Category Archives: Business Financing

What Percent of Small Business Owners Manage Cash Flow?

cash-ball-chain-bigstock-5041553 (1)I’m fascinated by the numbers Denise O’Berry turns up in her post Use Metrics To Manage Cash Flow – Small Business Expert Denise O’Berry. She quotes results of a survey sponsored by the American Institute of CPAs, which surveyed 500 owners of businesses averaging less than 10 employees and less than $2 million in revenues.

According to this, the biggest worry of small business owners, is (drumroll):

The number one issue facing small business is ensuring adequate cash flow from operations, according to 83% of survey respondents.

That’s Denise quoting Bill Reeb, CPA, surprising nobody. It is sort of like saying the number one issue in health is breathing.

(Of course, this is the AICPA asking … do you think (I’m just asking, that’s all) the results might have been different if the survey were taken by, say, the American Marketing Association? That increasing sales might have shown up as the top worry? That idea intrigues me. I’m just not a big fan of facts via surveys.) 

But this gets even more interesting, as Denise adds this:

Driving this issue is the fact that 51% of those surveyed say they don’t use a cash flow budget or forecasts to help manage their business and 32% say they don’t have specific metrics in place to monitor performance on a daily or weekly basis. And only 17% agreed that daily or weekly metrics are as important to them as their financial statements.

I commented on Denise’s post, wondering whether there might be a relationship between the roughly half of business owners who don’t plan and manage their cash flow and businesses whose normal operations don’t involve the cash-flow killers, sales on credit or product inventory. Sales on credit are not credit card sales, but rather business-to-business sales in which product or service is delivered to a business along with an invoice that will be paid later. That relates to collection days and accounts receivable. And product inventory means working capital is tied up in building and holding inventory, which separates the cash flow from the normal sales less cost of sales flow shown in a profit and loss statement.

I’ll tell you what taught me to watch cash flow, always, and very carefully: the lack of it. It wasn’t two years at business school; it was a growth spurt (sales doubled) that sucked up all the cash and left me looking for a second and third mortgage to keep the business going. That’s something you don’t forget.

 

 

Reality Check on Crowdfunding

I’m seeing more and more marketing showing up about so-called crowd funding these days. Sorry, but no. Not yet. Reports of crowdfunding in the U.S. are, as of today, just wishful thinking.

That is, to be sure, unless you play with definitions. For example, if you call KickStarter crowdfunding, then yes, Kickstarter is a great source of prepaid sales and donations, great to validate sales, and it’s healthy and growing. And Kiva too, is an excellent source of small loans for startups. However, much as I like both, neither of those is crowdfunding. Crowdfunding is supposed to mean lots of people each buying small shares of a startup or small business to fund it. Crowdfunding is about equity. People who contribute their money in crowdfunding get ownership in the business. Wikipedia Crowdfunding

And that, sadly, is not happening in the U.S. today. Yes, as the Wikipedia definition here suggests, the JOBS act of 2012 was supposed to open the door to crowdfunding; but it didn’t. What was supposed to happen was the Securities and Exchange Commission (SEC) was supposed to publish regulations to open up startup investing to more people investing smaller amounts without as many restrictions as before. And it didn’t.

The angel investment group I’m a member of, the Willamette Angel Conference in Eugene and Corvallis, OR, just finished its 2014 investment in a startup. Despite the promise of the 2012 law and the celebrations that followed, angel investing is now regulated and restricted even tighter than it was before. Our group joined six other angel investment groups in our state to figure out how to implement the regulations published last year. And the result: tighter controls, not looser.

Since our group started in 2009, we were always limited to was the SEC calls accredited investors. We always had to be careful not to advertise our meetings or recruit members openly, meaning that we could only recruit specific people who we had good reason to believe met the SEC qualifications.

Specifically, how is it tighter? This year, despite the myth of crowdfunding, we had to be much more careful than before. Our investment is coordinated with a local event to highlight the availability of angel investment in our region. In all past years, we had five finalist startups presenting their pitch to an audience of 200 or so local people interested in startups. The audience included the 35 or so member angel investors, of course. This year, however, we couldn’t have our finalist startups share their full pitch with the audience because the vague SEC regulations led some attorneys to worry that we’d be hurting the startups by making them guilty of a general solicitation.

To be honest, I’m not that anxious to see real crowdfunding happening. I’m not at all sure it will be the boon to startups we all think. Given that spammers are still making money by promising to enlarge body parts, people are still making some dumb choices on how they spend their money over the web. All we need is a well-publicized fraud to lead public opinion on crowdfunding, and step by step things will get worse, not better. Or so I fear.

But for now, at least: No, there is no crowdfunding going on in the U.S. Angel investment is still restricted to accredited investors only.

 

What’s the Difference Between Angel Investor and VC?

I see this confusion a lot: People use the terms “venture capital,” “venture capitalist,” and “VC” to apply to any outsider investing in a startup. However, it’s really useful to draw some distinctions in this area, between three important classifications: venture capital, angel investors, and anybody else. 

angel investment VC

Venture capital means big-money investment managed by professional investors spending other people’s money. The money comes from extremely wealthy people, insurance companies, university endowments, big corporations, etc. Think of Kleinert Perkins et al., First Round, Softbank, Oak, etc. Venture capital usually comes in millions of dollars. 

Angel investment is people who are accredited investors as defined by the U.S. Securities and Exchange Commision (SEC), which sets wealth criteria:

they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.

Those rules were going to relax with the Jobs Act of 2012, which people would open the gate to crowdfunding, but hasn’t yet.

The most important distinctions between angels and VCS are: 

  1. Angels invest their own money; VCs invest other people’s money. 
  2. Angel investment is much more likely to be in hundreds of thousands than in millions of dollars. 

Aside from those two distinctions, it is generally true that VCs will be more rigorous in studying (called “due diligence”) the investment before they make it. Both angels and VCs will have similar processes for looking at summaries, then pitches, then business plans. 

Anything else is called “friends and family,” which really means “not VC” and “not angel investment.” The laws on investment allow a few so-called friends and family, but there are limits. The intention of all the regulation in this area is to prevent the kind of stock frauds that were rampant during the great depression. 

Crowdfunding is Being Oversold

I think so-called “crowdfunding” is being oversold. Many people seem to think it’s going to mean a lot new investment money for U.S. startups. I don’t think so. Not yet. Maybe never. 

crowdfunding Google search

Crowdfunding, unfortunately, has become one of those bucket terms, that mean different things to different people. I use the term for ease of restrictions on small business and startup investments so more people can invest smaller amounts. And invest means buy shares of ownership. It’s risk investment. I really like KickStarter and the like, platforms startups can use to get financing help in return for prizes, advance purchases, and donations. But that’s not what I’m writing about here. It’s not risk investment. 

Maybe that’s why there is so much action on the web. Lots of offers. A google search (my illustration here) would indicate crowdfunding is everywhere. Half a million hits. 

The JOBs act of 2012 talked about it. Crowdfunding advocates celebrated., but hasn’t changed much. According to reports in VentureBeat and elsewhere, the most recent SEC ruling has as much bad news as good news for startups and angel investors. And some say the latest regulations make things worse, not better. The best summary I’ve seen of that negative view is Naval Ravikant’s letter to the SEC last month. Naval is the founder of Angellist. I posted my view on that a few weeks ago on Huffington Post, talking about some good news and some bad. And Alan McGlade has a good analysis posted as Crowdfunding will Flourish Regardless of What the SEC Does in Forbes.com yesterday. 

Action point? Conclusion? If you’re one of those people thinking crowdfunding is coming soon, don’t hold your breath. 

Willamette Angel Conference Invests More than $450K

Yesterday’s Willamette Angel Conference (WAC) 2013 event invested more than $465,000 in four Oregon startups, highlighted by more than $250,000 in Portland-based Sonivate, which has developed a fingertip-mounted ultrasound probe that enables imaging while leaving both hands free to do work with simultaneous tactile feedback. 

Willamette Angel Conference

Three other startups got WAC investment at the event: Amorphyx, a Corvallis company with innovative technology that reduces manufacturing costs and increasing the brightness, speed and efficiency of LCD and flexible displays; DesignMedix, a Portland company addressing the rapid rise in drug resistance in multiple diseases; and Green Zebra Grocery, an innovative chain of small healthy-food grocery and convenience stores, based in Portland.

The event concludes three months of study (called “due diligence”) by the group of more than 30 angel investors, about half and half from the Oregon university towns Corvallis and Eugene. This year’s event was held on campus at Oregon State University. The event alternates between Corvallis and Eugene. I’ve been a member since it started in 2009. 

Earlier in the day, keynote speaker Diane Fraiman of Voyager Capital noted that Oregon companies have received more than $600 million in venture capital funding, and challenged us, the WAC members, to continue investing in our area. That might have influenced us — our deliberations are strictly confidential, so I’m not saying — that afternoon as we added more than $200,000 to the investment amount originally planned that morning. That also doubled our previous year’s investment, and — we think — made this WAC event the largest investment of any of the Oregon angel investment groups. 

Hallspot, a Eugene company that started on campus at the University of Oregon, was awarded a $2,500 Palo Alto Software prize for the best concept-stage company. 

Q&A: I Need a Loan to Fill Orders

This is another question I received via the ask-me form on my website:

I have master service agreements with [omitted for confidentiality] in the midwest.  I am also working on an agreement with a company in South America.  I have a great reputation with upper management and they want to use my services.  The only problem I find is carrying payroll until the invoices start coming in, in this case they are net 60.  I literally have facilities telling me here are multimillion dollar contracts, but I cannot afford the payroll.  Any suggestions?

Yes, I do have suggestions. And the problem that solutions depend a lot on who you are, what resources you have, and your past history. Still, here’s my offer of help: 

cash flow working capital Shutterstock pot of gold

  1. What you’re running up against is banking law that prevents banks from taking risks with depositors’ money. Banks can loan money for a business plan or a possibility. 
  2. The SBA (small business administration) can guarantee up to 70% of the risk so banks can loan you that money without violating the law. You need to submit paperwork, a business plan, and an application. More than 1,000 banks work with the SBA, so there is probably one near you. Ask the small business banks in your area. The deal is done by the bank, but guaranteed by the SBA.
  3. What most entrepreneurs do, if they have the resources, and they can deal with the risk, is borrow off of existing assets. For example, my wife and I had a lien on our house for years to support a credit line for Palo Alto Software. We didn’t like it. It was risky. But we did it, and it worked out, because the company survived and grew. But you can lose your house or whatever assets you pledge, so be very careful. Never bet something you can’t afford to lose. And business is betting. It’s not something I haven’t done myself, but it’s not something I recommend comfortably.
  4. Before Palo Alto Software, when I was still doing business plan consulting, I found a local non-bank financial company to loan me against invoices from a major local corporation. They charged high interest but they advanced me 80% of every invoice and they didn’t take the risk because they had a hold on my bank account and if an invoice hadn’t had been paid (that, thank goodness, never happened) they would have subtracted the amount from my bank account. Google credit line on receivables to see what comes up. And the difference between that situation and yours is I was getting advances on invoices for finished work. 
  5. Some people find investors to advance them money for a non-bankable situation in exchange for a high interest rate, a small share of ownership (called an equity kicker), and drastic guarantees that give them your company if you can’t pay the loan. All of the terms are negotiable. Search the web for “angel lending” and see what you come up with. Ask your local small business development center (SBDC), chamber of commerce, or business school if they have any leads. There is no paved road for this kind of transaction, so you have to beat the bushes. This is hard to feet, and a lot will depend on who you are, your resources, your business plan, and your past history. It’s asking people to bet on your future. 

(image: shutter stock photo)

Some Hard Advice on Working for Sweat Equity

I just posted Why Sweat Equity Often Stinks on the gust.com blog for startups and angel investors. It’s quite cynical, I’m afraid, but it also reflects what I’ve seen for years.

istockphoto ball and chain

Sweat equity is a dangerous concept. It’s way too easy to misinterpret and misunderstand. And whether it’s intended to be or not, it’s way too often used as a lure to get people to work for less than they are worth. 

The good side of sweat equity is what startup founders earn by building their business. You create, work, develop, grow … and your business is worth more than it was. And you own the upside. 

The bad side of sweat equity is that it’s so often just thinly-disguised exploitation. 

Here’s my advice: if you’re getting paid less than your fair market value in a startup because you’re working for so-called sweat equity, understand that …

  • unless the equity deal is in writing somewhere, 
  • and defined with real numbers including percent of ownership, shares and total shares outstanding,
  • and real conditions such as vesting, and work expectations, what happens if you want to sell out and quit, what happens if they want to buy you out, and what about termination …

… then it’s probably not worth as much as you think. 

And what makes it worse, quite often, is that the people making the empty promises don’t intend to exploit you. They mean it when they say it, early on. But then the money starts flowing, investors come in, the board changes, and promises can’t be kept. Unforeseen circumstances are very common. So what you get is an apology. 

Some more advice: when I say get it in writing, I don’t mean a formal legal contract; at least, not necessarily. I’m a great believer in simple English signed by both parties, laying out what they think they’ve agreed to. Warning: I’m not an attorney. The attorneys are often valuable for pointing out all the issues to consider. But the big contracts usually end up in mediation anyway. Just make sure you have something written to remind everybody of what was promised. 

(Image: istockphoto.com)

Quiz: Can a Business Fail While Profitable?

I’ve posted here before on the problem of survivor bias and how hard it is to identify causes of business failure. Where do you find the people who failed? Do they tell you the truth? Do they even know. 

bills confusion istockphoto

In Are These Three Critical Threats Weeks Away From Sinking Your Business? on tweakyourbiz.com, post author Janine Gilmour interviewed 300 people about their business failure. That seems like a good start. A good interview might be able to get into real causes. 

The first cause: profits aren’t cash. Janine writes, specifically: 

About 60% of the businesses I reviewed were profitable when they failed, but they were upside down in terms of cash flow. 

Fascinating: “about 60%” of these failed businesses were profitable when they went under. I’d read “more than 40%” in this context sometime in the 1990s. 

Conclusion: watch your cash flow. Those of you with business-to-business sales are particularly vulnerable because businesses normally pay later, not now. Sales in those cases aren’t necessarily money until later, sometimes months later, sometimes never. And those of you who manage products, with inventory, are also particularly vulnerable. You typically spend the money way ahead of making the sale; and sometimes you spend the money without ever making the sale. 

Be careful. Profits aren’t cash. And profitable companies fail for lack of cash. 

(Image: istockphoto.com)