Tag Archive for 'capitalization'

Your small business, your banker and economic recovery

A small business is like the human body in at least two ways: To survive, it must have both nutrition - food and water - plus oxygen. For a business, nutrition is profits, and its oxygen is cash flow. And similar to the body, a business can survive for a while without the nourishment of profits but not very long without the breath of cash flow.

Arguably, the greatest reasons small businesses fail is they run out of cash. And as improbable as this may seem, even businesses with plenty of sales revenue - if cash is not collected in time - can fail. Every growing business, large or small, needs access to cash resources that can smooth out the operating cash rough spots. But for a small business, those resources are few in number, with the primary source being a loan from a bank.

If there is one thing that I have harped on for the past dozen years, it’s the importance of a small business establishing and maintaining a close working relationship with a bank. Furthermore, a decade before the financial meltdown of 2008-9, I began encouraging small businesses to make sure at least one of their bank relationships was with an independent community bank.  That advice turned out to be prophetic.

Recently, on my radio program, The Small Business Advocate Show, I talked about getting your small business ready for the coming expansion and building better banking relationships with an outstanding member of my Brain Trust, John Dini. We discussed some of the elements of growth that you should begin planning for right now, including a capitalization plan that includes a closer relationship with your banker. John is the leading Tab Boards franchisee in the U.S., President of Management Performance Network and author of 103 Tips for Better Hiring.

Take a few minutes to listen to our conversation and, as always, leave your thoughts on banking relationships and how you’re getting your business ready for the coming expansion. Listen Live! Download, Too!

Clarifying the record on start-ups and co-opetition

In any given month, I will be interviewed by various national and international media outlets. The contacts are appreciated because it allows me to leverage my opinions and whatever I’ve learned on behalf of small business issues. And, let’s face it, any PR is good PR, so the attribution is good for my brands.

There is one problem, however, with these kinds of interviews: The interviewer is taking notes as I am speaking, and the final product may not be as spot-on with regard to what I have said. Anyone who has ever been quoted by the media knows what I’m talking about. Sometimes the quote is perfect, sometimes it’s a little off and sometimes it bears no resemblance to what was said.

Recently, as a result of two interviews, I was quoted in ways that I feel I should respond to. Neither interviewer did anything wrong, but a little clarification and expansion is warranted.

In an interview with the Los Angeles Times (click here for article), I was asked about the concept of small businesses establishing alliances with each other to maximize limited resources during a recession. I have long considered this behavior to qualify as a best-practice, so it was easy for me to comment. I said, “There is a term called ‘co-opetition,’” and went on to explain that this is where businesses that were otherwise competitors would actually partner to accomplish a specific goal, like a contract with a larger customer.

When the article came out, I was incorrectly given credit for actually coining that term. As a thought-leader and unrecovering egomaniac, I coin new terms (and laws, see below) all the time, but alas, co-opetition isn’t one of them. Don’t know the genius who did coin this extremely intuitive and handy term, but it wasn’t me.

Last thought on co-opetition: If you’re having trouble qualifying for the specifications of a request for proposal (RFP), consider partnering with someone, even a competitor.

More recently, an Asian news agency contacted me about the impact of small business on the economic recovery (click here for article). One of the points I mentioned was the access-to-capital environment for start-ups. I said start-ups weren’t going to have as much of an impact on this recovery as in previous ones because the currently diminished availability of personal credit would limit the ability to fund a new launch. I was quoted correctly, and I stand by my opinion, but there are a few things that should be added.

It must be said that, clearly, there will be many start-ups who will find a way to launch their dreams against all these odds. The good news is, because of the extreme commitment of these entrepreneurs, their enterprises will probably have a higher success rate, just by sheer dint of will. An entrepreneur who will not be denied is a force of nature.

On the other hand, easy credit often allows for the creation of start-ups that should never have happened. Blasingame’s Second Law of Small Business states: “It’s easy to start a small business, but it’s not easy to operate and grow one successfully.” The casualty rate for start-ups in an easy credit environment is nothing short of grotesque.

Sometimes start-ups don’t price their products and services properly because they don’t yet know how much gross profit they must generate to fund day-to-day operations while simultaneously capitalizing growth. Consequently, in the process of failing from a combination of too much debt service and not enough gross profit, these newbies devalue the prices for their products, while the remaining industry players must work harder to get prices back to a level that allows for sustainability.
Making a sale by offering prices that don’t allow the company to survive is a Pyrrhic victory.

Thanks for allowing me to sort of correct the record while taking the opportunity to expand my thoughts on these issues.

For small business, Cash is no longer King – it’s the Emperor

For generations, business owners have learned that while Profit may be the Queen of business, Cash is King. And there is never a moment in the life of any business, large or small, when this generally accepted truth doesn’t apply. But in 2009, or anytime the economy slows, small businesses must elevate Cash to an even more supreme level. Consequently, these days, and for the foreseeable future,

Cash is Emperor.

Any Questions?

Blasingame’s 3rd Law of Small Business states: “It’s redundant to say, ‘undercapitalized small business.’” There are at least two reasons this statement is a law and not a maxim:

1. In every small business, there is always a place to put whatever capital may be available.

2. Small businesses typically have only three sources of capital: a) Retained earnings – profits left in the business; b) Bank loans; c) Investment capital, most of which comes from the owner.

Because of the impact of Blasingame’s 3rd law, any cash in a small business is precious and, therefore, availability must be maximized.

There are many fundamental best practices that can be executed to maximize cash. Here are a few:
- Sell at a gross profit margin that will more than fund operations.
- Manage expenses like a she-bear guards her cubs.
- Manage accounts receivable like your life depends upon it – it might.
- Establish and maintain a close relationship with a bank.
- Re-invest as much of the profits back into the company as possible.

Recently on my small business radio program, The Small Business Advocate show, I interviewed three top experts on cash management and capital acquisition. First, Gene Siciliano, author of Finance for the Non-Financial Manager, second, Joe Knight, author of Financial Intelligence for Entrepreneurs, and finally, Tom Markel, founder of iBank.com. Be sure to take a few minutes to listen to what these three world-class cash management experts have to say about this critical small business management fundamental. And, of course, be sure to leave your own thoughts.
For Gene Siciliano: For Joe Knight:
For Tom Markel:

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