Selling is a numbers game. Do you know how to manage your sales to plan future revenue? Watch as Jim explains the sales pipeline and how to use it to forecast sales, revenue and cash flow.
Tag Archive for 'cash flow'
Large, publicly traded businesses have a vast array of options when they want to capitalize growth. Small businesses? Not so much.
In fact, there are only three primary sources of growth capital for a small business:
1. Equity capital from the founder(s) and/or outside investor(s).
2. A combination of operating cash flow and profits left in the business, aka, retained earnings.
3. Borrowed funds, typically from a financial institution.
Because borrowed money is the significant small business source of capital, we asked our radio, Internet and Newsletter audiences the following question: “In terms of using a loan to capitalize business growth, which of these four options are you more likely to choose?”
Those who said they would use a national or large regional bank represented 13% of our respondents. Independent community banks came in at 31%, followed by credit unions, at 22%. And those who chose the last option: “We don’t need no shtinking bank loan!” were 34% of our sample.
It’s not surprising that over half of our respondents would prefer a local capital source like an independent community bank or credit union. For over a decade, I’ve been telling small business owners that the most consistent banking relationships, through thick and thin, are with locally-owned institutions that practice relationship banking. The financial crisis of 2008-9 turned my advice into a prophecy.
That crisis shined a bright light on at least one unfortunate truth: Banks that are beholden to Wall Street analysts and the computer-generated credit score are fair-weather friends to small businesses. It’s likely that the same poll taken pre-2008 would have produced more than 13% support for these banks.
Those who chose the emphatic “no shtinking loan” option, representing the largest single group, track with the prevailing small business sentiment in other polls I’ve reported on lately. Many small businesses are just not yet ready to use financial leverage to fund growth.
This group is either among that two-thirds of small businesses that polls show are not experiencing growth, or are among the other third that are growing but have learned how to do so more organically, which is another way of saying, “We don’t need no shtinking loan.”
A small business should have at least one banking relationship with an independent bank or credit union.
I talked more about how small businesses are funding their growth in the new normal today on The Small Business Advocate Show. I also talked with my good friend and Brain Trust member, Gary Moore, founder of The Financial Seminary and author of several excellent books on investing, about the advantages of having a relationship with an independent community bank. Take a few minutes to listen and give us your recommendations of large banks or smaller community banks. with Jim Blasingame
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!
Ti-i-i-ime is on my side - yes it is.
So sang the legendary Rolling Stones singer, Mick Jagger. As lyrics in a ballad this is a nice sentiment, even romantic. But in small business, it’s hogwash.
In the marketplace, there are actually three clocks at work: one for operating expenses, one for sales, and one for cash. Rarely are any on the side of a small business.
The clocks that tick on sales and cash collections often seem to have hands that drag or even get stuck, while the clock that is in control of expenses is so well oiled and finely tuned that the hands seem to fly around the face.
Let’s take a look at the three clocks of small business.
Operating Expense Clock
Every month, like clockwork, whether sales are good, cash collections are on schedule or profits exist, payroll must be met, rent must be paid, taxes must be remitted, plus phone bills, utilities statements, insurance premiums, etc., ad nauseum, must also be paid.
The Operating Expense Clock is hardwired to Greenwich, England for accuracy within a nanosecond per millennium, and nothing stops it short of a global, thermo-nuclear holocaust, coinciding with a direct hit from Halley’s comet. The only way to influence this clock is through operating efficiencies - you won’t be billed for something you don’t buy.
This clock runs off the customer relationships you’ve created so that sales result each month. You project when each sale will occur by qualifying prospects and attributing a “clock” to each potential transaction so that you can budget future sales volume.
The Sales Clock is completely logical and intuitive. A sale will be made made only when a prospect’s purchase requirements have been met.
What is not so logical or intuitive is the Cash Clock and its relationship to the other two clocks. Think of it like this:
Cash is to sales as snow is to winter:
- You can have winter without snow, but you can’t have snow without winter,
- You can have sales without cash receipts, but you can’t have cash receipts without sales.
And expenses are like weather: You get some every day.
But what every small business owner knows is that for every one glitch in the mainspring of the Sales Clock, there are 1000 sprocket failures that can slow or stop the Cash Clock. Consequently, this clock requires constant attention and maintenance.
Murphy’s Law flourishes inside of the Cash Clock and is a frequent resident in the Sales Clock. But the Operating Expense Clock is totally immune to Mr. Murphy’s insidious law and rocks on just like The Rolling Stones.
Recently, on my small business radio program, The Small Business Advocate Show, I talked about the three clocks of small business. I also had a conversation about cash in an interview with Brain Trust member, Phil Holland, founder of My Own Business. Take a few minutes to listen to these conversations on this important topic and, as always, be sure to leave a comment.
My interview with Phil Holland:
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.
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:
Last week we talked about assuming a survival attitude. Here are 10 things to do right now to execute on this attitude.
1. Profit is the Queen of business, but cash is King. Ask employees to help cut waste and expenses, plus review operational steps and eliminate or tighten up inefficient ones. What’s their motivation? How about job security? Watch the pennies, and the dollars will take care of themselves.
2. Stay close to accounts receivables and cash management. Many tasks can and should be delegated by a business owner, but right now cash management isn’t one of them.
3. Declare war on excess inventory. Don’t miss a sale, but don’t let one piece of inventory spend the night in your building unless it’s absolutely essential. Inventory is cash you can’t spend until you convert it back by making a sale.
4. Review ALL contracts for services to make sure you still need them. Your customers are doing the same thing; get ready.
5. Make your banker your survival partner in 2009. Keep him or her informed about how things are going, good or bad – especially the bad. Bankers need information, even if it’s bad news. Remember this: An uninformed banker is a scared banker, and no one ever got any help out of a scared banker.
6. Wherever possible renegotiate term loans, including real estate mortgages, to take advantage of lower interest rates. Longer amortization and lower rates preserve cash.
7. If you rent, talk with your landlord about adjustments in the terms of your lease. Don’t expect the landlord to take a major hit, but he or she knows that prospects may not line up to take your space if you leave. This is a good time to be creative.
8. Convert non-performing assets to cash – even if you have to sell for less than you want. What things were worth last year has no bearing on what they’re worth today, and they might be worth less tomorrow. If it’s not performing, cut it loose.
9. If it’s humanly possible, personally call on EVERY customer at least once in the near future, even if a salesperson is calling on them. This isn’t a sales call; it’s a relationship call. Find out what you can do to help them, and then do it. Your company’s future probably depends upon these visits.
10. Payroll expenses must be addressed. Non-performers must go first. Before making other cuts, ask your team to help find creative ways to allocate your bare-bones payroll budget. But don’t forget that now could be a good time to invest in the future by acquiring a highly trained “big business” employee who just got laid off.
Don’t wait - take these 2009 survival steps right now.
Recently, on my small business radio program, The Small Business Advocate Show, I discussed these 10 survival steps in more detail. You can listen to my thoughts by clicking on this link. And as always, I look forward to your comments.