash Flow Scenarios.

Posted in Business Finance. Comment

Business Trade Credit and Debt Finance

June 21, 2010 by Frank Goley, Business Consultant

Trade credit can be an excellent way to generate quick, flexible business capital, yet it can be costly. Understanding debt finance is crucial so you can determine what you can qualify for and if your debt ratios are acceptable. If you use trade credit and debt finance together, you can highly leverage your business capital, but you must be careful not to over extend yourself. This blog post explores both areas of business finance so you fully understand how they work, what the risks involved are, and how to effectively use them.  

I. Trade Credit and Supplier Finance

Trade credit and supplier finance is great for meeting short-term capital needs quickly and with less red tape than other short term finance instruments.

– Cost:  Can be high cost. Supplier Terms of 2% Cash Discount within 10 days, net 30 days.  By not taking advantage of the Discount, the Company is allowing use of its money for an additional 20 days at 2%.  On an Annualized basis, this is equivalent to a 36% Interest Rate. Late Payments can run 1-1.5%, monthly basis, which annualized is the equivalent of 12-18% Interest Rate. If used effectively for short-term needs, the higher costs associated with Trade Credit can be justified.  Over-reliance on Supplier Credit and using it as an intermediate or longer term finance need will significantly hamper Cash Flows and Growth

– Risk:  Suppliers can cut off credit at any time or demand upfront cash payments during difficult business periods. A solution could be adopting your Key Supplier as a small Equity Investor, which promotes more flexible finance terms during cash strapped periods.  The Supplier has a better understanding of your potential upside as an Equity Investor.

– Flexibility: Be careful of Suppliers offering Extended Payment Terms as you can get locked in or over committed to these suppliers, overshadowing other Suppliers who offer lower prices, a better product and more reliable delivery.

– Control:  Can lose effective Control of Company Operations if Trade Credit was over-extended to such a level where your Suppliers take Legal Action, which can result in attaching Assets and forcing the Company into Receivership.

– Availability:  This is a short-term need and your short-term Strategic and Cash Management must be up to the task. Can be significantly curtailed during Economic downturns; therefore, having a backup Line of Credit is mandatory.

– Short-Term Needs: Best utilized for small, short-term needs. Necessary to have excellent Planning in place to avoid unnecessary costs, such as forfeiting Cash Discounts or incurrence of Delinquency Fees.

II. Debt

– Timing:  The money market may be tight so having a well developed Business Plan is essential toward obtaining Debt. Banking relationships are Key when times are tight in the lending markets. Having a well prepared Loan Package is also essential.

Resource: Please see my Article on Funding Sources for your Business, for more information on establishing good Banking relationships.

– Financial Condition: A strong Equity Component in your Company’s Financial Structure will promote a Debt Ratio which is amendable to a Bank or Commercial Lender

– Stability:  A company’s capacity to withstand periods of lower earnings or losses without defaulting on Debt Obligations. A Company’s ability to carry more Debt.

Ratio Analysis:

·         Debt-Equity Ratio = Total Liabilities divided by Total Equity.  Compare to Industry’s Average to determine an Acceptable Threshold.

·         Debt Capacity = Acceptable Debt to Equity Ratio x Equity.  Estimate the amount of Debt that a Company can carry based on its Equity Strength. 

– Liquidity: Company’s ability to meet short-term obligations. Relationship between Current Assets & Current Liabilities.

Ratio Analysis:

·         Working Capital = Current Assets – Current Liabilities.

·         Current Ratio = Current Assets divided by Current Liabilities.

·         Acid Test = Quick Assets divided by current Liabilities. Can be converted to cash in 30 days. Indicates the adequacy of a Company’s Short-Term Capital position.

– Long Term verses Short Term Debt:  Liquidity Analysis can indicate whether a Company should obtain Short Term or Long Term Debt. Short Term Loan reduces the Current Ratio, while Long Term Finance often improves the Current Ratio. The trick is to find the right mix between Short-Term and Long-Term Debt to meet Stability and Liquidity thresholds.

– Collateral:  The Quality and Quantity of Collateral both matter equally. Free and Clear Collateral, not encumbered by excessive Liens. Understand how to Package Collateral Classes and leverage Cross- Collateralized Assets.Receivables Factors:  Aging, Customers’ Credit Standing and Bad Debt History.Inventory Factors:  Market Value Determination, Sales Track Record and Turnover.Equipment, Machinery and Real Estate Factors:  Market Valuation, Repayment Ability and Disposability of Assets.

Resource:  For a detailed explanation of Financial Formulas and Ratios, please refer to my Comprehensive Business Planning Guide and Workbook.

Posted in Business Finance. 2 Comments

Internal Business Capital Generation

June 18, 2010 by Frank Goley, Business Consultant

Are you looking to raise capital for your business? Do you need more working capital to sustain profitable operations? Before you go to the bank or capital markets, first look inside. Look at your own capital generation and analyze your company’s ability to generate cash. You may be surprised about the capital options this will produce for you. In this blog post I will discuss Sources of Internal Capital, Key Cost Factors, Capital Risk Factors, Capital Flexibility and Control Factors, and Capital Availability Factors.

Sources of Internal Capital

1.     Retained Earnings

a.     Profit improvement.

b.    Expense Reduction.

c.     Reducing Owners Distributions (dividends/ drawings).

d.    Watching levels of Principals’ Salaries during early stages of Company Growth.

e.     Practicing good Budgeting practices.

f.     Successful Milestone achievements.

2.     Asset Management

a.     Disposing non-performing Assets.

b.    Control Systems for Inventories, Receivables, Equipment, Machinery and other Fixed Assets.

i.   Understanding how lease finance can improve Internal Capital Generation.

c.     Schedule of Real Estate Control System to effectively manage your Company’s Real Estate Holdings.

3.  Cost Controls

a.     Supplier pricing.

b.    Office supplies management.

c.     Cost Control Systems to minimize costs and increase cash flows.

Cost Factors Affecting Capital

1. Customer Controls are too tight.

2. Reducing inventories too much- not being prepared for increased Sales or Production levels.

3. Poor Performing or High Expense Ratio Fixed Assets.

4. Old, Expensive-to-Run Equipment/ Machinery.

5. If Investor Funds are necessary, need to find a Capital Structure which will enhance Retained Earnings, yet award Investors a tolerable Dividend Payout Level and Capital Gains.    

a. Try to minimize Dividend payouts to Investors to enhance Earnings, while promoting a  higher Capital Gain payout.

b.    Run several Financial Structure Models to find a Mix of Dividends and Capital Gain Payouts which enhance Earnings and mollify the Investor.

Capital Risk Factors

1. Not having links from Product Development to Marketing Planning to Strategic Planning  to Financial Statement Modeling.    

a. Lack of Coordination will leave a lot of money on the table.    

b. Company inefficiencies can snowball and severely hamper a Company’s ability to generate cash.

c.   Unrealistic Financial Management will significantly reduce a Business’ Internal Capital Generation.

Financial Flexibility Factors

1. Increased Internal Capital Generation can give your Company enhanced Financial Flexibility.    

a. Can tap Opportunities when they arise in the Market.    

b. Can carry you through rough Economic periods.

2.  Mismanagement of Internal Capital will bring about costly inflexibility and unresponsiveness to Market opportunities.    

a. Mismanagement can cause a reliance on higher Loan to Value/ Cost Debt Structures, which severely hamper a Business’ Cash Generation.

Control Factors Affecting Business Capital

1. Have a solid Operating Agreement in Place with Investors so Control Issues don’t hurt future Cash Generation.

2. Internal Control Struggles between Company Principals can cause a Rift in Company Management and significantly affect the Company’s earnings potential.

3.  Proper Budgeting Control Systems in place for effective Cash Management.

4.  Effective Cash Flow Management.

Capital Availability Factors

1.     Retained earnings can be enhanced no faster than Profits are realized; therefore, Cash Generation is integrally tied to the effectiveness of your Strategic Plan, which is derived from solid Marketing Plan and Product Develop Plan.

2.     An Effectively Developed and Implemented Business Plan will ensure the availability of Internally Generated Cash and produce Financial Structures to effectively generate and manage Cash Flows.3.     Increasing the availability of Internal Capital will create less reliance on other more costly sources of Capital, such as Debt or Equity Finance. Moreover increased levels of Cash Generation increases confidence levels of prospective Lenders and Investors, proving the Company has an Effective Business Plan and can effectively manage its internal affairs.

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Business Finance Feasibility Factors

June 17, 2010 by Frank Goley, Business Consultant

You are looking for business finance to start or grow a company. Have you determined if your Finance Initiative is feasible? What factors should you consider? I explore the areas of Cost, Risk, Flexibility, Control and Availability in this blog post to help you determine if your potential funding sources are a good match for your business finance campaign.

Cost

How will each Funding Source affect our Company’s Earnings?

Plug in the Interest Rate and Equity Participation Models into your Income & Expense Statement and Cash Flow Statement to see the effects of Debt and Equity Finance on your short- term and long- term Earnings and Cash Flows.

Risk

What levels of risk exposure are associated with the different Sources of Funding you are considering?

1.     Equity Finance holds less risk to the Company than Debt Finance as the Equity Investor is taking all the risk.

a)     Determine the Risks on your Cash Flows which Debt Capital imposes.  How does mixing Debt and Equity Finance affect your Risk Threshold?

b)    Remember:  Debt Finance is conservative but it does present an inherent interest rate and default risk.  Leveraging your Debt exposure with Equity Funding can be a very effective means of reducing your Total Finance Risk.

Flexibility 

Will covenants and conditions imposed by your Potential Funding Sources reduce your Flexibility in obtaining future Capital or leveraging internally generated Capital?

1.      Business Loans and Commercial Finance can carry stipulations which might prevent you from pledging receivables, inventory or other collateral for future borrowing.

a)     Be careful in packaging your collateral and asset classes when negotiating your Debt Finance.

2.     Consider Sale-Leaseback Structures to maximize Loan to Values and Tax Advantages on your Equipment and Machinery.

a)     Lease Structures are very flexible and are structured specifically for certain assets.

3.     Consider Cross-Collateralizing your Assets only if absolutely necessary as this Business Finance Practice can take away a lot of the future flexibility for collateralizing loans.

4.     Rolling Credit Lines can be set up using a variety of Collateral Sources and provide instant opportunity Capital when needed.

a)     You could use rental income from a Real Estate Investment to secure a Line of Credit.

b)    You can use Blue Chip Stock Portfolios as LOC collateral.

c)     Think outside the box and reserve your major Asset Classes for your Major Finance needs.

– For instance:    

- Real Estate Assets for Long Term Finance.   

- Equipment and Machinery for Lease Finance.    

- Receivables for Factoring when needed.   

- Inventory for short term finance needs.   

- Cross Collateralize Personal Assets for your Line of Credit Opportunity fund: Rental   Property, House, Condo, Stocks, Cash Value Life Insurance, etc.    

- Utilize Supplier Credit to leverage your LOC if necessary.

Note:  Short- Term Finance is often much more expensive than Long- Term Finance so ensure your anticipated Revenue Growth & Cash Flow can quickly pay it off.  Remember the Matching Rule

Control

Can your ownership control be affected?

1.     Determine the effect of Board of Directors representation.

2.     What Operating Mandates does a potential Equity Sharing Agreement contain?

3.     Will pledging of Shares for Equity or Debt Finance inhibit your control down the road? i.e. May not affect present day operations but could affect Operations down the road as your Stock Structure, Ownership Structure or Business Structure changes over time.

Availability 

How has availability to certain Business Funding Sources been affected?

1.      Economic Conditions can severely limit the availability of Bank Finance.  Prolonged Economic Downturns can limit Equity availability.

2.     Timing is key for Equity Funding.  Are the Venture Capital Funds you are interested in still investing in opportunities or have they closed the fund or pledged their remaining funds already?

3.     What Alternative Funding Sources are in your Funding Strategy if availability for anticipated, preferred Finance Sources dries up?

Analyzing The Funding Factors

1.     Which of the prescribed Business Finance Factors are most important?

a.     Prioritize your Factors to be applied to your development of the Company Funding Strategy (to be discussed in a later section).

b.    Prioritizing will allow you to easily assess how certain Finance Sources can or cannot be used, as well as, enable you to you to begin structuring your Funding Instruments and Products.

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