Month: August 2023

Funding business growth and working with bankers

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All business owners know that cash is the life-blood of their business. You might not be in the position yet to borrow funds to expand the business or smooth out cash flow irregularities, but chances are you may need funds in the future to support growth plans, hire new employees, upgrade equipment or even weather a slow business cycle.  Therefore, maintaining a good relationship with a banker and a healthy Line-of-Credit is vital.  Keep in mind that anticipating the need for credit well in advance will put you in a much stronger position not only to secure a loan, but also to negotiate competitive terms.

Many business owners ask, “What will the bank look for to loan my business money?”  It truly boils down to: “The 5 C’s of Credit”:

 

Cash Flow: How is your cash flow? This is basically your company’s capacity to pay back your loan.   A lender will prepare a cash-flow analysis that demonstrates this over a specific period of time (typically, a year). Your business’s cash flow tells a lender how much debt your business can successfully handle and how much cash flow is left to be reinvested into your business.

Character:    Good character is seen through a solid credit report. Your credit score reflects your ability to handle your personal finances, so lenders assume if that’s good, it means you will also be able to handle your business finances well. As soon as you apply for a business loan, expect the lender to do a soft credit pull. This won’t harm your credit and will tell the lender only your credit score and a brief summary of your credit report. The better your credit score is, the more loan options you’ll have available to you. You’ll want to aim for a credit score of at least 600—and even higher, ideally.

Collateral:  The nature of the collateral is often predetermined by the loan type. Collateral is an asset that a lender accepts as security for a loan. If the business owner borrows money and defaults on the loan payments, the lender can seize the collateral and resell it to recoup the losses. If you’re applying for an SBA loan or bank loan, lenders will want to know what kind of collateral your small business has and its value.

Capitalization:  This refers to how much money you’ve put back into your business.  Bankers want to see that you have a financial commitment and that you’ve put yourself at risk in your own company. How you capitalize your business can have long-term effects on your company’s success. Funding expenses, inventory, and operations is a challenge for many business owners. It’s important to understand and explore the options available along with the risks and rewards.

Conditions:  The conditions refer to economic conditions.  The banker will evaluate the current economic climate and if there could be any potential impacts to your company. As history shows, these conditions change over time along with business cycles, as an economy goes through periods of expansion and contraction. For example, indicators like new orders for manufactured goods and new housing permits indicate the pace of future economic activity as it relates to the rate of manufacturing and the output and housing construction. Other indicators that can forecast future economic conditions include the consumer confidence index, new factory orders  and business inventories. These are all tell-tale signs of the health of the economy and it’s impact on a business.

This is just a starting point for considering your possible need to secure a business loan. There’s a lot more to learn.  Every business has different needs, and no financial solution is one size fits all. If you have questions, please contact me today.

Leaving your company in good shape for a successor

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Family owned businesses are economic powerhouses that drive local, national, and global economies. 

According to a recent survey[1], family-owned businesses in the United States account for over 64% of the nation’s gross domestic product. Yet, over 50% of those businesses fail to last beyond the first generation. Successful business owners who want to pass along their business to family members know there are certain “big-company” fundamentals that apply to their business.

For example, big companies spend a significant amount of time, money, and resources on strategic planning, but when surveyed, less than 54% of family-owned businesses had a written strategic plan. Big companies have a management succession plan. Only 30% of the family-owned businesses surveyed said they have spent any time on a succession plan. On another front, most companies spend a great deal of time searching for qualified people to staff their businesses. However, 64% of family business owners do not require family members entering the business to have the qualifications or related experience necessary to be successful.

So here are a few “secrets” of successful family-owned businesses preparing a path for an exit or transition in the future:

  • Develop a shared strategic vision of the business and communicate that vision.
    • Business is easier when everyone knows the score. Commit to a consistent and effective communication process among family members and employees.
    • De-mystify the sacred cows.
    • Use outside data (market data) to find out and verify what is going on.

Most businesses will change their strategies four or five times before it gets passed on to the next generation. Doing what is best for the business, employees, customers, and community may preserve it for the next generation.

  • Establish a board of directors and recruit outsiders to participate
    • Mentors need mentoring and leaders need mentoring. Insiders cannot be objective and are certainly not always independent in their thinking.
    • Outside board members who are successful business people or financial experts, can provide balance for the company’s direction.
    • Outside board members have a fiduciary responsibility to provide their advice for what is best for the company.

Of the businesses surveyed that already had a board of directors that included outsiders, 77% said they strongly agreed that the board made a positive contribution to the direction of their business.

 

  • Cultivate a climate that develops good leadership
    • Founders must find ways to give feedback to employees, foster growth via success and failures, and build a culture of opportunity.
    • Foster a philosophy of fair family and employee compensation. Family businesses should not confuse the flow of funds or mislead family members into believing they are worth more.
    • Adopt a transition planning process early.

Family business owners must know what “hat” they are wearing when they come in contact with other family members both at work and at home. Social engineering is an important part of a functioning business unit.

“Finding the Exit,” and ensuring a smooth transition between generations requires many sound business fundamentals. It is important to make sure the assets are protected to ensure the well-being of both generations. Often, a well-thought-out buy/sell agreement can help “in-the-business” and “out-of-the-business” family members make the transition. Buy/Sell agreements lay important groundwork ranging from establishing the price to detailing how other family members might acquire ownership.

If you should have any questions, contact us today.

 

 

[1] Source used: Laird Newton  Family Business Survey

Managing cash flow in today’s business environment

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Cash flow.  It’s a topic and a concern of most business owners.   Especially today, with margin pressure, inflation and simply the cost of doing business has escalated.
Whether your business is growing or struggling, managing your cash flow can be the key to business survival.  Working with privately held business, here several proactive steps to help businesses monitor cash flow and fix shortages before they cripple the business.

There are several strategies for dealing with cash shortfalls you can implement today:

Utilize both long and short-term cash management and forecasting tools. Use an annual budget as a foundation to project long-term cashflow. Identify large cash outlays and seasonal cash flow cycles. Also employ a short-term cash management tool (3 to 8 weeks) to manage weekly cash requirements. In our experience, a cash flow forecast is essential for all businesses. The forecast allows you to predict which months you can expect to see a cash deficit, and which months you can expect a surplus.

Shorten collection times and accelerate accounts receivable.  Your cash reserves can dwindle if customers regularly pay late. Send customer invoices immediately (daily) and abbreviate collection terms. Actively manage accounts receivable with established collection policies.  Consider creating a consistent collection process for the very day an invoice becomes overdue. For specific customers situations, you can offer special terms or set a policy of collecting a deposit/down payment if possible. Also, be sure your own customer collection terms are in synch with your suppliers and vendor credit terms. For example, if your customers have 30 days to pay you, but your suppliers want their pay within 14 days, a cash flow problem may strike.

Effectively manage accounts payable. Don’t rush to pay bills early. Negotiate extended terms with your vendors if possible, however avoid paying late fees and interest charges. By negotiating with vendors and suppliers, many are willing to extend payment terms with business they view as long-term customers.  By extending our payables and accelerating receivables, you can improve cash flow quickly.

Develop purchasing policies to keep inventory levels at a minimum.  A business’ cash flow cycle depends on your inventory. You spend cash to buy your supplies, and that inventory turns back into cash when it sells. Consequently, your cash flow is easily reduced by poor inventory management. Even worse if you provide poor service due to poor inventory management, customers are going to lose trust in your business and stop purchasing from you.  Steps like planning ahead, establishing systems and habits to track the quantity you order, sell and store will help you determine if you are over or under stocking, which can impact your overall cash flow.

Establish a banking relationship before you need cash – not when you need it.  A strong banking relationship is invaluable to your business. Take the time to cultivate banking relationships and build a stakeholder community that can be a resource when threats or opportunities confront your business.  The business banking manager you choose should go beyond a loan or monthly statement. They should be able to provide solutions to help your business obtain financing, enhance cash flow and stay secure. Seek a banker who is a committed advocate for your business even when times turn tough.