12 Most Common Mistakes of Small Business

(I originally posted this on August 8, 2011 in the 12most.com blog)

Many of us face challenging economic times with uncertain tax and new mandates that causes business planning challenges. It’s been my experience that success in small business has as much to do with avoiding operational mistakes as it does with doing the overall economic environment. With many small businesses not making it during the past several years, I want to highlight 12 common mistakes made by business owners so that you can avoid them.

1. Focus

A common mistake is lack of focus. Small businesses often do not have the resources to go after multiple markets simultaneously, and if they try, their marketing message is sure to be muddled. Specialization simplifies your life and maximizes your profits. Focus helps you define your customer and minimize competition.

2. No Tracking

Many small businesses do not routinely monitor key business indicators and process measures. This reduces the ability to more timely respond to business issues or to identify problems in the making. Track your lead generation activities as well as your production or service processes.

3. Selling

Another mistake is not spending enough time selling. This is particularly a problem for sole practitioners without a dedicated sales person. If you are a one-person shop, spend at least 25 percent of your time selling. Your business cannot grow without new customers. It’s tough, but you must make the effort to contact new prospects each week. You need to keep the future funnel filled while working on your existing projects.

4. Planning

Without a plan you can’t know where you are going. You normally wouldn’t take a vacation without a plan, so why would try to run something as important or complex as a business without a plan? The plan should be where you document the reasons for your major decisions. You then need to monitor the plan to understand deviations. There is a reason no bank will loan money to persons without a business plan. People who plan are generally more successful.

5. Pricing

Pricing is a key. I see too much discounting. Why sell at a price lower than you have to? Charge for your product or service based upon value to the customer rather than what you think they are willing to pay. Target the customers who can pay for your value. Understand your competition’s pricing put don’t get into a pricing war. A key is to deliver a quality product and service at a reasonable price.

6. Customer

The next mistake is not clearly defining your customer. Without a clear definition of your customer, you cannot be focused, and with a clear definition of your customer, you are much more likely to be focused. Describe your ideal customer profile in specific words.

7. Poor Budgeting

Many small businesses do not create a budget to set goals or plan key expenses. The key is to plan for profit and make sure your revenues and expenses are aligned to support that goal. Too many times, I see profit as a “leftover” versus a specific goal.

8. Repeat Business

Another mistake is not going after repeat business. The best customer is the repeat customer, and many studies show the repeat customer is the most profitable customer. Attracting new customers is expensive and can be time consuming, so avoid this mistake. Maintain a database of your customer’s likes and dislikes and figure out how to sell more products and services to them. Also thank them and follow up in a non-sales mode. Your social media network would be one great tool for this follow up and to stay top on mind.

9. Employees

The first employee mistake is not hiring employees to free you up to do what you do best. Your greatest constraint is time, and the best way to leverage your time is to hire employees and delegate work that can be performed by others. Some of these tasks could be virtual assistant part time positions which is a growing field. Take time to hire the right employee. Mistakes here will cost you dearly, both emotionally and financially. And once you hire someone, clearly define job responsibilities. Write job descriptions beginning with the first employee you hire. You do not want finger pointing or misaligned priorities.

10. Bookkeeping

Financial records provide you with the information you need to manage your business. Data, in particular financial data, should drive your decision making. Operating a business without financial records is like driving a car without a dashboard. Don’t do it. There are a variety of low cost options out there to help you.

11. Technology

Next to employees, your best productivity boost will come from maximizing technology. If you are weak in the areas of word processing, spreadsheets, bookkeeping, and utilizing Social Media tools, take classes. You can outsource these tasks, but computer skills are becoming basic requirements for today’s successful business owners. If you run a retail operation, a point-of-sale system is essential, and a computerized customer database is key for maximizing repeat business and identifying your ideal customer. More importantly, a business without a web presence is potentially losing a lot of leads.

12. Capitalization

Not having enough capital – cash in the bank to support yourself and to get the business off the ground. Your car and mortgage/rental payments still have to be paid. Once operational, sufficient working capital is needed when customers are slow to pay or when you have the dry spells. Working capital becomes even more important to support growth. You don’t want to outgrow your working capital capacity.

What other common issues have you seen

Featured image courtesy of  licensed via creative commons.

Crowd-Funding Sites Prepare for a Financing Boom #Smallbiz

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The Securities and Exchange Commission may adopt rules to let Internet based technologies be used in fund-raising. The agency is considering to let companies use social networks such as Facebook and Twitter to raise funding by tapping thousands of small individual investors for small amounts of money, the Wall Street Journal reported.  The full WSJ post is below. 


The move is part of a larger review by the Securities and Exchange Commission into whether to ease decades-old constraints on how companies can issue new shares to the public. The new funding techniques, known as “crowd funding,” could usher in a new era of capital raising for start ups.  The technique has spread from artists looking to fund their creative works to entrepreneurs trying to bootstrap companies without giving up control to venture capitalists. Typically, a company might raise $100,000 from an Internet site where users could sign up to buy $100 worth of shares.

Crowd funding could be a cheap source of cash, competing with angel investors who specialize in giving seed rounds to start-ups. Since the amounts of money are small, the downside risk isn’t too bad for investors. But the trick will be in protecting the public from scammers who have no intention of following through on promises since many small investments can mean millions of dollars.  The SEC has rules today restricting a lot of these type of investments to "Knowledgeable Investors" who have minimum networth requirements.  Several start-up businesses that I have talked to are interested in this source of funding.

Would you invest in a business start-up this way?


Small Business News: Crowd-Funding Sites Prepare for a Boom - WSJ.com

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Small Business Working Capital Tug of War

Small Businesses today are caught in a Working Capital Tug-of-War with there larger big brothers.  Small and Medium businesses are further disadvantaged as they have had a smaller share of limited capital funding over the past several years.  



The following are top Working Capital Challenges faced by small businesses:

1.  Squeezing Cash Out of the business.  There aren't too many more areas left to cut.  Any growth has been fueled more from ongoing operations than borrowing or equity financing.  Businesses of all sizes are holding finance staff more accountable with increased focused on margins, Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO) versus top line growth.

2.  Pent up Demand.  Large businesses are expected to start spending again.  More than 55% of small and medium businesses surveyed expect top line growth in 2011.  This growth will come from large business customers.

3.  Working Capital is the New Credit Reality.  Credit remains scarce.  More than 300 banks have closed their doors since 2008.  Bank lending showed the largest drop since the great depression.  More than 75% of small and medium business had their bank lines cancelled or restricted during this economic contraction.  We will not likely return to 2008 funding levels any time soon.


4.  Liquidity Gap needs to be closed.  We have a large capital divide between large and small businesses.  Debt is becoming more available and cheaper for larger businesses while small and medium business borrowing continues to be restricted.  For many Small and Medium business customers, their  customers are larger than they are.  Most small businesses are reporting DSO's are at all time highs.  The challenge is that large company customers are seeking to lengthen DPO's to manage their cash flow while small businesses are on the other side trying to reduce DSO's, on the other side/

Small and Medium business need to adopt with this financing challenge and secure a new mix of capital if they cannot realign DSO.  In addition to the usual capital sources, a new option is available to businesses with Business Receivables.  Receivables Auctions are becoming more economic viable financing options relative to bank Accounts Receivable financing and Accounts Receivable factoring.


How has your business been dealing with this Working Capital tug-of-war?

Financing: 8 Considerations for Taking Other People's Money

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Congratulations, you now have the proceeds from your financing efforts and survived the financing gauntlet.  You feel relieved and relaxed, but in reality that’s when the work and the pressure starts. Now, for the first time, you really have a boss, or several bosses, and often very demanding ones at that. Having participated in several venture capital fund meetings for Sprint's Pension Fund and helping small and start-up businesses develop business plans for venture capital financing, I've had a chance to see this in action from both sides.

Angel and venture capital investors rarely just give a small business or a start-up cash, and stand back to wait for you to spend it the way you want. First of all, they are generally experienced in your own domain, so they have strong views on what it takes to succeed.  Secondly, they likely didn’t give all the money up front, but made part of it contingent on meeting some measurable milestones. Your start-up is now part of a portfolio that is expecting high risk adjusted returns.  Here are a few of the ways you should expect to be monitored by your investors:

1. One or more seats on the Board. Maybe you had an informal Advisory Board before, but now you have a formal Board of Directors. This means you shouldn’t expect to make any strategic decisions without their approval. You should now plan for formal presentations to the board, with communications in between. Key business decisions that could be immediately executed after reaching agreement between you and another party now need additional approvals.
2. Manage to documented milestones. A normal part of a funding agreement is a set of accomplishments, with dates, that you are expected to achieve in order to remain in good standing and qualify for remaining cash distributions. These covenants can be either financial like cash flow, operating profit, etc. or operational such as customer counts, transaction volumes, etc.  Treat them as management objectives that will get you fired if you don’t perform. You will also need processes to routinely track and predict these measures and be able to explain variances.
3. Visits from key investors. Both angel investors and venture capital partners like to make personal visits to your facility or a regular basis, sometimes unannounced, to see how the business is running. You should expect to personally host these visits, and openly answer any questions or concerns that are raised. Do not delegate these visits.  You always should be able to speak to your key measurements.
4. Number of  contacts from you. Every investor expects to be contacted and updated proactively on key decisions or issues. A quick way to lose investor confidence is to always wait for the investor to call, or inversely to call the investor for every minor decision. It is a balancing act that needs to be managed.
5. Access to operational information. All investors have information rights which are detailed in your contracts. They generally expect you to share key operational data, such as the sales pipeline, developmental efforts, vendor discussions, and quality issues, at any time. Don’t keep secrets from your investors.
6. Extra focus on cash flow. Remember, it’s their cash, so treat it like gold. Because you now have money in the bank, now is not the time to upgrade to Class A office space, or travel around the world first-class on company business. Pinching pennies and bootstrapping like you did in the early days is still the only approach.
7. You are now graded.  Also realize that you are now being "graded" compared to other companies in their portfolio. It is to your advantage to keep track of how your company performance compares to others in the investor’s portfolio. You may think you are doing well, but if your numbers put you at the bottom of the ranking, you may need to decide that taking more risk is better than the risk of being cut from the source of financing.  On the other end of the spectrum, if you are one of the top performers, a venture capitalist may encourage you to take big risks and swing for a home run, even when a base hit or double would be a smarter move from your perspective.
8. You have more paperwork.  You will now have firm dates to turn in financial and planning information that your processes must now meet and they will likely vary from the ones you used.  Comparison to your documented milestones is key.

You no longer have full control, and you don’t need any surprises, just like the investor doesn’t want any.  The simple fact is that your whole world as an entrepreneur changes when you take someone’s else’s money. Do it with your eyes open.

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Five Small Business Banking Mistakes

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As a virtual CFO, I have worked with a lot of small  businesses to improve their financial processes.  A lot of Entrepreneurs are so busy working in their business versus on their business, they make some common banking mistakes that can hurt their business.  The following are five common banking mistakes that I have observed and are easily fixable.

1.  Banking Only at One Bank: It is easy for a small business owner to utilize one bank and perform your banking activity through that one institution. However, this can have ill side effects. When it comes time for a loan and your bank denies you, if you don't have a relationship with another bank, you could be out of luck. Secondly, you should make banks compete for your business and shop around for the best deals.  You need to have a good handle on what your money management needs are to get the best deal for you.  Thirdly, if your business is with a small bank and you are fast growing and needing financing, you could outgrow the one banks ability to finance you by hitting their exposure ceiling.

Small Business Loans and the Plan to Obtain One

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Eventually most small businesses need to get a business loan, whether to get the operating capital for a business startup or to finance an expansion.  The success of a small business depends on the funding it is able to arrange from various sources, which make sure a smooth cash flow. Finding adequate funding for small businesses is tough and time-consuming.  But whether you're approaching an institution or a friend for a business loan, the lender will have the same expectations. 

You can greatly increase your chances of successfully securing a loan by being ready to meet those expectations.  If someone asked you for a small business loan, you'd want to know:

1. Exactly why he or she wanted the money, and
2. What the chances were that he or she would repay the loan in full and on time.

So the key to getting a loan is preparation to get the right answer  for those two questions.First, gather together the documents that will help persuade the lender that a business loan is necessary and that you are a good risk.  Answering the first question means being  conversant with all the details of your business plan and being able to point to the relevant financial statements, documents, charts or graphs   that will help convince the lender that you need the amount of money you're asking for to do what you want to do.  Answering the second question means having already given some thought to the credit risk you represent to the lender and being ready to discuss his or her concerns.

These are the documents you will need:

Statement of your personal financial status - A list of your personal assets, debts, and other income sources to give the lender a fuller financial picture.

Past business tax returns- For established businesses, you need to give past business tax returns.  They'll give the lender a better idea of how your business is doing financially.

Financial Statements-  You will need to have historical financial statements for established businesses and a forecast of those financial statements.  You will need to include Income Statement, Balance Sheet, and Cash Flows.  Many small businesses will not have audited financial statements, but an accountants "review letter" that the historical statements conform to generally accepted accounting principles  would be helpful.

Collateral you have - Collateral refers to  tangible assets you are willing to put up to secure the loan. These assets might be:  equipment, stocks and bonds, a house, a car - something of value that you own. If you fail to repay the loan, then the proceeds from the sale of the assets are used for repayment.  You should offer statements and valuations supporting the values.

Resume -  This should detail your experience and background in the area you are securing funding for.  Because the success of your business is dependent on this to some degree, any potential lender will want to know more about you.  You will need one for each member of the management team.

Your Own Funding - How much money will you be putting into the business and your sources of the funding.

Credit Rating Report -  This assessment summarizes how well you pay back any current credit relationships.  While the banker will and can easily get one on their own, its important for you to know what your business and personal credit ratings are and correct any errors before the banker orders one on you.  If there are any issues, be upfront and give an answer for any negative history.

Business Plan - This shows the lender not only why you want a small business loan but what you plan to do with the money. The financial element the investor will key on are the Cash Flow Projections  with a focus on will you be able to repay the loan.  Your business's cash flow projections give lenders  financial data that they can use to assess this risk.

Now that you have all the documents you need to get a small business loan in order, the next step in getting a small business loan is to persuade the lender to give you the loan. You need to prepare in advance to make a winning small business loan presentation.  Approach the loan presentation as a sales meeting with a major client.  Generally, you will have an hour to meet with the banker.  You should use 20 minutes for the formal presentation and reserve the remaining 40 minutes for questions and answers that will probe details.  Your "formal" oral presentation consists about 10 high level slides covering the following points:

1. Why are you seeking the loan
2. Describe the pain you are trying to solve or the Market Opportunity and how are you going to offer the solution.
3. How are you going to market the solution.
4. Summarize your business model that is in detail in your business plan.
5. What background and support do you bring to the table? Detail your qualifications and those of your management team if you have one and show them that you are capable of producing, servicing, or marketing your product
6. Don't try to impress with your language. Using simple terms, describe your goals, your product or service, what you intend to charge, and how you can compete with the competition.
7. A forecast showing your ability to pay,  when you expect to breakeven, and what you will do with positive cash flow.

You will have a business plan with you that will give details to your oral presentation.  The oral presentation is the pitch to get the investor to discuss, read, and seriously consider the investment opportunity.This is a big effort, but the reward is funding for your business opportunity.

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Uncertainty Keeping Business Plans From Being Executed

Economic uncertainty and questions about the impact of health care reform and congressional tax and small business lending legislation are keeping many small businesses on the sidelines and not executing sound Business Plans.  In my discussions with small business owners, they are hesitant to hire, expand locations, and inventory.

• There is a small business bill that is now stuck in the Senate. This bill would establish a  $30 billion small business lending program for community banks and provide small companies billions in new tax breaks.  Generally funding has been fairly tight even though a few larger banks are beginning to make some more loans.  Until this goes through, it will be tough to act on.

• Small businesses are not seeing much of a recovery as evidenced through several surveys and general discussions.  Small Businesses have a lot of consumer like sentiment in "what recovery?"

• Many small business owners are still trying to get a handle on what impact Health Care will have on them. Some accounting entrepreneurs are creating health care tax calculators to help small businesses evaluate the impact.  Do companies try to avoid being over 50 employees through different legal structures?   How much will insurance cost continue to increase above inflation?  How much can employers pass on to their employees without triggering  health care penalties?

What I am observing is that many solid value generating business plans that are financially sound are setting on the table until we have more certainty.  How has this uncertainty impacted you?

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10 Tips to Create a Budget For Your Small Business

The key for small business success is cash flow which needs planned and managed. A budget is a useful tool. It is a written financial plan that helps you set goals and measure progress. A properly structured budget model will also let you do what if scenario analysis to see the impact on your cash flow and help to secure financing.


Here are 10 Tips for creating your budget:

1) What do you expect to sell? Start by coming up with a sales revenue target. This is driven by multiplying your units and price for your key products and services. This will allow you to test the impact of rate and volume variances. Your first year needs to be monthly so that you can check monthly cash flow needs. You also need to consider how your prices compare to the market to understand any pricing pressures you need to evaluate.
2) What's it costing you to produce the goods/services you sell? If you're buying finished items for resale, this is relatively easy. It's trickier when your produce items since you have to calculate all the factors, such as labor and material, which go into manufacturing a product. This needs accuracy for your model to work properly. The cost per unit needs to match the units you are using to drive sales.
The difference between your Revenues and Cost of Goods is Gross Profit. Dividing the Gross Profit by Revenues gives you a Gross Profit Margin percent. If your Gross Profit Margin percent is staying flat or trending upward, you're probably on track in terms of adjusting your prices to show changes in what you pay for what you sell or produce. Seeding a declining margin over time gives you a heads-up that you must adjust your prices or check your cost structure.
3) What's it costing you to sell what you sell and operate? Advertising, marketing, labor commission, storage and general and administrative overhead. Some of these costs will be variable with sales and some will be fixed within a sales volume range.
4) What are the financing costs? You need to include interest expense on all forms of debt including any credit card or accounts receivable financing. This expense will normally be a function of the amount being financed.
5) How much Inventory do you Need? Inventory levels are very important to manage. It should be a reason of your forecast sales. Too much inventory and you are using up cash unnecessarily and too little, you may have lost sales. Managing your supply chain is critical to having proper and timely inventory levels. Retail businesses will have finished goods as their major inventory while manufacturing and construction businesses will have to factor in raw materials and unfinished inventory.
6) What are your Accounts Receivable? Managing Accounts Receivable is critical to the cash flow lifeblood of a small business. You need to understand how long it is taking for your customers to pay and develop ways to improve it if it is hurting your business. There is where having a real credit and collections policy is important and you need to track delinquent accounts. For big-ticket items that have a long lead time, you may need to consider an upfront deposit
7) What are your other assets? In addition to accounts receivable and inventory, you have cash balances and property, plant, and equipment to forecast. You also need to reduce the balance for accumulated depreciation and depreciation expense. Don't forget to consider the age of your equipment if you need to replace it during the forecast period. If your capital spending is a function of growth you need to have it as a function of your sales growth and don't forget about the lead time to get it installed.
8) What are your liabilities? This represents who you owe including payroll taxes and current debt payments. This would also include credit cards. Accounts payable is important to manage. Pay too quickly and you are using up cash and pay too slow it could hurt your businesses credit rating. This should be a factor of your monthly expense forecast and capital spending. When you make debt payments you want to be sure to separate the interest as an expense and the principal portion as a reduction in the balance.
9) What is your debt to asset ratio?  This measures debt as a percent of total assets.  If this ratio keeps increasing, your business becomes more riskier.  You need to include debt repayments on existing debt as well as new debt.
10) What is your cash Flow? This is the bottom line of what you need to see. The following is the formula for cash flow:
Net Income
+ Depreciation
- Change in Current Assets
+ Change in Current Liabilities
-Capital Spending
+ Change in Debt
= Cash Flow

Conclusion
Although tracking the big 10 budget tips and knowing what's up with your cash flow is essential to knowing and running your business, don't be afraid to turn to professionals for help. It needs to be done right.

The Sketchpad: Personal Finance on a Napkin

This is an interesting article I saw in the New York Times Money Section. In a series of back-of-the-napkin drawings and posts on the Bucks blog Carl Richards, has been explaining the basics of money through simple graphs and diagrams.  The aggregated series of drawings can be found in this link.  If I was still teaching some of my Financial Planning and Analysis classes, this would be a good kick-off to each class (with authors permission of course).  

It reminded me of the Dilbert carton by Scott Adams.  There were always good cartoons pertaining to what was going on around me or pertaining to concepts I was teaching.

While both are very entertaining, they do point to some underlying truths.  I want to make sure my readers were aware of this resource.

Financial Resources For Small Businesses

In several of my engagements, I have helped Entrepreneurs secure financing for their business.  Every business needs a certain amount of money to start. The success of a small business depends on the funding it is able to arrange to ensure a smooth cash flow. Different Business Life Cycle Stages will help determine the type of financing available and timing of receiving the financing.   

These life cycle stages are:

• Startup:  You develop the business model and infrastructure and start early operations.
• Growth: Generally a business has an initial time of negative profit until it breaks even and begins to show increased revenues that allow it to grow.
• Expansion:  This is the point at which a business gets to the point where there is sufficient revenue being brought in so that there are no doubts of its survival and it can expand its horizons.
• Mature: The business is now stable enough to survive most unforeseen circumstances. It has enough backing, capital and support to ensure that even if the market becomes unstable, it can pull through.

While many small businesses may choose to get funding in the early stages to start the business, many need access to financial resources even for a running business especially with those that have seasonal patterns. Finding adequate funding for small ventures can be tough and time consuming. Often entrepreneurs end up utilizing their entire savings to keep the business afloat until other financing is available.

These are some of the financing options available:

• Self financing
• Bank Loan
• Friends and Family Loans
• Cash Advance
• Equipment Financing
• Unsecured Loan
• Accounts Receivable Factoring
• Line of Credit
• Home Equity Lines
• Credit Cards
• Inventory Loan
• Vendor Financing
• Working Capital Loan
• Franchise Loan
• Grants
• Equity Investment

Several of these options are more appropriate and easier to secure in the later life cycle stages.  Small business financing come at a price and also increase the element of risk involved. However, financing becomes necessary to ensure cash flow, purchase assets like property, expansion of business, equipment or inventory purchase, or simply to have adequate working capital.   Utilizing financing makes sense versus using up all of your personal assets and resources.  But getting a small business financing approved requires that the owner/borrower is able to provide the following:

• A sound business plan
• Personal profile with qualifications and experience
• Personal financial status statement
• Credit rating of the business if already in operation, or credit history
• Track record of taxes paid in previous years
• Collateral that can be used to secure the loan

Subsequent Blogs will expand on each of these options and points.

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