Revisiting Your Business Plan

By Jeff Wright, Senior Vice President, Hennessey Capital

Every business, no matter what size, should have a business plan to be used by management as a tool to guide the company in achieving its corporate goals. It should describe the company’s strength, weaknesses, opportunities and threats and be accompanied by supporting assumptions. Over time, however, internal and external factors influence operating results. The business plan must be flexible enough to be and revised often to meet ever changing market conditions.

Do you have new competition? Are existing competitors doing anything differently that requires you to revisit how you do business? What are the needs of your existing or potential customers? Is sales volume increasing or decreasing due to economic or industry conditions? By reviewing these factors, management can implement changes to address the need to add personnel, buy equipment, improve technology, expand or move to a new facility, and finance the expected growth or cut personnel or overhead expenses, reduce inventory levels, sell idle equipment. It may require negotiating price increases with customers or finding alternative suppliers to maintain margins necessary to operate profitably. An action plan must be in place to address revenue and expense concerns.

Many struggling companies react too slowly to their changing environment. Reviewing actual operating results versus planned performance provides management valuable feedback. Unfavorable variances must be reviewed and changes implemented. Ask yourself what occurred, what are you going to do, and how are you going to do it will help get the company back on track? It is important be share the information with top management and involve trusted advisors, i.e. CPA or business consultant? The changes must be clearly defined so that everybody in the organization knows their responsibilities to make the plan a reality.

The business plan is a living document which should be continuously revised as market conditions and behavior change. It should include revised goals that take the company to the next level of growth and measured against expected results.

Moving from Prototype to Production

By Mike Semanco, President, Hennessey Capital

 

In our world of lending money to small and midsized companies for working capital purposes, we get calls all the time about how to commercialize a concept or product.  Most of the time, these conversations are very difficult.  Entrepreneur’s are passionate about their product and know it inside and out.  The challenge comes in the form of addressing the following unknowns:

1) is there a market?
2) how is the initial launch funded?
3) how do you scale the business if the product takes off?
 

Setting the stage to address the above questions was a recent dinner conversation with a budding entrepreneur.  She developed a clothing product for both kids and adults to use in the winter months.  Even though there are similar products in the market, hers has a few twists which makes it very unique.  I proceed to ask the questions stated above and hear the following. 

1) Of course there is a market, I gave it to friends and family to try out and they loved it. I think it could be a big hit in the retail market.

2) I hear commercials all the time from banks that they will lend money to small businesses so I will ask my bank for the money.

3)  I have no idea.

Interesting answers.  We proceed with dinner and I put on my coaching hat and do my best.

A market test with family and friends is a good start but if you truly want to build a business and not just a hobby, don’t think small.  First, have you determined if the product can be patented in order to protect your idea before you begin approaching specialty retailers and distributors?  As for financing the initial launch, I am sure sweat equity was poured into making the first few hundred products.  Since the business has been no sales outside of friends and family, the first round of financing will come from the entrepreneur’s savings account, possibly from family members or friends of friends who believe in the idea enough to take the risk.  Banks like to lend money to companies with a track record, typically 2 years or more and a history of some earnings.  Lenders who specialize in purchase order financing and receivable financing may be able to help but they will require the business to have sales or a purchase order from a reputable buyer. 

What happens if the product does take off?  Has the business owner considered which suppliers to approach for raw material as well as manufacturing, packaging and distribution sources? 

The process of moving from prototype to production can be a daunting task.  A task that an entrepreneur should not take on alone.  Remember the business plan that was written a few years back when you thought it was not needed.  Time to dust it off and use it as a framework to tackle the next stage in your business.  Your CPA, attorney, friends and fellow business owners should be leveraged to help you think through the details of moving from prototype to production.  This is an exciting time in an entrepreneur’s life but it can also be one of the most stressful.     

Accessing Capital When Traditional Credit is Constrained

By Mike Semanco, President, Hennessey Capital

What is a borrower to do?  Although the traditional credit market is showing signs of life, businesses are still facing a challenging credit market.  Hard asset (equipment and real estate) collateral values have dropped dramatically so refinancing of loans requires more cash in each deal.  Younger companies still require a track record, typically 2 years, to qualify for traditional lending.  Because of constrained credit conditions, companies have to think outside the traditional box to finance their business. 

 

In our business, we have seen companies negotiate preferred payment terms with their customers.  Down payments, progress payments and shortened A/R terms are being pursued as viable alternatives.  Companies who have normally written off the notion of factoring receivables are now using it as a standalone financing product or using it in addition to current bank lines to fund incremental growth.  ABL lines of credit are now more mainstream since most ABL lenders are focused on collateral and not solely on cash flow. 

 

In addition to working capital alternatives, companies are looking at micro loan programs and seed funds to help with growth financing.  These loans are usually under $50,000 but can make a difference to a young, growing business.  State funded programs are constrained with lack of cash but could also be a source for creative financing.  PO Financing for distribution businesses remain a good source of capital but project financing for manufacturing companies is non-existent in the traditional market. 

 

Young companies are traditionally undercapitalized.  In a tightened credit market, this creates more stress when new opportunities become available.  Communication is always the key.  Ask your banker if options exist outside their world.  Do be afraid to ask customers what may be available.  If customers like your product or service, they may be open to concessions.  Ask your professional advisors to make introductions to funding sources.  They should be aware of various options and point you in new directions. 

 

Credit is available.  You may just need to look outside the traditional box to find it.

Payroll Funding: Avoiding the Cash Crunch

By Joe Romeo, Senior Business Development Representative, Hennessey Capital

Are you pulling your hair out each time Payroll Check Date approaches?   Maybe a review of your working capital resources is in order.

Many companies face a recurring cash crunch when it’s time to pay their most valuable assets, their employees. Next to the fixed costs associated with buying inventory, building products or creating deliverable services, making payroll is often one of the biggest consumers of cash.

 

Typical scenario:  Your business is going pretty well resulting in a good amount of A/R, but your customers continue to defer payment to or beyond terms.   These are some of your best customers so you are caught in the delicate trap of “collections versus managing the customer relationship.”

 

There is a sound and simple solution for this scenario – working capital financing.   Services like factoring can give you access to immediate cash to provide gap financing and reducing the stress around meeting payroll.

 

Factoring advances of up to 85% of your A/R immediately, when you invoice your customers giving you the working capital you need to run your business and make payroll.  As a bonus, factoring is completely discretionary - you utilize it when you need it.

 

While we are on the subject of payroll, there are some other things you should consider.

 

Paying your employees and satisfying your payroll tax requirements are an essential part of running a successful business.  Many organizations outsource this service.  Outsourcing will save time and expense by not having to perform this work in-house, allowing the business owner to focus on running the business and managing the bottom line. 

 

You can also combine a factoring facility with Hennessey Capital Payroll Solutions – a single point to handle all your human capital management needs.

 

Steering clear of the many pitfalls associated with the regulations involved with payroll is often difficult.  Outsourcing this function to a third party can be an effective remedy. Solutions can include general payroll administration as well as reporting and depositing your taxes with the proper State/Federal authorities. 

 

This involves:

• Accurately calculating and submitting payroll taxes to the state and federal agencies.
• Selecting the proper options available to pay employees and submit payroll.
• Making sure data that is stored or transmitted electronically is secure.
• Ensuring your data is protected from unexpected circumstance such as a fire, hurricane, snow storm, flood or power outage, etc. Optimal disaster recovery plans continuously back up all client data in different locations, so that even in the event of an unforeseen circumstance (weather-related delays, power outages, etc.) all clients’, employees’ and any corporate sensitive information is protected and secure.

As your business grows, you will likely need to hire more employees and add staff to manage those employees. As a company’s employee size increases, more attention needs to be given to Human Capital Management issues. 

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

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.

Creating Strategic Partnerships to Build Your Business

By Joe Romeo, Senior Business Development Rep., Hennessey Capital

 

Creating partnerships can help build your business and connect you to new people and markets. The right strategic alliances can strengthen the breadth of your company through association with other related industry specialists.

 

This brands your company as more well-rounded to your client base and builds deeper bonds and support from your business partners while growing stronger inter-relationships.  These bonds can last for years, paying dividends along the way.

 

Often these partnerships become valuable referral connections for your existing clients and result in the most valuable return you can get from any client as you help them in “other areas” outside the scope of your expertise. Customers recognize and appreciate your assistance has no direct self-serving interest.

 

To get started, it’s important to find partner companies that operate in your prospects’ circle.  There are two essential components for your best alliance partnerships:  the actual companies and the individuals representing those companies.

 

The right company is any non-competing company that is well respected and interacts with key decision-makers, influencers, and your prospect customers.   It is particularly beneficial to reach out to  trusted advisors, including bankers, CPAs, lawyers and business consultants whom your prospects look to for guidance.

 

Other good candidates might be third party connections like state, local and federal agencies or associations who help businesses find the resources they need.

 

The best fit for any business will be a partner with similar values and like cultures.  The business can be at the opposite end of the product or service spectrum, but should operate with the same primary principles to yield the quickest results and easiest collaborations.

 

Equally important is the right ambassador, who should be a “rain-maker,” not a resource waster.  The individual should be an effective executive who works on the right things, is efficient, capable and “connected.” 

 

Approach:  Work to develop relationships in a complementary, collaborative manner.  This requires that you put the partner’s interests ahead of your own.  A valuable adage is “you can best get what you need by giving others what they want.”

 

In this stage, seek to understand the partner’s business and learn where they fit in/complement to your company. It is also critical to be cognizant of their key objectives. This will add value to your relationship and lead to a mutually beneficial partnership.

 

Keep in mind that everyone’s favorite station is WII-FM (What’s In It For Me) and build your approach accordingly. 

 

Team with partners in joint presentations, white papers, event exhibits or other such marketing channels to maximize your exposure and partnership opportunities. Your affiliation with key companies will increase your own company’s visibility and help you gain traction and the benefits of associating with recognized, expert partners.  This will lead to great network connections and the ROI will be measurable.  

 

BENEFIT:

Some of your partners will turn into future clients or you may need their services some day and enjoy the preferred customer treatment.

 

More traditional returns include the warm introductions you will get as your alliance partners act as trusted advisors for their clients and you are favored with the pole position as the result.

 

The ability to share ideas and get a diverse viewpoint or opinion can be an extremely valuable benefit from your strategic partners.  If you look at CEO business coaching you will see that they purposely intermix CEOs from different businesses for this very benefit.  Often a creative perspective or the view from some distant, unrelated business field will lead to a different outcome. 

 

Invest loyally with partners  before you look to make any withdrawals. This is an ongoing process, not a one-time commitment. Maintain your investment and stay on your partner’s radar. 

 

A useful resource is www.networlding.com and Melissa Giovagnoli

 

When to Consider Hiring a Temporary CFO

By: Jeff Wright, Senior Vice President, Hennessey Capital

In my 27 years of asset-based lending and commercial loan workout experience, I have consulted with many small businesses that know how to manufacture a product but have difficulty managing the financial aspect of their business. This includes companies that are experiencing significant challenges as well as growth-oriented companies. Many rely on trusted advisors like their CPA, banker, or attorney to provide assistance on financial matters affecting their business. However, these key advisors are often handling many clients, or may not have experience in your industry to provide targeted guidance on some of the complexities of the situation.  When this is the case, a temporary CFO can provide invaluable insight and expertise in evaluating and managing your business finances. Owners can draw on the CFO’s experience to fill skills sets management does not possess. This frees up management to address operational issues and marketing initiatives. Owners, however, must be willing to give up some control.

It goes without saying that small businesses need strong financial support in place. A temporary CFO with experience in the industry can provide invaluable support in the strategic planning, budgeting, and cost control for a small business as they grow. Their objective opinion can be helpful when considering taking on a new project, investing in new equipment, or evaluating overhead expense to improve cash flow. A temporary CFO’s experience can also be used as a resource when discussing financing options with a lender or suppliers, and in dealing with customers. They can also implement financial systems to monitor the financial performance of the company and provide timely reporting to help management make educated business decisions.

The primary role of a temporary CFO is to manage the cash of the business. Ownership can draw on their skills on an as-needed-basis without expending significant dollars usually required for a full time CFO.  If you could use additional assistance in managing your financial operations and benefit from an outside perspective, it may be time to consider a temporary CFO for your business.

Credit Shortage Threatens Supplier Growth

Detroit Free Press writer Susan Tompor sheds light on the challenges that lie ahead for small to medium sizes businesses, particularly in the manufacturing sector. As analysts proclaim that the recession is over, how do small manufacturing shops access the capital they need to re-set production and re-hire workers? Read the article

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