Utilizing an Advisory Board to Guide Your Business
By Mike Semanco, President, Hennessey Capital
The importance of an advisory board to an entrepreneur and business owner is invaluable. Entrepreneurs thrive on developing ideas, products and strategies on their own terms and at their own pace. The “charge ahead”, “get it done” mentality is second nature to this group of individuals. Entrepreneurs come in many shapes and sizes- sole practitioner, division managers or even CEO. Whatever the title or responsibility, surrounding yourself with a group of professionals you can rely on for sound advice and direction will only improve your chances of success and keep you sane.
An advisory board is different than a board of directors or managers, who hold fiduciary responsibilities of the business. Advisory boards can take many forms ranging from formal CEO roundtables and annual retreats to informal gatherings over coffee, lunch, or golf. Having a sounding board to share ideas and challenges help entrepreneurs feel they are not tackling the world alone. You can have a great internal management team or partner but there are times when outside influence is needed. A different perspective from a trusted advisor who has encountered the same issue helps you see the challenge or opportunity in a new light.
Advisory board members can consist of professional advisors (your CPA, attorney, banker or consultant), friends or associates who may or may not own their own business, or even a current staff member. The key is to surround yourself with people who have diverse backgrounds, are willing to challenge the status quo and who you like to be around. Start by selecting two or three contacts you feel could be strategic to your business and can fill the gaps you determine are needed. Meet with them and discuss your plans and ask them of their interest to meet on a regular basis. This could be once a month, quarterly or as needed depending on how critical your needs.
Daily business decisions are not easy so having a group you can turn to for renewed perspectives and friendly banter is refreshing.
Reprioritize Your Continuous Improvement Efforts to Maximize Profitability
By Mike Pircer, President, MAP Business Solutions
As companies constantly reduce resources in this tough economic environment, continuous improvement initiatives are being thrown by the wayside. Many businesses are still doing the same things with fewer employees but then find themselves coping with poor morale, disconnected processes, shrinking margins, and dissatisfied customers. Continuous improvement initiatives are either not being implemented or being executed poorly in which there are no improvements at all. Those that are being worked on have a tendency to be knee‐jerk reactions that are not well‐planned, do not involve all the key stakeholders and do not connect to the organization’s overall strategy.
Companies need to recognize business processes as value streams. These streams represent all value‐adding and non‐value‐adding activities that are required to deliver a product (good or service) from request to delivery (and ultimately, to receipt of payment from the customer). Knowing what the customer values and is willing to pay for helps differentiate which activities are truly required.
In order to put continuous improvement back in play, these are the priorities in which an organization must focus on:
Priority #1: Eliminate unnecessary non‐value adding activities. An organization can uncover the unnecessary non‐value‐adding activities through a myriad of tools such as:
- Value Stream Mapping
- Customer Surveys/Interviews
- Warranty Claims
- Customer Complaints
Once an organization identifies the unnecessary non‐value‐adding activities, then the required resources can focus on the elimination of these activities. These are usually “low‐hanging fruit” and can be done quickly and cheaply.
Priority #2: Reduce necessary non‐value‐adding activities. Necessary non‐value adding activities are recognized as processes that the customer doesn’t care about, but they are necessary to keep the operation going. These types of activities could include:
- Invoicing the customer
- Sales calls
- Material handling
For example, a salesperson for a computer repair company may be out in the field making face to face calls on prospects and clients. While the client doesn’t value (or pay for) this activity, it is necessary in order to generate more business for the organization. An improvement initiative may be to reduce the amount of travel time for the face to face meetings and incorporate more internet marketing processes. In these areas, the goal becomes to reduce the effort required to assure compliance and proper operation of the business.
Priority #3: Optimize value‐adding activities. These are considered the organization’s “bread and butter” processes. Improvement activities could include projects that focus on reduction of cycle time, reduction of defects, and/or reduction of downtime. Improvements in this area are generally more time and resource consuming and could be more costly.
While optimizing value‐adding activities is important, lean thinking shows that faster and more dramatic results occur by first eliminating NVA activities. The outcomes from eliminating NVA are measurable and wide ranging, including faster delivery, improved quality, freed capacity, and reduced inventory – all of which lead to greater customer loyalty, market share and reduced expenses. Collateral benefits that result from eliminating non‐value‐adding work include improved interdepartmental and interpersonal relationships, safer working conditions, and reduced workforce frustration – all of which create a work environment that attracts and retains a talented workforce, which, in turn, leads to further business growth.1
1 Value Stream Management for the Lean Office, Don Tapping and Tom Shuker
5 Ways Factoring Can Help Your Business Grow
By Toby Dahm, Senior Vice President, Hennessey Capital
As businesses across the country slowly emerge from the worst economic crisis since the Great Depression, a stark reality is hitting many of them. That reality is that even though sales are rebounding and they are even showing positive earnings, they are starved for cash. What is going on? The problem is they are experiencing working capital pressure. After stretching vendors as far as they can, as orders pick up, so must inventory and accounts receivable, which increases the cash that companies have tied up in working capital. For many companies that do not carry inventory, or have become lean managers of inventory, this pressure is solely the result of the growth in accounts receivable that comes with the uptick in sales.
What can a business owner do to relieve this pressure and to continue to seize opportunity? One excellent tool for growth financing, which is often overlooked, is factoring. Quite simply, factoring is the sale of an invoice (account receivable) to a lender (called the factor) in exchange for a fee. The factor will advance up to 85% of the invoice value and will provide the remainder of the invoice value, less a small fee, to the client when the invoice is paid. This frees up cash that would otherwise be tied up in accounts receivable for 45 days or more. There are many benefits to using factoring as a liquidity tool. We will explore five of them.
Quick and Inexpensive Closing Process:
Unlike applying for and closing on a loan, the process of closing on a factoring agreement is simple, quick, and inexpensive. The application is brief, and the information required to close is focused on the accounts receivable to be financed, the strength of the paying customer (account debtor) and the ability of the factor to confirm the validity of the invoices. It can usually be accomplished in less than one week and at a nominal cost to close. Also, numerous factoring companies will not require a minimum financing volume commitment or term obligation which means that the client is free to try factoring and terminate the agreement if they find that it is not advantageous.
Accommodates Rapid Growth:
Traditional lenders are looking for highly creditworthy and stable companies, which is often not compatible with rapid growth. Such high growth companies often have financing needs that are well in excess of what a bank is willing to lend, due to the focus of traditional lending on past results and financial strength. Factoring, on the other hand, is focused on the current opportunities that a client has and the quality of the accounts receivable they generate. Most factors will provide unfettered growth financing to a client as long as the client demonstrates that it is a viable business that generates high quality accounts receivable.
Complementing a Bank Line of Credit:
A borrower does not necessarily have to choose between a bank loan and factoring. Banks and factors often work together to form a mutually beneficial financing arrangement that enables the client to maintain the low cost bank loan and use the factor to provide the incremental growth financing it needs. This is most often implemented by identifying certain accounts that the factor will finance, with an understanding by all parties that the factor has the first claim on those accounts while the bank enjoys a senior collateral position in all the other assets it formerly held as collateral. This also enables the borrower to grow at a much faster rate than without factoring.
Small Relative Cost:
There is a misconception that factoring is prohibitively expensive, which is not the case. For a growing company with a decent gross profit margin, factoring is a very smart form of financing as opposed to missing a sales opportunity or giving up equity to increase the capital base. It comes down to margin. Often the cost of saying “no” to a prospective client is far more detrimental than having the ability to say “yes” to an opportunity that grows the relationship and can lead to increased business. Sacrificing a small percentage of profit margin and executing the new order or job effectively, may pave the way for enhanced business with your client in the future.
Gaining an Experienced Partner
Many factors have decades of business experience, often as entrepreneurs themselves. They can bring this experience to bear in many areas, including evaluation of credit extension to customers, advice as to the structuring of payment terms, collection assistance, accounting assistance relating to accounts receivable, as well as more general business advice and support, such as introduction to new sales opportunities they become aware of. Most factors view their success as being linked to the success of their clients. A positive relationship with a factor can be a valuable asset to your business.
It is a little known fact that factoring is a centuries old form of finance. It was initially used to finance trade between England and the thirteen colonies. There is good reason that it has persevered, and is gaining popularity today….it makes great business sense!
Business Plan Basics
By Joe Romeo, Senior Business Development Representative, Hennessey Capital
Any entrepreneur knows that writing a business plan can be a daunting task. How is it possible to cram all of your aspirations for your company into one document? Challenging as it may be, a solid business plan is paramount when seeking financial support for your business. Here are a few concepts to keep in mind as you build or update the business plan for your new business venture.
SCALABLE PLAN:
One multi-level plan that is scalable for different audiences is best. A full blown business plan with all of the details in every section offers a deep dive for owners, strategic partners and trusted advisors. It is also critical to demonstrate how you, the business owner, are assuming some level of risk. Investors want to know that you have “skin in the game,” thus creating a vested interest in the company’s success. Make sure your plan includes a thorough explanation of your personal investment in the venture.
This fully developed and detailed version can offer a comprehensive review of the entire business and can be abbreviated into a brief overview for others.
Most important will be a skeletal version with all but the essentials removed, referred to as an executive summary. This will be needed for your most important audience - outside investors.
This group (Venture Capitalists, Angel Investors, Private Equity investors, etc) won’t spend more than a couple of minutes on the initial review of any plan. These individuals review a myriad of investment opportunities every day so providing a basic overview that is succinct is key.
REASONABLE PROJECTIONS:
Avoid any ‘blue sky” projections. This market space is full of them and you can put all of the businesses that hit their outlandish projections in a thimble. Be realistic with your financial projections.
There are two essential projections you should include as part of your plan. 1) a conservative projection that you are very confident you can attain. This should be used as the basis for all of your cost and expense budgeting. Remember to keep your projections S.M.A.R.T. - Specific
Measurable, Attainable, Realistic and Timely. The other is a less conservative projection that should be the realistic target or goal the business is working to achieve, otherwise known as a “stretch” goal. Be sure to include ROI projections for your most important audience.
SELF STRESS TEST:
This is not something to include in the business plan, but you should be ready to address questions about the worse case scenario. Pre-perform a stress test for your business.
Have a contingency plan to adjust for unforeseen market conditions. This lets potential partners know you are savvy enough to have considered “all” of the scenarios…good and bad…you’ve identified and evaluated the down side. Investors view this as a rare dose of reality amongst the over-ambitious entrepreneurs.
END GAME / EXIT PLAN:
Although this is often premature for start up businesses and entrepreneurs, it is best to have an exit strategy or succession plan in place. Capital investors hold this part of the process sacred and always have an exit strategy in mind. It is the one true affirmation of their investment and the final step that determines the actual risk or reward of their decisions. Ultimately, investors will want to know how they can recoup their investment and exit the business.
There is a plethora of online resources focused on preparing and building a business plan. Here are just a few I would recommend:
www.automationalley.com
www.sba.gov
www.techtownwsu.org
www.oakland.edu/ouinc
www.oakland.edu/macombouinc
www.annarborusa.org
Tips for Staffing Companies: How to Increase Working Capital
By Jeff Wright, Senior Vice President, Hennessey Capital
As we continue to see signs of an economic recovery, the strength and duration of it remains uncertain. As a result, companies are reluctant to hire permanent employees. Instead, they are turning to temporary staffing companies to fill their needs. The staffing industry is beginning to see an increase in the level of activity as businesses ramp up production and level of service. This can create a cash flow problem for staffing companies that do not have adequate cash reserves. Employees must be paid weekly or bi-weekly but must wait 30-60 days to collect from their debtors. This causes a drain on cash especially when they are trying to grow their business. They may also lose out on the opportunity to bid on new contracts, due to cash constraints. Management can inject additional capital or they can secure funding from third party investors. The challenge with either of these options is that current ownership may have to sacrifice a level of control within their business to achieve the desired outcome.
An alternative for staffing companies that face this cash crunch is to seek business financing. Since the staffing company’s primary asset is the people they contract out, it does create an accounts receivable that can be leveraged to generate the working capital they need to pay its employees and operating expenses on time and take advantage of new opportunities. If traditional banking sources are not available, a factoring company can provide an alternative source of financing. Factoring is the sale of accounts receivable or invoices at a small discount to obtain immediate cash. This type of financing gives businesses the ability to ensure growth without diluting equity or incurring debt. While factors are concerned with the long term viability of the company, their primary focus is on the debtor strength, the debtor’s ability to pay the invoices being purchased and the character of the management team. While traditional funding sources, like banks, may focus on the staffing company’s past, factors look at future opportunity and growth opportunities. A factoring facility is easy to qualify for and can quickly create immediate working capital availability to meet cash needs. Factoring can be used to bridge the gap between the time the service is delivered and the time the invoice is paid and helps in managing the in-flow and out-flow of cash for staffing companies that want to capitalize on the prospects that lie ahead for their in-demand service.
PO Financing- the ideal financing tool for the right situation
By Mike Semanco, President, Hennessey Capital
For many entrepreneurs, landing that large purchase order is just what the doctor ordered. You worked hard to win the client, outlasted the competition and are in a position to build on your success. The team celebrates until someone asks, “Do we have the cash to purchase the large amount of supplies needed to deliver the project?”
Growth can be a major drain on a company’s cash and a major reason why we stress the importance of cash forecasting.
Although purchase orders are covered in the Uniform Commercial Code as an asset of a business, it is not an asset that is easily financed, unlike accounts receivable, inventory, equipment or real estate.
Purchase order financing is offered by very few finance companies and is usually best suited for distributors. Manufacturers and service providers are not ideal candidates for PO financing due to the concern of performance risk. PO Financing for distributors allows for the securing of goods by way of letter of credit (promise to pay once certain stipulations are met), so that the distributor can increase its buying power with suppliers. In the case of a distributor, they are not responsible for manufacturing the product so performance risk lies with the supplier. PO financing will be structured so that the supplier will not receive payment unless they produce the proper product as defined in the PO, which eliminates the issue of performance risk and thus satisfies the PO funding source.
PO financing carries more risk to a lender than traditional A/R financing thus the cost is more than traditional A/R financing. Due to the increased cost, companies must make sure they have sufficient margin in the order. PO financing is typically used in conjunction with an A/R line of credit or factoring facility so that once the product is received by the end user, invoices can be financed and the cash can be used to repay the PO funding source. This opens up the PO finance facility to be used for new orders.
Purchase order financing is not ideal for every business but in the case of a distribution model where product needs to be purchased and sold to large entities or retailers, it could be a great tool to secure the cash needed for new growth.
Communicating Effectively with Stakeholders
By Toby Dahm, Senior Vice President, Hennessey Capital
What word comes to mind when you hear the name Roger Penske? For most people, that word is success. Roger Penske’s pathway to success began as a part time race car driver. He used his success on the race circuit to take a vigorous dive into the business side of auto racing, where he has remained on top for three decades. Not entirely satisfied by his triumphs on the race track, Roger expanded his universe and built one of the world’s leading transportation empires.
Penske was always part of a team. Whether racing, managing a race team, building a global empire, or orchestrating Super Bowl XL, he was a master of building and leading productive teams. Perhaps the most vivid illustration of his leadership ability was when he chaired the Detroit Super Bowl XL host committee. Penske assembled a 41-member committee that identified problem areas, raised donations, met with NFL officials and garnered volunteer support for the event. The transformation that took place in Detroit, which presented itself as a world class city was amazing. About Penske, Bill Ford, Chairman of Ford Motor Company said “He is the most impressive businessman in the city. Everything he touches works because of his personal drive and because his attention to detail is so exquisite. I just love being around that guy.”
What is it about Roger Penske and other leaders that allows them to possess what seems like a golden touch? It is the ability to communicate effectively with all stakeholders. No person is an island. No matter how much drive and talent an individual has, if they cannot build an effective team and coordinate the effort of their team with suppliers, customers, fans, officials, volunteers, and whatever stakeholders are mission critical, they will fall short of realizing their potential.
A two year study by Deloitte in 2001 confirmed that effective communication is a key factor in business success, which comes as no surprise. While this appears to be common sense, great execution is much less common. We must remind ourselves that while the concept of communication appears simple, we cannot lose sight of its importance. Here are four tips that will help you communicate with the stakeholders of your business:
- Be proactive. As a leader, you not only need to cast and communicate your vision, you also need to be out in front of (or at least on top of) important issues and developments. The sooner you address these, the more influence you will have and less damage will be done by the infamous rumor mill.
- Be genuine. Show concern and empathy for each stakeholder’s position. Knowing your audience and listening to their concerns is what will lead to success here.
- Use simple language. Speak or write the way you normally talk, and avoid acronyms and jargon, which only serves to alienate others and develop cliques. Great leaders are just as easily understood by line worker bees as they are by their board of directors.
- Be positive in your approach. Recognize that there is an element of negotiation in most communication, so look for a win/win outcome. Think from the point of view of your audience. What’s in it for them? Roger Penske was masterful in getting thousands of volunteers to see the success of the Super Bowl as a personal success for them.
While Roger Penske is immensely talented, passionate, and determined, he would not have achieved the success he has without being a great communicator, which enabled him to get thousands of people to embrace and achieve his vision.
Equipment Leasing - Does it make sense for your business?
By Jeff Wright, Senior Vice President, Hennessey Capital
Many businesses are faced with the decision of whether to buy or lease equipment. Each decision must be made on an individual basis. In each situation, the needs of the business and purpose are two important considerations. Is it revenue-producing equipment or can it offer cost savings and efficiencies?
A number of other factors also should be considered before making the decision. One consideration is the predicted lifespan of the equipment. Will the asset be useful for a long period of time or will it be obsolete in the next few years? Leasing may be more advantageous if the asset has a short lifespan while purchasing may be preferable if the productive life of the equipment is longer. For example, computers are an asset where technology advancements render them obsolete after a few years. Leasing may be the preferable option. Service and repair costs should also be considered.
You business’s current cash position must be taken into account as well. Leasing generally does not require a large capital investment or deposit up front. Monthly payments may also differ allowing the business to conserve cash. The related concept here is the opportunity costs. Can the cash saved by leasing be invested in other areas of the business to growth the company? Therefore, leasing may offer more flexibility and fewer constraints to growth because it requires less upfront cash.
When exploring the benefits and challenges of leasing, entrepreneurs should also examine how the asset is accounted for. When you lease equipment, you do not own the asset and it is not recorded as an asset on the company balance sheet. Payments are recorded as an expense and reduce your profit. The equipment will have some value at the end of the lease. Its estimated value is called the residual value and is generally a percentage of the purchase price. Most leases allow you the option to purchase the equipment for the residual value at the end of the lease. When purchasing, you own the equipment and the asset and related loan, if you borrowed the funds to purchase, are recorded on the balance sheet. The interest cost and depreciation are expensed and impact the profit and loss statement. The interest cost between the two options and method of depreciation should be part of your analysis.
Be sure to review the lease agreement and consider any cost you may be charged at the conclusion of the lease. Factor in charges for damage or overuse. Are there requirements for providing timely notice for the termination of the lease or penalties for not returning the equipment on time?
The helpful tool for determining whether to lease or purchase an asset is to calculate the net present value. It uses the discounted cash flow, accounts for the time value of money, tax implications, depreciation, and timing of cash flows. The alternative with the lower net present value cost is the most economical. Your CPA can help you with this analysis.
Is ABL The Answer?
By Toby Dahm, Senior Vice President
In 2009, when most forms of lending were greatly reduced, loan commitments by asset based lenders actually increased, putting a very mild dent in the credit crisis. Why were asset based lenders willing to extend more loans when the rest of the lending community was hunkering down? It has to do the focus of the industry.
Asset based lenders base their credit decision largely on the value of the assets (or collateral) that they are lending against, as well as the business outlook of their borrower. These are different criteria than tradition lending, which emphasizes financial strength, liquidity and historical profitability. It is this focus on the present and the near future that enabled asset based lenders to select viable candidates to back despite the deep recession and the adverse financial impact it had on most borrowers.
To many businesses, the choice to use asset based lending was made for them due to no other options being available. Other companies, which had options ranging from issuing bonds to selling equity, chose an asset based loan due to advantages it provided. The main advantage is that it provides borrowing availability at precisely the time it is needed the most. As the level of assets grow when orders are received and fulfilled, asset based lending provides for real time advances against the growing asset base, thus minimizing the drain on cash flow caused by growth.
Another advantage is the close working relationship between the asset based lender and the borrower. The asset based lender is in very close communication with the borrower. In turbulent and dynamic times, and asset based lender is at an advantage in responding to client needs that often arise suddenly, due to this close working relationship.
Asset based lending agreements are covenant light. The documents contain many fewer financial and operational covenants that can trip up a borrower or limit their flexibility.
Lastly, asset based lending establishes a borrowing discipline that requires the borrower to utilize the loan properly. It is a tool to fund growth and seize opportunities, however it forces borrowers to cut borrowing levels during times of decline. Although this forced discipline is not fully appreciated at the time, the borrower will ultimately come to understand the advantage of having lower debt during lean economic times. As we have seen played out recently in many painful bankruptcies and restructurings, carrying excessive debt loads is a huge competitive disadvantage.
These and other benefits of this form of lending are the reason that so many companies are looking at this style of lending as being the best fit to meet their borrowing needs.
Working with trusted advisors to achieve your business goals
By Joe Romeo, Senior Business Development, Hennessey Capital
Who are trusted advisors? Trusted advisors include your banker, accountant, CPA , attorney, business coach, mentor, academic scholars and other experts in your particular field of interest
A trusted professional is someone you can rely on to give you straight answers and tell you what you need to hear rather than what you want to hear. Integral to the trusted advisor relationship is someone who places your interests first above all others and who will be there when you need them. Trusted advisors are committed to your long term goals and successes and will have a deep understanding of those aspirations. They exercise sound business judgment and will protect your assets and interests as if they were their own.
A trusted advisor is typically an expert in his or her field and is able to offer solid advice and direction along with objective assessments and valuable input.
Advisors are an important part of managing your business because often we don’t know what we don’t know. Entrepreneurs cannot be experts at everything and it is extremely valuable to gain a different perspective. Your valued consultants can help guide you in the direction of the best solution for your business and help you think critically about your vision and strategy.
Selecting the right group of trusted advisors is a significant undertaking and the old adage “you get what you pay for” is applicable in this case. It is important that you invest the time and resources to adequately research advisors and pick the individuals that will best complement your business. You are building a long-term relationship, so it’s critical that you engage with an expert who can offer professional counsel and you enjoy working with.
Business icons like Bill Gates, Steve Jobs and the like have put this concept into practice by surrounding themselves with the best professionals in various areas of expertise to provide guidance and complement their knowledge and skill set.
A beneficial way to engage your advisors is to utilize them as a “board of directors” of sorts. Share your business ideas, new concepts and key issues with them on a regular basis to gain perspective and insight. Beyond benefitting from his or her expertise, it will also provide an opportunity for the advisor to better guide you business. The more your advisors know about the challenges and opportunities within your business, the better their ability to provide guidance. In return, patronize and promote their business. In a relationship-based business world, there is no better gift and reinforcement of confidence in an advisor’s abilities than a quality referral.
Business Week articulated this concept in a recent article, “Your Competitor is your Customer is your Partner”
Choose your advisor group wisely to include a mix of professionals representing the key disciplines for your business.
Bankers or other financial experts, legal for corporate structure, partnership agreements, industry documentation/contracts, intellectual property and other protections, CPAs for accounting, tax and other financial support, academia for their connective value and as a wealth of information and prototype infrastructure you will need, marketing, advertising, communication, media, social networks, web site, internet and technology support, business coach and strategic planner, insurance for protection against risk and any industry specific specialists that apply to your particular business.
In summary, take advantage of the valuable resources surrounding your business and selectively apply what you glean from this group. It can pay dividends in many ways including new business opportunties.
