Journey of a Serial Entrepreneur

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How to get from where you are to where you want to be

5 Tips for Better Cash Flows

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” Warren Buffet

Mismanagement of cash flows is a leading cause of failure among businesses. Business owners do not realize how critical it is to budget and plan cash flows from the beginning of the venture and most times a liquidity crisis catches them completely off guard. This often leads to irrational last minute maneuvering which amplifies the problems at hand. To ensure smooth cash flow cycles we have to ensure that we are extremely vigilant of the financial health of our business from the onset. This may appear to be over simplistic advice, however the truth of the matter is, not enough emphasis is given to this function. The excitement lies in closing those million dollar deals and creating fancy marketing campaigns. Reality of the matter is that if we do not have the financial structure in place to support these deals and campaigns we will soon find ourselves in a lot of trouble. Listed below are a couple of tips which have helped me manage cash flows better.

1. Inflows & Outflows: From the onset identify your inflows and outflows. If you have adequate historic data, map out how long on average it takes to receive cash after providing your product/service. Next carefully map out all your expenses, and dates when they need to be paid. Next we have to minimize the time between the two flows. Usually inflows are much slower than expected and this needs to be compensated by negotiating favorable agreements with suppliers, stocking less and invoicing your customers at regular intervals. To learn more about the importance of mapping out inflows and outflows please click here.

2. Cost Management: Cost cuts do not necessarily require a business to layoff staff or drastically cut marketing expenditure. I take the approach of measuring cost effectiveness in terms of every product or service that the business is providing. The goal must be to provide the product or service at a lower cost than the competition. Identify all direct costs, incremental costs of increasing volume, fixed costs and overall cost structures in comparision to the competition. This does not necessarily have to be reflected in lower price points. As we widen the cost comparison between competitors, we are able to hold a much stronger position in the overall industry. To learn about each cost in greater detail please click here.

3. Marketing: Cutting marketing expenses to conserve cash is often not the most optimal solution for solving one’s cash flow problems. Assessing marketing strategies and tactics needs to be practiced on a regular basis. It is not wise to make marketing expenses cyclical with business cycles. With optimized marketing campaigns and strategies in place, a business has greater chances of avoiding these cash gluts as business is constantly being generated at a healthy level. To learn more about marketing strategies during a liquidity crunch please click here.

4. Technology: Gone are the days of keeping track of your business expenses on excel sheets. As a business owner today we should use one of the many accounting packages available to make sure we always have a financial snapshot of the health of our business. This will provide us with the ability to quickly identify trends and potential liquidity crunches before they take place. Please click here to read five questions you need to answer before selecting which accounting package is right for you.

5. Last Resort Measures: There will be times however when a liquidity crisis will hit . It is important that when it does we remain calm and evaluate the options we have instead of making rash decisions. The options I have used during these period of times are, discounting, credit cards, loans from friends and family, invoice factoring and secured credit lines. All of these options need to be used when all other alternatives have been exhausted. Attention needs to given to ensure that all documentation has been read carefully and that one is fully aware of the pro’s and con’s of each measure. To learn more about each measure please click here.

Those who have experienced liquidity crunches realize how stressful and frustrating these cycles are. They can result in partners leaving the business, unpleasantness at the office and even eventual closure of the business. Using some of the tips provided above we can avert a number of these situations. It comes down to better financial planning and catering for unforseen events. We have to be prepared when such situations arise and must deal with them face on. There is no need to dig ourselves deeper into a hole by using temporary fixes. If the business that you are running is repeatedly running into cash flow problems, do your best to re-engineer it from the ground up, or have the discipline to change boats.

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Getting out of a Cash Crunch

“When you’re in a pit, the first thing to do is to stop digging.” James Ellman

At some point of time or other most entrepreneurs go through a cash crunch period. These are stressful and frustrating times when the world seems to be falling apart around us and we have a limited set of options to get out of the mess. I have found that by following the tips provided earlier in this series we can reduce the probability of being stuck in a liquidity crisis substantially. However, there are times when even after having planned for every conceivable outcome there is a blind spot we missed out. The important thing to do at this point is not to panic. Cutting your marketing budget, laying off staff and hawking office equipment on ebay is not usually the answer. In a situation where we have exhausted options of negotiating extensions with suppliers and run out of excuses why we have not settled the rent, there are a couple of alternatives I have used. Listed below in order of my personal preference are:

1. Discounting: If we are in a quarter with a number of payments due I include a clause in outgoing invoices stating that if payment is made within x number of days there will be an x% discount. This creates monetary incentive for clients to pay up on time. If invoices have been pending for a while I give the same discount to the client stating they should pay the discounted bill or we would be forced into calling in collection agencies. Surprisingly I have had very good results using this method in speeding up payments causing strapped up cash.

2. Credit Cards: I personally do not advocate using this type of financing but when the situation calls for it, use it as an emergency backup. These can be either business applied credit cards or personal cards. Using the cash advance option, essential payments can be made. This will help tide through the business until payments are made by clients. Using this option for any other expenses other than these critical ones results in getting buried by ridiculously high interest payments. Instead of fueling growth for your business this stunts growth. Use it with caution

3. Loans from Friends & Family: If you are in desperate need of some bridging capital and need access to it quickly, going to friends and family is a valid option. I do not like mixing friends and family with business, but at times it is unavoidable. Make sure when you take the money there is an agreement with terms and conditions spelt out in black and white. Full disclosure must be made regarding the situation at hand as well as when you are expected to repay the loan. Conflicts tend to arise when inadequate information is given, this results in confusion and unrealistic expectations.

4. Invoice Factoring: For businesses with natural and steady flows of revenue, but prone to erratic payments, applying for these schemes through banks or specialist factoring companies is an option. These basically take into account your average business activity and streams of revenue, then provide you a credit line against it. This can free up much of your working capital and can boost growth. However read the fine print carefully. Sometimes these institutions limit who you can do business with, and can also force your clients to interact with them as far as payments are concerned. This reflects negatively on the business and does not convey a good image to your customers.

5. Secured Credit Lines: If one is expecting the next couple of quarters or year to be tight, taking out a secure credit line may be a good alternative to solve the liquidity crunch. The bank provides you with a line of credit which is usually secured against a particular asset. The asset is usually real estate which you or the business may own. The business is then able to borrow money against the asset conveniently. This is an option exercised by many entrepreneurs. However it takes time to setup, therefore one must plan for it well in advance and not when you are stuck in a liquidity crisis.

No one wants to be stuck in a liquidity crisis. We must do all we can to ensure the business does not slip into one. Keep your eyes on both the sale numbers and controlling expenses. When and if the situation becomes critical these last resort measures can provide significant relief in assisting you to get out of the mess. It is important to use these options wisely and to do thorough research on them before committing to any one of them.

Related Articles:

Raising Capital from Family & Friends

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Technology and Cash Flow Management

“What amount of value creation can be assigned to the efforts of management for a particular time period? That is the essence of accounting. Otherwise, it’s simply an appraisal process.” Charles W Mulford

Gone are the days of keeping track of your business expenses on excel sheets. Earlier on in my entrepreneurial journey we relied solely on excel sheets to manage accounts. However we were then introduced to Quickbooks, and it completely changed the way we viewed our accounts. With this software we were actually able to extrapolate a lot of data and zoom into key metrics by which we could monitor the growth of our business. Many business owners wait until they have an ‘established’ business before investing in standard accounting software. This is like wearing a helmet after you have experienced a fall. Undoubtedly experience is a great teacher and one should continue to learn from mistakes. There are however some precautions which should be taken beforehand, and getting software to manage your accounts is one of them.

There are many great accounting solutions available in the market today. These key questions need to be answered when selecting an accounting package:

1. What is your budget allocation for purchasing this software? (If a budget has not been allocated there are many free accounting solutions which one can find online)

2. Do you want the software to run locally on your computer or would you want web access to your data?

3. How many users will be using the software?

4. What is the primary purpose of purchasing the software? (Do you require a simple application which helps to track all of your incomes and expenses, or do you require one through which you can manage inventory, payroll, invoices etc)

5. What level of reporting will be required? (If one requires simple profit/loss, cash flow and balance sheet statements there are a lot of great packages out there. For more complex reporting, software like Quickbooks premier can generate detailed reports on sales report per employee and profitability per product)

Once these key questions have been answered, you will have a better idea for the sort of solution required and your search would have been made easier. When you have selected a software, assign someone or a group of people to continually update it to ensure access to the latest activity. This acts as a safeguard and protects over exposing the business to unnecessary risk as well as maximizing the opportunities currently in hand. I plan on creating a widget which will compile the answers to the questions above, and help provide a list of appropriate software or services. If anyone would like to help me out in creating it please let me know at blog (at) usmansheikh.net

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Cutting your Marketing Budget?

“Marketing is not an event, but a process . . . It has a beginning, a middle, but never an end, for it is a process. You improve it, perfect it, change it, even pause it. But you never stop it completely.” Jay Conrad Levinson

The quote above encapsulates the essence of this blog post. I don’t think anyone could have said it better. I am a fan of all Mr. Levinson’s work especially his book “Guerrilla Marketing”. In the book there is constant emphasis on marketing being a process which we cannot cut whenever things get tight. As I mentioned in my last post, costs need to be contained tightly if we are to reach our goal of attaining a positive cash flow. What I have noticed is that whenever things get tight, cash flow wise, many entrepreneurs tend to pull the plug on marketing expenses in an effort to control costs. This however leads to a decrease in new business development, which ultimately results in decreased revenues.

Cutting marketing expenses to conserve cash is often not the most optimal solution to solving one’s cash flow problems. Assessing marketing strategies and tactics needs to be practiced on a regular basis. For example we could be advertising our new virtual assistant services on the front page of a popular web portal. We have continued to run the ad for the last quarter but have barely broken even on our investment.  We find however that ads running with much greater ROI on a couple of niche blogs and portals relating to the GTD methodology. As a business owner we should assess these trends on a regular basis and change out strategies likewise. If we take the approach of cutting all web advertising, it is more like amputation instead of laser point surgery.

These budgets and control measures need to be adopted from the onset of your business venture. It is not wise to make marketing expenses cyclical with business cycles. With optimized marketing campaigns and strategies in place, a business has greater chances of avoiding these cash gluts as business is constantly being generated at a healthy level. If you are currently experiencing cash flow difficulties in your business, assess your marketing budget and find ways to optimize the cash available to you in order to maximize your ROI.

Related Posts:

Marketing Budgets & Controls

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How lean is your startup?

“Excess cost can be created by indirect factors that aren’t immediately apparent. You can attack these costs only by getting to the real heart of the problem, rather than just bashing away at the cost itself. The three biggest indirect cost generators are time, complexity, and poor quality.” Andrew Wileman

These days there is a lot of talk about shaving costs and becoming more capital efficient. With the credit markets the way they are, just about every venture capitalist has sent out doomsday emails telling their portfolio companies to brace themselves for tough times. I understand that market conditions are very bad, however what I fail to understand is why such emails are not sent out on a regular basis to portfolio companies. As companies become more adept at providing products and services there should be a natural downward trend in their costs. If such a trend is not becoming apparent the business needs to re-evaluate it’s position and figure out where it is leaking cash. From a cash flow perspective this is an extremely vital exercise. If costs are allowed to inflate without sufficient increase in revenue and benefits of economies of scale, the business is headed straight for trouble.

I take the approach of measuring cost effectiveness in terms of every product or service that the business is providing. The goal must be to provide the product or service at a lower cost than the competition. This does not necessarily have to be reflected in lower price points. As we widen the cost comparison between competitors, we are able to hold a much stronger position in the overall industry. Some questions that you can ask yourself to determine how lean your startup is, are:

1. What are the direct costs associated with providing the product or service? If you are selling used mobile phones through the internet for instance, then some of these costs would include; procurement expenses, hosting of a website, marketing campaigns for the website, and delivery costs to customers.

2. What is the incremental cost of producing one more unit or providing another service? Over time economies of scale should kick in and we should see a fall in the incremental cost. In today’s world, thanks to the internet the cost of delivering the same service to many customers has very little incremental cost. For instance if you set up a web service to provide an ability to create invoices, the architecture can be used to serve 1 or a 1000 customers. What needs to be identified is, when does one need to add more servers or optimize the architecture to handle more users.

3. What costs remain unchanged irrespective of volume of products and services provided? These are your fixed costs. One needs to find a level of products and services to ensure we break even. These costs must be contained in order to reach positive cash flows and profitability faster. Services such as Amazon’s s3 cloud computing services provide new web startups the ability to scale much faster and keep fixed operating costs at a minimum. Finds ways how you can reduce your fixed operating costs.

4. How does your cost structure compare against your competitors? This is often difficult to assess but it is possible to get a rough idea after doing some research regarding the competition’s processes. Once we can assess areas of advantage and disadvantage we can build on these segments respectively.

Cost cuts do not necessarily require a business to layoff staff or drastically cut marketing expenditure. If costs are inflated to begin with, these cuts need to take place whether we are in a boom cycle or a recession cycle. The focus needs to be placed on ensuring we optimize reduction of overhead counts, at the same time not letting our growth stagnate. An equilibirum needs to be found, once we have thoroughly assessed the business we will be able to reach such a level.

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Inflows and Outflows

“Eventually everything shows up in earnings and cash flow, but it shows up late.” David Larcker

A fundamental premise of business is that when your inflow exceeds your outflow, the business will make a profit. In principle that is how things work, but there is a big difference between profit and cash flow. One could have a positive cash flow yet be running at a loss. As an entrepreneur we have to first make sure we become cash flow positive and then ensure that we make a profit doing so. Going for big multi-million dollar deals with huge margins is very exciting. However when we pursue such types of deals, we get stuck with the hidden costs associated with such deals fairly early on. They include major revisions, slower decision making, slower payment cycles and the possibility of losing the deal at the last minute. I have learned this lesson the hard way and have since become a true believer in singles and doubles (smaller deals) rather than going for the home run.

The cash flow section of the business plan is a critical component and is often given great importance and emphasis by investors when evaluating a business. This section basically involves outlining both the inflow and outflow from your business activities. Quite simply, these are revenue and interest earned on investment subtracted by the costs associated with running the business. If you have been having cash flow problems in your business and have not created a cash flow projection sheet, I recommend you do so immediately by identifying your inflows and outflows. However the real problem is that inflows are usually much slower to come in than your outflows. This is when the business begins to run out of cash and is put under a lot of pressure. There are a couple of tips which can help ease this problem:

1. Invoice at regular intervals and have a strict follow-up policy. Instead of billing the client for your services at one go, bill them in smaller increments regularly to ensure a steady stream of cash. Have built-in policies to ensure that customers who delay payments are downgraded for all future deals and are constantly reminded via all means about outstanding payments.

2. Extend supplier credit for as long as you possibly can. These are usually large payments that put an enormous strain on the business cash flow position. Negotiating extended supplier credit terms can be very tricky. If you have guaranteed orders which are going to be given to the supplier in the near future I seldom use those to gain more leverage during the negotiation process.

3. Stock less of your product if meeting supplier payments will be an issue. Converting idle inventory to cash usually takes quite a long time and panic offloading will result in large losses if they are unloaded below cost.

Managing inflows and outflows is a very challenging. However, missteps to manage them efficiently ultimately leads to the closure of the business. Therefore we need to continually forecast cash flow projections and ensure that we remain in a position to meet our obligations.

Related Posts:

Forecasting

– Communication Channels

Internal Policies

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Are you Out of Cash?

Happiness is a positive cash flow. Fred Adler.

I do not agree completely with Mr. Adler’s point of view but I do understand where he is coming from. Those of you who have been through tight cash flow cycles, will be able to connect with the quotation much as I did. Running out of cash is a fundamental reason why many businesses have to pack up and fold. Without correct management of this critical asset, we find ourselves unable to meet payroll needs, pay suppliers or even cover basic business expenses. We could have a booming business yet mismatched inflows and outflows can cripple the business’ ability to meet obligations.

First time entrepreneurs, and in general smaller companies are more vulnerable to experiencing such incidents. There are a few major reasons behind this.

1. Firstly, due to inexperience, first time business owners generally do not have a tight control over outflows. This results in over inflated payrolls, very high basic expenditures and often frivolous spending on equipment and services which they clearly do not have a requirement for. With high burn rates and not enough business coming in, the business usually has to drastically cut expenses and lay-off staff to make ends meet.

2. Secondly, marketing plans are usually not executed as planned and controls are not put into place to measure their effectiveness. This results in fewer deals being clinched and ultimately lower revenue figures. With less cash in hand, marketing efforts are usually scaled back and this becomes a vicious cycle where there is not enough business coming in to sustain basic expenses.

3. Thirdly, due to their smaller size, larger clients usually take advantage of them by delaying payments and suppliers do not provide adequate credit support. This results in a two way pull where matching inflows to outflows becomes an extremely challenging juggling act.

These are just some major problems which result in a cash flow crisis. Not only are these situations detrimental for the health of the business, they also lead to higher levels of stress for the business owner. The fact of the matter is that managing cash flow is challenging for any business regardless of its size. It requires discipline, creativity and a lot of perseverance. Over the course of this week I will share some insights on how to make cash management systems more effective. I would like to know what systems readers are currently using to manage their cash flows, and, what has worked and what has not.

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5 Steps to Better Inventory Management

“Every company has metrics that track performance. The key question is whether these metrics really provide visibility to performance as viewed by the customer.” Steve Matthesen

Inventory management is an aspect of business which needs to be given more attention than what it currently receives. It is certainly not the most glamorous aspects of running a business. Inventory management is a basic business building block like marketing, sales or finance. Simply put, inventory management deals with how efficiently an organization manages it stock cycles. Stocks in inventory, relate to aspects of business that are exposed to risk when accumulated beyond certain thresholds. In the case of a service business, it is the amount of outstanding payments. Efficient inventory management helps a business to maximize its existing assets by increasing turnover. Listed below are five steps to assist your business in managing inventory cycles better:

1. Inventory Velocity: This is an essential metric, which measures the speed at which a business can move it’s stock. The speed at which a business moves it’s inventory will impact substantially on its profitability and ROI. Inventory velocity can be calculated by simply dividing the cost of goods sold by the average inventory for the period. This is a benchmark all businesses should watch very closely. To learn more about the importance of measuring inventory velocity please click here.

2. Forecasting: Mistakes made by forecasting incorrectly will impact directly on the level of inventory at the end of a financial period. There are three important aspects to be considered when constructing forecasts. The forecasts need to be based on data acquired from the market, sales channels and the current pipeline. Based on these aspects, we can construct forecasts for multiple scenarios which enable us to put measures in place, for the best and worst case scenarios. It is important to remember that forecasts are only as good as the assumptions they are based upon. To learn more about how to forecast revenue for your business please click here.

3. Communication Channels: When there are insufficient channels of communication between the producer, distributor, retailer and customer inventory, management becomes challenging. The information gap needs to be bridged by implementing several communication channels which include, allocated representatives, conference calls, real time stock levels and feedback channels. When information is allowed to flow freely from the customer to the producer, changes can be made faster and everyone in the chain stands to benefit. To learn more about the various communication channels please click here.

4. Technology: Organizations such as Walmart and Dell have shown the power of technology to optimize inventory management. Today, entrepreneurs have access to several tools such as bar coding, inventory management  and billing management software, which can help give small businesses an edge in managing their inventories optimally. To learn more about different types of technologies available for inventory management please click here.

5. Internal Policies: Policies and controls need to be selected carefully. Their main objective should be to facilitate bottom line growth for the business. These objectives act as guiding principles, and policies are intended to facilitate reaching those goals. Proper inventory management can impact bottom line figures and results for the business substantially. Policies pertaining to ordering, review and collections need to be mapped out in detail to ensure proper management of inventories. To learn more about internal policies relating to inventory management please click here.

Operations and supply chain management are the nuts and bolts of all businesses. Without smooth operations and proper controls, we could have a great website, killer marketing strategies and still come up short. When a customer does not get the product in time, or at the right price, we lose the customer. It all comes down to execution, and ensuring that we have systems in place to manage each order optimally. Inventory management is a critical aspect of this chain, and I recommend all business owners review their inventory cycles and work out ways to optimize them.

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Inventory Management Internal Policies

Policies are many, Principles are few, Policies will change, Principles never do. John C. Maxwell

A common answer I get when I ask individuals why they chose to become entrepreneurs is, “We did not want to get buried in bureaucracy and policies which stop us from performing optimally.” I completely understand where they are coming from. It is true that in some larger organizations policies and controls become so complex that it leads to much frustration. However, I do not advocate running a business without any control measures. Policies and controls need to be selected carefully. Their main objective should be to facilitate bottom line growth for the business. These objectives act as guiding principles, and policies are intended to facilitate reaching those goals. Proper inventory management can impact bottom line figures and results for the business substantially, and is an area where entrepreneurs need control measures to ensure that things move smoothly. Listed below are a few policies which may be helpful:

1. Ordering: If your business depends on manufacturers to produce your product, it is best you have documented your specifications in detail. It is also advisable to get quotes from a number of manufacturers before deciding to go with a particular vendor. This not only helps gather market information, it enables you to get the best price as well.

2. Inventory Review: I recommend setting up a policy to review inventory stock levels periodically. This helps determine current worth, idle stock alternative strategies to be offloaded can be discussed, and it provides management with a holistic view of the level of risk they are currently exposed to. For a service based business, this can identify customers not paying on time, and adjust their credit lines accordingly.

3. Collections: This is an area where entrepreneurs face a lot of challenges. If you have outstanding payments for products sold through retailers or for services rendered, it is essential that a mechanism is in place to receive this payments as soon as possible. I would recommend setting up periodic reminders through, email, phone calls and personal visits to speed up this process. Depending on your business model, having a collection policy which is adhered to closely, can increase short term liquidity substantially.

Inventory management is definitely not the most exciting aspects of business. It is however, a critical function which needs to be given a lot more focus. Through appropriate policies and control measures, we can achieve optimal inventory velocity and increase the likelihood of turning in even greater profit.

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Noise Levels

“Go placidly amid the noise and haste, and remember what peace there may be in silence. As far as possible, without surrender, be on good terms with all persons.” Max Erhman

When I refer to noise I am referring to the level of direct or indirect involvement of people from outside the core team. In my experience noise level reach unacceptable levels especially in family/friend businesses, when you share information regarding progress, performance and difficulties you are facing with your immediate circle. It starts with you sharing with your wife, girl friend, mother, father or other, how person X is just not pulling their weight in the team thereby causing problems. This then turns into the game, telephone , the next person who hears about it will get a distorted version and it continues to become worse. The problem now is, that if it is a family business or close friends, this news is going to get around and things then tend to get ugly between you and partner X.

The same also holds true if you are going through a dry patch and facing some cyclical difficulties with your business. Over the years I have incorporated a much higher level of candor in the organizations I work with, to keep the level of noise to the bare minimum. This factor needs to be controlled very tightly to insure the livelihood of the team as a whole. All partners especially if they are closely related should keep strict controls on what is to be shared outside of the core group. It is has dramatically relieved stressed levels and has made everyone more comfortable with talking things out among each other.

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