Small Business Development Center
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Category Archives: Money & Finance

Business owners should get comfortable with the numbers

By Chemeketa SBDC

How do you feel about math and numbers? If you’re like a lot of business owners you either don’t like them, don’t understand them, or don’t pay attention as closely as you should. You know you should have a handle on all of this but can’t find the motivation to get any further.

Lots of business owners have some form of math anxiety. Couple that with an aversion to accounting and you’ve got a real problem on your hands.

But here’s the raw truth: your business runs by numbers and if you don’t know how to read them you are flying blind. It’s time for you to step up and make the decision to get the training and knowledge you need to make that happen. You need to understand what the numbers mean and what the relationships between them. You don’t need to love it, you just need to be competent. And you need to do it now!

You already know that numbers will tell you if you’re making a profit or not. But numbers will also tell you whether you can afford to buy a new piece of equipment or hire someone. They’ll tell you how your marketing campaign is contributing (or not) to your bottom line. How good your sales are. Whether your costs are increasing, etc.

You can’t sit around and wait for your bookkeeper or your accountant to bring you up to speed on these things. It’s your responsibility. You need to dive into your financial statements and bring these things to light yourself. So how do you do that?

First, decide that it’s worth your time and attention and that it’s a priority. Really, isn’t it more than time for you to know this stuff? Consider all the decisions you’re making now based on guesses and hunches, and then imagine making those same decisions based on hard facts. What might you do differently? I’ll bet probably plenty.

Second, look around for educational opportunities. Community colleges have accounting, bookkeeping, and other types of financial courses. There are free online sources like educational websites. Hit your public library and check out one of their books on any of these subject areas. They have lots of titles; find one that’s written so you can understand it. Google a term like “cash flow” and then go to a site that looks to have lots of definitions. Look up the concept on Wikipedia. Ask people you know who are good at this and see if you can’t get a little tutoring.

Keep working on this a little at a time. You’ll be amazed at how even a small increase in your understanding in this area will transform your thinking as a business owner. Your business will thank you.

 


Financing Your New Business

By Chemeketa SBDC

Obtaining a loan for an existing business can sometimes be very difficult. It is even more difficult for a new startup company. It is, however, usually possible to do so if the owner or prospective owner is willing to follow some basic steps.

The prospective borrower should realize that small business loans are considered high risk for a bank. Lending institutions, therefore, almost always require the pledging of personal property by the owner as collateral.

The first step to obtaining a loan is the creation of a loan proposal which consists principally of a business plan. The loan proposal must be a selling document with its main purpose to give the prospective lender confidence that the business is or will become financially successful. To be successful a business must be profitable, have positive cash flow, provide an adequate return on investment, show a strong balance sheet, and perhaps most importantly have longevity and value beyond the present owner.

The loan proposal should first state how much money is being sought and how it will use the funds. If equipment is to be purchased, specific quotes from the manufacturer or supplier of the equipment should be included. Enough working capital should be requested to ensure that the business will have enough cash to operate successfully. It is important to show how the loan will be repaid so a cash flow projection for at least the next three years must be included. Of particular interest to the lender is the balance sheet which must show all the assets of a business balanced against its liabilities and owner’s equity. Most lending institutions want to see an owner’s equity of at least 20 to 30 percent.

A description of the owner’s background experience in the field, the owner’s personal financial statement, and copies of personal tax returns for at least the last three years should be included.

All of the above should be neatly packaged and presented to the lending establishment. Business loans, when granted, are normally for no longer than five years and interest rates are usually higher than loans for non-business purposes such as the purchase of a new car or truck.

 


Projecting Sales

By Chemeketa SBDC

Even if you are an existing business – you should be forecasting – projecting your sales.  You may use actual numbers if you have historical financial records.  But what do you do if you have nothing to refer back to?  You will need to determine how many potential customers are there, how many of these potential customers are likely to buy from you, decide the average sale per customer and then project this out for the year. Try this:

First, determine the total number of potential customers living in your territory.  (Don’t forget – the more clearly you can define your customer – the more realistic your research!) If you sell to the general public, you need to find the information from the new US Census data for your market area.  You can find this information on the web or at the library (http://www.census.gov).

If you sell to other businesses, there are many potential sources of information; one of the best is a trade association that represents your industry.  You can also find this information through a web search or at the public library.  Once you have determined the total number of potential customers living within your geographical area – you have the base to begin narrowing down your target market.

Second:  determine the number that will likely buy from you. You need to be realistic.   Consider your competition (both in number and quality), consider that some of the people will not buy from you or your competition, and consider people will find substitutes for your product.  What percentage of the total available population will you be able to attract?

Third: determine your average customer sales per year. How many purchases will your average customer make in a year? How much will they spend on each purchase?   Is this a repeat business or once and only once.  Does the average customer buy the same product/service or will they need other complimentary services?  Trade associations are good sources of information to help answer these questions.

Fourth:  determine your annual sales volume. You have determined the number of customers and determined the average amount each customer will spend per year.  Multiply these two numbers together to calculate your expected annual sales volume.

Finally:  Evaluate the annual sales volume figure.  Does the number you calculated make sense?  If not, go back and work the numbers again.  What assumptions have you made about your customers?  How accurate or risky are these assumptions.  You can guess, and this is not a bad place to start.  But – then – you need to back up your assumptions with actual figures to gain the greatest degree of reality for your projections.


Consider Starting Business Using ‘Boot-Strap’ Method

By Chemeketa SBDC

In this current economic climate starting a business using the “bootstrap” method minimizes your personal financial risk to outside sources. Bootstrapping is a means of financing a start-up business through creative acquisition and use of resources without raising equity from traditional sources or borrowing money from a bank. In short, “bootstrapping” means starting a new business without start-up capital; it is a self-sustaining process that proceeds on its own.

Objectively evaluating your current financial position will help you determine how to proceed with your business idea. Many people will need to get some financial management training and work on clearing out unnecessary debt before launching their business. Others will benefit from dedicating themselves to becoming frugal minimalists by scrutinizing expenditures. Building this foundation for yourself will help you establish a core value for your business success.

There are lots of ways to get a business up and running while staying within your financial parameters. Here are a few.

•  Start your business out of your home. Rent is one of the biggest expenses for any business. If you can, start your business in your home office, basement, or garage.

•  Start with what you have. Use what you have around the house first. Consider borrowing from a friend, renting or buying used equipment when you can.

•  Learn to barter. Barter everything you possibly can. Think outside the box —trade services with other entrepreneurs

•  Start small. You don’t need a huge start-up marketing campaign. Start small and ever-so-slowly work your way up. Keep in mind that a moderate expenditure for an established business can be an outrageous one for a start-up.

•  Be creative. One of the keys to keeping start-up costs low is to find affordable and creative ways of doing what you need to get done, rather than just spending cash to hire someone else. Save money by making your own fliers and business cards, instead of getting them professionally designed and printed.

How you maintain your personal finances is a good indicator as to how you will manage your business finances. A good place to start is to develop a good cash flow budget. This is a goal setting tool to help you see the flow of income and expenses over a period of time. It is an estimate of cash coming in and cash flowing out. Monitoring when and how money comes in, and where it goes on what dates, will allow you to save for upcoming months when money may not be as plentiful. Knowing this will help you determine when to purchase equipment and other needed supplies thus keeping you in the black.

Cash flow should be the first priority for every business, so begin this practice in your personal finances to get a feel for doing it in your business. There are many resources available to help you understand this process and effectively implement it in your personal finances.

This link will give you a cash flow worksheet: http://www.entrepreneur.com/formnet/form/483

For a good explanation of cash flow try: http://www.entrepreneur.com/encyclopedia/term/82034.html

Mona Edwards is a program coordinator working with the MERIT Microenterprise Program at the Chemeketa Small Business Development Center. www.sbdc.chemeketa.edu.


Hate Collecting Money From Customers?

By Chemeketa SBDC

Hate collecting money from customers? The operative word here is “collecting.” That is where the discomfort comes in. You are not alone. Recent OPEN Small Business Network Polls from American Express shows accounts receivables is the top cash flow concern of small business owners.

It is true, most of us don’t review our credit practices (notice I did not say policies — often practices evolve over time without much thought about systems) until we have a customer who isn’t paying. The larger the customer’s account — the more drastic this situation — the more likely (if you survive the crisis) you are to review your operations. It’s a fact but, it probably makes sense to take some time before your business is in cash flow jeopardy to set up some good systems.

To get your invoices paid in a timely manner, think like your customer. Several factors affect how your invoices will get paid, including the size of the bill, the financial health of your customer, the format of your invoice and your relationship with the customer.

•  Your relationship with your customers is critical. People pay more quickly if they know you.

•  An equally important factor is the format of your invoices. If you are like most, you send whatever your accounting software spits out. Think about customizing your invoices so they help your customer want to pay you. Are they clear and easy to understand? Make them easy to read, consistent in format, reference the transaction, and with clear terms. The harder an invoice is to understand or the more research they have to do to make sense of your bill, the longer they may procrastinate.

•  It is critical to make your terms clear and easy to understand. Use your terms as a way to encourage payment. Be very specific about the due date, and state it clearly. Instead of: “Pay by the 10th” — use: “Pay by August 10, 2012.” Instead of: “2% 10, net 20” — use: “Take $20 off if paid by August 10, 2012.”

Naturally you want to only take on customers who you know have the ability to pay. So how do you stack the odds in your favor? Before offering credit for especially large amounts try the following:

•  Run a credit report. Reduce your overdue accounts by running a credit check on your potential business client before the deal is done. Expect to spend some money on a Dun & Bradstreet report. D & B uses self-reported data but adds credibility by including: banking data from company suppliers, bankruptcy filings, media sources, suits, liens, and judgments.

•  Always check references. Any small business planning to sign a “big deal” would be advised to run trade and bank reference checks. Simply inquiring with your potential customer’s bank can reveal important banking relationship information and how they have maintained their accounts.

Think before you have a problem. It will simplify complex situations — when they come.

Marcia Bagnall is Director of the Chemeketa Small Business Development Center and instructor of Small Business Management Program . The Small-Business Adviser column is produced by the center and appears each Sunday. Questions can be submitted to SBDC@chemeketa.edu. Visit the SBDC at 626 High Street NE. in downtown Salem or call (503) 399-5088.


Forecasting Sales Benefits Your Business

By Chemeketa SBDC

Even if you are an existing business, you should be forecasting — projecting your sales. You may use actual numbers if you have historical financial records. But what do you do if you have nothing to refer back to? You will need to determine how many potential customers are there, how many of these potential customers are likely to buy from you, decide the average sale per customer and then project this out for the year. Try this:

First: Determine the total number of potential customers living in your territory. (Don’t forget — the more clearly you can define your customer, the more realistic your research.) If you sell to the public, you need to find the information from the new U.S. Census data for your market area.  You can find this information at www.census.gov or at the library.

If you sell to other businesses, there are many potential sources of information; one of the best is a trade association that represents your industry. You also can find this information through a web search or at the public library. After you have determined the total number of potential customers living within your geographical area, you have the base to begin narrowing down your target market.

Second: Determine the number that likely will buy from you. You need to be realistic. Consider your competition (in number and quality), consider that some of the people will not buy from you or your competition, and consider people will find substitutes for your product.  What percentage of the total available population will you be able to attract?

Third: Determine your average customer sales per year. How many purchases will your average customer make in a year? How much will they spend on each purchase? Is this a repeat business or once and only once. Does the average customer buy the same product/service or will they need other complimentary services? Trade associations are good sources of information to help answer these questions.

Fourth: Determine your annual sales volume. You have determined the number of customers and determined the average amount each customer will spend per year.  Multiply these two numbers together to calculate your expected annual sales volume.

Finally: Evaluate the annual sales volume figure. Does the number you calculated make sense? If not, go back and work the numbers again. What assumptions have you made about your customers? How accurate or risky are these assumptions. You can guess, and this is not a bad place to start. But — then — you need to back up your assumptions with actual figures to gain the greatest degree of reality for your projections.

Marcia Bagnall is director of the Chemeketa Small Business Development Center and instructor of Small Business Management Program . The Small-Business Adviser column is produced by the center and appears each Sunday. Questions can be submitted to SBDC@chemeketa.edu. Visit the SBDC at 626 High St. NE. in downtown Salem or call (503) 399-5088.


Guide Offers Business Financial Resource Listings

By Chemeketa SBDC

Have you been turned down for a business loan from the bank? Too scared to even ask for a loan from the bank? Looking for funding outside of the bank? You’re in luck; MERIT, a program of the SBDC, has recently published and distributed the free “Mid-Willamette Valley Guide to Small Business Financial Resources.” The guide is a comprehensive look at the funding opportunities for small business owners in Marion, Polk, and Yamhill counties. Here’s a glance:

Loans: Municipalities, the Oregon Business Development Department, and the Mid-Willamette Valley Council of Governments provide a range of business loans. Some of the loans are specific to certain industries or geographic areas.

Microloans: Microloans are loans that lend up to a certain amount. Smaller loans are not as profitable for banks so microloans fit the need of business owners who do not need a lot of funding.

Grants: We get asked about business grants at the SBDC all the time. The fact is they don’t really exist — at least not how people want them to exist. Some municipalities offer façade grant programs. These grants typically work on a match basis.

Individual Development Accounts: IDAs are a matched savings program. Typically, the match is 3 to 1. It can be used for a start-up business or business expansion. You must income qualify to be eligible for an IDA.

Tax Incentives: Oregon offers some tax incentives for eco-friendly businesses or businesses in particular geographic locations.

Venture Capital: Venture capitalists invest in high-potential companies and in return take an equity position in the company. The guide lists several Oregon-based venture capitalist firms and networks to join.

Alternate Funding: Crowdfunding is an alternate way to raise funds for a business venture by creating a campaign online and soliciting funds from friends, family, neighbors, and strangers around the world.

Credit Building Products: Your credit score is a vital component to any loan application. If you have no credit or bad credit, contact your bank or credit union to learn about the different products they have that can help build your credit score.

Loan Guarantee Programs: Loan guarantee programs get a lot of press, mainly the SBA loans. However, loan guarantee programs do not work directly with the borrower. Instead the programs work with the lender by insuring their position so they can take on riskier loans.

The USDA and the Department of the Interior: Indian Affairs also have loan guarantee programs that are not widely known.

Most of the resources listed in the “Mid-Willamette Valley Guide to Small Business Financial Resources” are underutilized. Stop by the SBDC to pick up your copy of this guide today.

Kristin Mozian is a resource development coordinator working with the MERIT Microenterprise Program at the Chemeketa Small Business Development Center. www.sbdc.chemeketa.edu.


Buying Locally Boosts Community

By Chemeketa SBDC

Are you still shopping for the holidays? What a ridiculous question! Of course you are! And no doubt you have heard the “buy-local” messages that have been so prevalent this year. So, as if you needed them, here are a few reasons to do your shopping with local merchants. Make everyone’s holiday season a little brighter, right here at home!

-Practicality and convenience. First, you usually can see the item before you buy it to make sure it’s perfect. And then consider that your time and car expense can be saved by shopping locally. If you need to return it, you can avoid the hassle of packaging and shipping it to get it back to the store. You save time by not having to drive long distances to exchange or facilitate the return. Need to make a special request? In a small business, the decisions are made locally; no waiting for “management” in some other location to decide if your concern warrants attention.

-Environmental reasons. Not driving all over the place saves fuel and cuts down on air pollution. You also eliminate the wasteful packaging (Styrofoam peanuts, plastic wrap, etc.) that comes with items you order online and have sent to you.

-Community support. I have to admit, this is my favorite reason. It has been reported that a locally owned business returns approximately 80 percent of each dollar spent back to the community, and your dollars spent in locally owned businesses have three times the effect on our community as dollars spent at national chains. Your dollars are kept in your community. This creates more commerce and more jobs here. Likewise, local stores pay taxes and in doing so help support a stronger infrastructure in the area. Many local merchants support your fundraisers and community events, but they need your consumer support in order to continue to do so. Remember that you shouldn’t complain about the schools, the roads, and local services if you don’t support your local businesses.


Think Before Buying a Business

By Chemeketa SBDC

Have you been considering buying a business recently? Perhaps someone you know is selling theirs and you would like to try your hand at running it? There are several important considerations before you jump on the opportunity. Think them through and make an informed decision before proceeding.

First, what is your experience and background in running a small business and in this particular industry? If you have never owned a business before it is very helpful to look for one in your particular field of expertise. And, generally, a bank would never consider loaning you money for a business in which you have no experience.

Next, look at the business itself. Why is it for sale? If it is as great as the seller claims it to be, why sell? Why not hire a manager, keep it in the family, or even lease it out? The reasons are rarely simple. The sale requires more research than just the seller’s explanation. There will be both personal and professional reasons. You job is to understand and to make your risk decisions accordingly.

What are you actually buying? How does the price tag spread across the assets of the business? What is the condition of the equipment? What is the true replacement value of the furniture, fixtures and equipment? What would you need to pay for similar assets on the used market? What assets are not staying with the business? Are any of these departing assets critical to success of the business?

Make certain that you are not (unintentionally) buying the business debt. At times the owner will sell accounts receivables along with the accounts payables. How old are these receivables? Are any actual bad debts that you can never collect? How old are the accounts payables? Has the business not paid their suppliers and therefore are on cash on delivery? Check the amounts and ages of the accounts receivables and payables — even it you are not “buying” them.

Look at the financial statements and summaries for trends in income. Does this business have the ability to keep its current market share and remain competitive? What will keep the customer-base coming back? Can they be easily lured away by your competitors? How many existing customers will the business actually lose with a change in ownership?

How much additional money must be invested in the business in order to make the changes you think are necessary?

This business may be running profitably now and yet still not be able to sustain the debt load (bank loan) if you have to borrow money to purchase and run the business.

The last three to five years of financial statements and tax returns (ask to see both!) can be an indicator of whether the business has been well run.

If you are told that the financial statements don’t really reflect the true value of the business — that, in fact, much of the profit is “hidden” — walk away.


Year-End Numbers Can Aid Plans

By Chemeketa SBDC

Preparing for the end-of-year wrap-up (or frankly any time, but why not now?) is a great time to take stock of your business. Naturally, you want to do everything you possibly can to ensure the survival and growth of your company. One of the greatest skills you bring to the table is the understanding, tracking, and use of numbers to manage your business.

Although you may feel you aren’t good at math, or don’t know accounting, or can’t figure out the computer — you are probably selling yourself short. Anybody can work with numbers and the kind of number tracking you need to do here is not magic. And you are the expert on your business. Nobody else is as motivated or informed as you are to get the numbers working for your business.

First, get a financial snapshot of your business.

This should be simple. It is meant to be easy to prepare and able to be digested by you in no more than five minutes. The point is to get the quickest possible handle on key aspects of your operations. You may decide that a monthly snapshot is adequate; some owners want to see this on a weekly basis. It is used to determine your cash reserves, your accounts receivable status, inventory levels and to compare trends. The financial snapshot should include the following categories: Current Assets, Inventory, Current Liabilities, Fixed Monthly Expenses, Loans Outstanding, Monthly Sales to date, and Yearly Sales to date.

Second, cash flow statements that are regularly updated.

Projecting cash flow is one of the most important ways you can use numbers to manage and grow your business. As you begin this exercise, keep an Assumptions Sheet on which you list all the assumptions you used to develop your numbers. This way the numbers will have meaning and you will know how you got them.

Next, project your monthly sales for a full year. From these projections, deduct your monthly expenses. You can divide expenses between fixed (same every month) and variable (those that change with volume of sales). The balance is the monthly operations. To that you will add the monthly cumulative cash position (it looks very much like your checkbook) adding last month’s balance and determining the next month’s beginning balance. To this projected cash flow, you will compare actual numbers and determine where you stand in relationship to your plan.

Third, conduct a cost analysis of your product/service.

Understanding the cost of selling your product/service is critical to understanding the cash position of your business. There are many different opinions of what should go into cost of goods sold, and each business will vary — the important thing is to be consistent and to include those costs that are directly related to the expense of selling. What is “left over” is the contribution margin to pay the fixed cost of doing business, and after that your profit.