Social Media Is Just Not About Customers

While working on the Social Media element of a Business Plan's Marketing strategy, many Entrepreneurs focus on the customer.  While the customer is king, we can not forget the other constituencies that Social Media touches.  Businesses of all sizes have long understood that building relationships with customers is key to success.  What is less recognized is the importance of the Social Media relationships across the entire spectrum of constituents.  Many organizations recognize and utilize Michael Porter's Five Forces SWOT analysis from an overall strategy perspective, it is often forgotten about in Social Media Implementations. Suppliers, Distribution Channels, Employees, etc. are all considered.  The stronger your relationships across all constituencies, the likelihood of your success increases.  These constituencies need to be considered in your Social Media Implementation:

• Customers
• Employees
• Suppliers
• Vendors
• Distributors
• Stakeholders
• Governments
• Outside Agencies

With the openness of the Social Media, remember and consider these other constituencies as they are likely listening to you as well as your customers.

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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.

Great Reasons to outsource Payroll

I have come across several small businesses with payroll and IRS issues when they attempted payroll on their own.  Even a small business with few employees should consider outsourcing of payroll.  While peace of mind may be reason alone for outsourcing payroll, below are additional reasons why outsourcing payroll services may be a great solution for your small business:

1. Save time by letting outsourced payroll specialists do the work.
2. Generate money by focusing your time on building your business.
3. Avoid penalties where errors in federal, state and local taxes and filing requirements may be avoided.
4. Reduce costs by comparing in-house processing wages to outsourced processing fees.
5. Avoid the hassle of needing to stay on top of payroll rules and regulations.
6. Economically Add employee benefits such as direct deposit and 401(k) plan options.
7. Avoid payroll processing headaches having to upgrade in-house software.
8. Leverage outside expertise on regulations, withholding rates and government forms.
9. Eliminate payroll disruption if your payroll person leaves.
10. Security, most payroll services firms have technologies that can spot and alert clients to various types of payroll fraud.
11. Have all reports and forms filed timely.
12. Ability to leverage multiple payment options.
13. Small Business Accounting Systems such as Quickbooks have interfaces to major payroll vendors in addition to their own outsourced payroll service.  For those utilizing many of Quickbooks features, Intuit's payroll services should be considered.

Traditional Business Plan - Why it is Not Appropriate For Entrepreneurs

Image by Alex Osterwalder via Flickr

In my Financial Planning and Analysis work, I had the opportunity to review and develop many business plans for both large corporations and for entrepreneurs.  A conclusion I have reached is the traditional business plan is not appropriate for entrepreneurs.

When I review my small business consulting work, I have helped entrepreneurs develop four types of business plans depending on where they are in their business life cycle:

• The "Idea" Business Plan: It is a summary where you describe your venture in broad strokes and what will be required to make it happen. The objective is to answer the question to you concerning the feasibility of the idea.  And, yes at times I have seen the original genesis on  napkins (They were big ones).

•   The "Equity Financing" Business Plan: This highly polished 20-35 page document is used to persuade equity partners to invest now. The objective is to sell a potential investor on the value of a ‘show & tell’ meeting with you.

• The "Operating" Business Plan: This plan evolving over time contains the details  documenting how to operate your business from launch date to maturity.  This Business Model can be used to highlight key processes for improvement.

• The "Bank/Debt Loan" Business Plan: This conservative version of the business plan is used to apply for a loan and focuses on persuading the banker that you can satisfy their lending criteria.  Be careful since this plan can be the source of financial covenants you must meet in the loan document.

I did some research given my corporate background since none of these were the traditional corporate business plan that I had developed and taught how to do over the past twenty years.  I found from my experiences and research the entrepreneur needed  a more flexible planning approach for the following reasons:

1)  Mindset:    As I observed, entrepreneurs and larger corporations think differently and have different goal structures.   Research conducted in 1997 by Saras D. Sarasvathy, Phd of the University of Virginia concluded that entrepreneurs used an Effectual rather than a Causal reasoning when transforming their ideas into a full fledged business. Causal reasoning is the underlying philosophy of the traditional business plan structure:

• Take a predetermined goal and given a set of means,
• Develop any new means needed to achieve that goal,
• Identify the best cheapest, fastest, most efficient way to achieve that given goal.

Effectual reasoning is opposite of casual reasoning in that it begins with a set of means and allows the goals to emerge over time.  It is more of a stepping stone or option approach.  A good analogy can be derived from my restaurant consulting experiences.  Casual reasoning would be when a client provides the catering chef with a menu and the chef then determines the most effective way to prepare the menu.  Casual reasoning would be when a client asks the chef to prepare a menu at the last minute with what he currently has on hand.  The chef then looks at all the potential outcomes to make a decision.  The latter better reflects the mindset of the entrepreneur while the former reflects the business manager or strategist's in existing enterprises.” 

2)  How do you research new?  Traditional business planning focuses on getting the market research right before you do anything else. How to you research new?  Entrepreneurs gain their best market research from actually launching in an Alpha mode and then adapting to the market as it responds to their new venture's offer.

3)  Its all going to change!  Entrepreneurial research shows successful outcomes have high deviation from their original concepts.  The traditional business plan asks us to sit down and plan out the next 3-5 years and describe in detail the sequence of events. Experienced entrepreneurs know that there are just too many variables in resources, market acceptances, timing, product development and the entrepreneur themselves to predict meaningfully in detail the traditional 3-5 year business plan forecast. The entrepreneur will rely on their ability to adapt to the changing environment as it evolves around them.

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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