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Financing Growth for the Financing Growth for the Small Business Small Business Practical Cash Tactics” Practical Cash Tactics” Dean Capper Finance Dept. - CSUF [email protected] 949-370-8738
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Financing Growth for the Financing Growth for the Small BusinessSmall Business““Practical Cash Tactics”Practical Cash Tactics”

Dean CapperFinance Dept. - CSUF

[email protected]

Why consider having your own business?

“when you get the desire to have/start your own business, you should lie down until the feeling goes away”

Thank you for doing it anyway!

“A large portion of our positive activities depend on spontaneous optimism rather than on mathematical expectation … if animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die.”

-- J. M. Keynes

Perspective …

• ~25,000 Publicly Owned Firms– Less than 1%

• Several Million Privately Owned– More than 99%

• Our Focus … the Privately Owned!

Touted Sources of Raising Money – The “Success”

Hierarchy

• Angel Investors• Venture Capitalists• Investment Bankers

-Initial Public Offerings-Stock-Bonds

However …

• 90% of Cos. in NASDAQ never received O/S funding!

• Public Cos. make-up less than 1% of all Cos.

… So, what are your chances?

Lets Look at Some Relative Costs

Choices available for funds – Opportunity costs

Table 1-1 Expected Financial Returns of Investment Opportunity

Investment Opportunity Expected Annual Return (%)

Purchase stock 11

Purchase home 9

Purchase bonds 6

Place money in bank savings account 2

Purchase new car -15

 

Hurdle Rates For Venture Capital

Balance SheetAssetsAssets Debt & EquityDebt & Equity

Current Assets: Cash Accounts Receivable Inventories

Fixed Assets: Machinery and

Equipment Buildings and Land

“Free” Debt: Accounts Payable “Not-Free” Debt:

Short-term NotesLong-term Notes Mortgages

Equity:Ownership – “Really Not-Free”

Income StatementSALES

− Cost of Goods Sold− Operating Expenses

= OPERATING INCOME− Interest Expense− Income Taxes

= NET INCOMEMoney for the Owners!!

A practical approach!

… Doing more with what you already have

Its about Time Management!

Don’t “waste” time looking “outside” for money … Sell Something!

1. Let Customers become your funding source.- Small Business Owners are 1st and Foremost …

Salespeople.

2. Then manage the Income Statement & Balance Sheet to maximize the “Cash” you already have!

Managing the Income Statement

Why?

• To reduce costs … increase “real” profits.

• To reduce/delay Taxes … increase the cash you get to keep!

Some Bootstrapping Thoughts/Ideas … Reducing, Avoiding

Expenses

• Home office, Garage, Basement– Avoid rent and maybe some taxes

• Husband/Wife as de facto receptionist– And the kids?!

• Do you really need that new car?

Bootstrapping … cont.

• Why the “latest/greatest” PDA?– Cell phones for all?

• Focus on a market niche– If you are going to compete with Muhammad Ali … don’t

do it in the ring

Bootstrapping … cont.

• E-mail vs. direct mail advertising

• Use independent contractors

• Hire temps/lease employees

• Student interns/consultants

TITAN CO. LTD.Sales $5,000,000

- Cost of Goods Sold 3,500,000

Gross Profit 1,500,000

- General And Administrative 250,000

- Selling Expense 250,000

-Depreciation Expense 500,000

Pre-Tax Profit 500,000

- Tax 200,000

Net Income $300,000

- Ouch!!

Reducing/Delaying Taxes … “Private Business Mindset”

• Advantages of a “Private” Business.• Do you need/want the “Sale” this year?• Be aggressive with “judgment” expenses.

– Bad Debt “write-offs”– Warranty “reserves”– Returns/allowances

• Inventory “write-off” … most popular …

Inventory Balance vs. Income – a Basic Rule

• The Higher the Ending Inventory, the Higher the Income.

• The Lower the Ending Inventory, the Lower the Income.

How to “Value” Inventory

• Lower of Cost or Market– Materials– Labor & Overhead

• Devaluing inventory: Obsolescence

• Avoid the “Pack-Rat” syndrome!

ADJUSTED INCOME STATEMENT

Sales $5,000,000 5,000,000- Cost of Goods Sold 3,500,000 4,000,000Equals: Gross Profit 1,500,000 1,000,000- General & Adm.Expense

300,000 300,000

- Selling Expense 300,000 300,000-Depreciation Expense 400,000 400,000Equals: Pre-Tax Profit 500,000 Nothing- Tax 200,000 SorryNet Income $300,000 Zip!

OLD NEW

HOW TO SUCCEED IN BUSINESS!

• HOW DID YOU DO THAT?

However … There is a caveat!!

The View from Outside …

• PATTERN OF EARNINGS– The IDEAL pattern:

Time

Earnings$’s

Here you don’t have to be clairvoyant to seewhere this company’s earnings are going

Understand the downside!

• PATTERN OF EARNINGS– The “We never pay taxes” syndrome

Time

Earnings

+

-

Congratulations! Now how are we going to value your wonderful company?

MANAGING THE BALANCE SHEET

Why?

• Every dollar tied up in an asset is a dollar that could be used elsewhere!

Managing Cash …

• Why should a firm worry about having too much cash?

• Because cash is about the most unproductive asset of all!

• Cash on hand indicates an Opportunity Cost– where could it be used to generate a return??

Managing Cash

• Many Firms today utilize “sweep” or “zero balance” accounts

• They “sweep” into and out of Money Market Accounts

• Or better yet … into and out of a “Line of Credit”

Managing Accounts Receivable

Where the real cash is …

Collection Effort

… be a Pest!

Managing Accounts Receivable… Understand the Cash Discount

… Is it worth offering?

Effective Annual Interest Rates in Typical 10 day Discount Period and 30 day Credit Period:

– 1.0% Discount = 18%– 2.0% Discount = 36%– 3.0% Discount = 54%

Managing Inventory

Effective inventory management is directly related to the size of the investment in inventory … ways to reduce:

– Just-in-Time … JIT– Take on consignment– Vendor hold & deliver only when needed– Vendor deliver direct– Shorten production/turnaround time

Managing Fixed Assets

• Rent or lease … don’t buy physical assets

• Buy used furniture & equipment

• Outsource … let someone else make the investment/take the risk

Managing Accounts Payable

Everything I said under Managing Accounts Receivable … only in REVERSE! … remember:

– Its “free” money

– Rate of return on Discounts

– If they don’t care enough to follow-up?

Some Tips for those times when things are not going well …

What to Manage First??

• Income Statement– Dollars are Gone forever!

• Balance Sheet can come later– Dollar in Inventory, A/R, A/P = Cash!

• The “Fixed Cost” Myth!

Another Thought

… Letters of Credit!

Using Customers as a funding source!

• Back-to-Back Letters of Credit• A Transferable L/C• Assignment of Proceeds

Debt Management …a Cash Flow approach

Say you have $100k per year to service debt:

1. At 10%, Interest only, you can service a loan of $1,000,000.

2. At 15%, Interest only, you can service a loan of $666,666.

3. At 12%, Principal & Interest over 7 years, you can service a loan of $455,000.

4. At 10%, Principal & Interest over 3 years, you can service a loan of $250,000.

Debt Management …Subordinated Debt

Debt that serves as Equity … something to consider when:

- Buying a business- Selling a business- Structuring your debt.

Thanks for your Attention!

Dean CapperFinance Dept. - [email protected]

What Mom Taught Me• Don’t owe anyone• Pay your bills on time• Do good in school, learn how to add &

subtract• Be a good citizen• Be nice, respectful of others

What I Really Needed to Know!

• Its better to owe than to be owed• If they don’t follow-up its their problem• Forget adding & subtracting, learn how to

deduct• Don’t ever pay taxes any earlier than you

have to• When someone owes you money its OK to

be a pest

Financing Sources for Private Business … a partial list

• Self (Bootstrapping)– Savings– Home Equity– Credit cards

• Friends and Family– Bank of Dad

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 15

Financing Sources for Private Business … cont.

• Business Operations– Profits– Employee-provided Financing– Accounts Receivable Discounts

• Suppliers and Customers– Customer Financing– Vendor Financing (Trade Credit)

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 15

Financing Sources for Private Business … cont.

• Government assistance programs– Small Business Administration– Economic Development Program– Small Business Investment Companies-SBICs

• Commercial Banks/Finance Cos.– Equipment Leasing– Asset-based Lending– Factoring– Term Loan

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 15

Most of these can have substantial associated costs …

- Out-of-pocket- Emotional