The Risk of Undercapitalization

By: Toby Dahm

A horrible week came to an end with the worst moment of all - Jay had to inform his employees that he could not meet payroll that day. Instead of focusing on quoting new work, Jay had spent this week fielding calls from angry suppliers seeking payment and tracking down his company’s own balances due from customers.  His business had run out of cash.

I see this scenario played out all too often, in companies big and small across the country. The whole world watched it unfold as General Motors and Chrysler came to the brink of financial disaster. What enabled Ford to continue executing its business plan while General Motors and Chrysler endured seemingly endless scrutiny, extraordinary professional fees, and months of distraction?  In a word: CAPITAL.

Having sufficient capital enables a company to sail through rough seas and
concentrate on steering out of the storm rather than fighting the storm itself. It doesn’t matter how good your product is, how many sales opportunities are around the corner or how efficient your operations are if you can’t pay your bills. That’s right – if you can’t pay your bills, it’s all for naught.

Having capital is as important as having a keen grasp on every other of business management that inspires an entrepreneur to go into business and succeed.

Step 1
The first step in establishing capital is to know how much you will need.  A good business plan will address the capital need conservatively.  It’s important to have contingency reserves because Murphy’s Law is very real – if something bad can happen, it usually will.  There are many resources that provide assistance with a business plan including State and County Agencies that do this at no cost or low cost. You may want to check out your local SBTDC or SCORE office.

Step 2
The next step is to approach funding sources that are appropriate to your life cycle stage and industry.  Trusted advisors, such as your accountant, attorney, mentor, as well as the above mentioned government agencies can also help you with this. You may be asked to give up substantial ownership, which you will have to weigh against the risk of operating with insufficient capital, as our friend Jay did.

If you find that capital is limited, you will need to adjust your business plan to succeed on the smaller capital base.  This usually translates into slowing your growth trajectory.  If you find yourself in that position, remember that slow and steady usually wins the race.

As you build your business, keep in mind that capital is critical to making the entrepreneurial equation work.

Keys to Enhancing Profitability

By: Joe Romeo

Profitability is an essential ingredient for business success, but too often leaders focus on the wrong things.

When it comes to price avoid competing on price alone

Strongly market your competitive advantage (create one if needed) to differentiate yourself from the competition; avoid competing on a price-only basis.  Continually work to set yourself apart from the competition so you have a value-add that defies the price-only evaluation.

If you are forced to lower your price to stay competitive,  focus on lowering your cost, not your profit. Certain market dynamics are inescapable so be sure to recognize and optimize them.

ELASTICITY

The price of a product or service normally enjoys an inverse relationship with demand for that product; work on ways to lower the price of your product without compromising profit and let the market dynamics work in your favor as demand and sales increase.

PROBABILITY

The branch of mathematics that studies the likelihood of occurrence of random events in order to predict behavior.

Be sure to measure and evaluate your business properly.  Your bread and butter deals/customers are more constantly predictable than are those long shot, random chance  deals and should be weighted accordingly when setting your marketing strategies. 

Play the odds and put the magic of probability to work in your business - don’t leave it to chance.

CULL

Continually cull your deals/business to identify and “cut” the low profit/low margin business.  The traditional bell curve applies here and your bottom 10-20% profit product/service/customers should be eliminated.

STRATEGY

Employ a simple strategy:  keep doing  what works (is most profitable) and cut your losses (least profitable business) quickly to minimize your lowest margin deals.

Keep in mind, Peter Drucker tells us: “Effective Executives work on the right things.”  This is an important mantra to keep in mind as you look to enhance your company’s profitability.  Get additional insights from renowned business consultant and writer Peter Drucker.

Preparing for New Growth Opportunities in a 2010 Economy

By: Mike Semanco, President, Hennessey Capital

When we do see the light at the end of the proverbial tunnel, companies need to be prepared to handle the pent up demand which builds in challenging times.  Business owners have spent the last 18 months streamlining operations and cutting where possible.  Now is the time to begin planning for new opportunities so that when they arrive at your doorstep, you can welcome them in versus turning them away.  There are two critical needs which small business leaders are concerned about- access to capital and talent attraction. 

All signs indicate that credit markets will remain tight throughout 2010 so entrepreneurs need to be prepared to consider multiple sources that can work in tandem to meet their funding needs.  This means your working capital lender will probably not handle your real estate loan or equipment loan.  It may also mean that the cost of capital may be higher than in the past but with new opportunities in hand; the cost of saying “no” will be greater than the new cost of capital.  In regards to talent, the key will be finding individuals with the right skill set.  Candidates will need to be multi-dimensional and be required to take on new projects outside their comfort zone.  Companies will want to maximize their hires and accept the fact that overstaffed businesses are a thing of the past.  Consult with your professional advisors to get the most out of new opportunities.  Survivors will thrive if they are prepared.

A look at the annual Commercial Finance Association conference

By: Jeff Wright, Senior Vice President, Hennessey Capital

 

I recently attended the CFA Annual Conference held in Las Vegas. The theme throughout the conference was “Opportunities. With the current lending environment being what it is and access to capital tougher to acquire, plenty of opportunities exist for asset based lenders to help both small and mid-sized companies finance their working capital needs.

 

The event was highlighted by the key note speaker, Condoleezza Rice, sharing her experiences as the Secretary of State. She stressed that free trade is critical and that the U.S will be led out of the recession by the private sector investment and their willingness to take risk. Ron Shapiro, author of “Power of Nice” discussed how to be prepared. His eight-step methodical approach to being prepared and out performing the competition is

1. Understand your objectives
2. Plan with precedents
3. Know of alternatives
4. Define the interests
5.  Set your strategy
6. Do a timeline
7. Pick your team
8. Write a script

SBA Lending: Down But Not Out

Although SBA lending is down sharply in 2009 compared to 2008, the movement of new activity as of late, is a positive sign of good things to come.  Even a slight increase in activity will give entrepreneurs some level of hope that a bigger credit thaw will happen in 2010.  In the meantime, entrepreneurs need to be creative and think outside the bank box for financing solutions.  Asset-based lending, factoring, PO financing and equipment leasing will continue to be viable solutions to today’s financing challenges.

Key Steps To Improving Your Collections Process: Podcast Episode 6

The most important part of the sales cycle is getting paid.If your company is not being paid for the product or service you are providing, you’re losing money on the work.

In this episode of Capital Conversations we take a look at how to make the collections process easier, how to overcome obstacles, and how to anticipate collection issues and recognize red flags to avoid problems in the first place.

Join us for a  chat with Candi Pavliscak, the Chief Credit Officer here at Hennessey Capital, to get the inside track on what you need to do as a business to ensure full and timely payment..

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4 Things Small Business Investors Are Looking For

Whether you are already in business and searching for additional capital and/or a new finance parter, or you are considering embarking on a new entrepreneurial adventure, there are some key criteria investors will consider:

1. A business plan that describes the market opportunity. The value the the business will deliver and its acceptance in the marketplace must be clear. In short, there must be a compelling reason the business exists. NOTE: An executive summary is key. Most investors do not want to see, nor will they take the time to review a 50-page marketing plan.
2. A capable entrepreneur. Since their money will be in your hands, the entrepreneur must convince the investor/lender of his or her competence, commitment and integrty. You are the business.
3. A realistic financial plan. You need to know how much capital you will need, when you will need it and how it will be deployed in executing the business plan. Sure, $1 million sounds great to any business owner, but is that really your cash need and how to plan to use it?
4. An exit strategy. How and when will the investors get their money back and what is the expected return on their investment?

So your customer needs a rush order?

There are a variety of red flags that can signal a potential problem with payment and/or collections from your customer. Beware: repeated rush order requests is one of those red flags. A sudden need for a “rush order” from your client might signal cash flow issues on their end. This might indicate that your customer has not planned accordingly for work flow. It could also mean they are short on cash and need to expedite delivery of a good or service, to speed up their payment and resolve a cash bind. If an unexpected “rush order” request is made, don’t be afraid to ask questions of your customer, including why the rush order is needed. You may also want to ask “What happened during the production cycle to cause this sudden need?” “Do you anticipate additional rush orders in the future and why?” The answers to these questions may signal there are troubles ahead. Keep in mind a one-time request doesn’t necessarily indicate a problem, but if you receive repeated requests from the same customer, you might want to think twice.

Confidence in Michigan: It Still Exists

Mike Semanco, President & COO of Hennessey Capital, is featured as the guest blogger on Michigan Positive today. Michigan Positive is dedicated sharing positive local news. Read the blog

What Businesses are Doing to Cut Costs

Cost cutting is a fact of life for many entrepreneurs in today’s economic climate and can be part of a strategy to manage cash flow. However, identifying ways to curb spending doesn’t have to be as painful as it seems. This Kiplinger’s article focuses on how entrepreneurs are cutting costs big and small.

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