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Do you have too many customers?

Do you have too many customers?

July 31, 2018/in Business Productivity, Operations /by Wil Rivera

The concept of having too many customers might seem impossible to some business owners. If your business is striving to be profitable, having a high volume of total customers may seem like an ideal scenario; however, the customers who aren’t profitable can cause your business wasted time and energy that may be better spent on those customers who are.

A high number of unprofitable customers may mean your business can’t provide the best service to the clients who matter most to your bottom line. This is why it’s important to identify and focus on the kind of customers who matter most.

Create Client Behavior Profiles

Matt Sharp, who operates a gym and a marketing company in Lexington, Kentucky doesn’t want too many customers — he wants ideal customers. Causely, Sharp’s marketing firm, helps small businesses promote and manage their philanthropic endeavors. After marketing his services, he realized that small businesses which weren’t already spending $100 a month on marketing were unlikely to be interested. Immediately after filtering prospects by that criteria, his sales staff saw dead-end inquirers drop by 30%.

As Sharp probed deeper, he found that the businesses most receptive to Causely were those whose customers were primarily moms and millennials.

Based on this insight, Sharp was able to create a profile of the ideal customer to target. These short profiles highlight the characteristics and concerns of customers who will provide the highest lifetime value — the people who like your offerings, and keep coming back for more.

Ask Lots of Questions

Score, a non-profit that offers business mentoring services, advises companies to pull together lots of data about their best customers to develop customer personas. For consumer-oriented companies, this can include age, gender, marital status, and life stage. For B-to-B marketers, the data could include industry, years in business, and number of employees.

Along with collecting data, it’s equally important to get insight directly from your customers. Social media provides a treasure trove of comments. You can also speak to customers one-on-one, or in focus groups, seeking out what they like and dislike about your offerings. Score suggests these insights to get started:

  • How do customers research product and services like yours?
  • What factors into how they decide on their purchases?
  • What newspapers, web sites, TV, and radio do they pay attention to?
  • What made them buy from you the first time, and what kept them coming back?
  • What do they get from you that competitors don’t offer?

It can be critical to approach this process with an open, unbiased mind, rather than guide customers to provide the answers you’re looking for. If you identify insights that surprise you — or even shock you — you’re on your way to improving your marketing.

Cut Through the Clutter

Based on this information, you can create a “persona” of your ideal customers that can guide your sales and marketing efforts. Many small businesses create a few personas that identify their goals, challenges and how their business can help, often including actual quotes from the focus groups as well as an “elevator pitch” that is targeted to each persona.

In Sharp’s case, he knows that his “ideal customer” always revolves around the two M’s, moms and millennials, and his successful marketing efforts always take them into consideration. He says this helps him focus his business efforts, target the right people, and lower the cost of acquiring new customers.

https://kapitus.com/wp-content/uploads/2018/11/do-you-have-too-many-customers-scaled.jpg 1695 2560 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-31 00:00:002022-04-07 18:23:30Do you have too many customers?
The 5 C's of Credit and How They Impact Business Financing Decisions

The Five C’s of Credit and How They Impact Business Financing Decisions

July 30, 2018/in Featured Stories, Uncategorized /by Wil Rivera

If you’ve heard of the five C’s of credit, you may assume that this phrase is only associated with personal credit; however, it’s also a tool used by lenders to evaluate businesses pursuing credit options.

Here’s why the five C’s of credit are important to your business; how lenders evaluate each of them; and how to best position your business when applying for financing.

What are the 5 C’s of Credit?

The term “five C’s of credit” refers to one way in which lenders evaluate the credit-worthiness of an applicant. It can be used for individuals and couples applying for personal credit such as a loan, credit card or a mortgage. But, it’s also used to help assess the “worthiness” of business credit applicants.

Lenders review how well a business meets each of the five C’s, and then use their findings to help make a lending decision.

1. Character

Character refers to the likelihood that a business will pay back borrowed money. Information for the Character portion of the five C’s of credit often comes from the history noted on a business’ credit reports. It will also include the business credit score generated from these reports. Business credit reports come from business credit reporting agencies such as Dun & Bradstreet, Equifax, and Experian.

These detailed reports contain particulars of previous borrowing arrangements – including total amounts borrowed and repaid, as well as delinquencies and late payments. The reports also include details of judgments, liens, and accounts in collections going back through seven years.

2. Capacity

Capacity is your ability to pay back the money borrowed from the proceeds of your business. Before a lender gives a borrower any money, they’ll want some evidence that the borrower (being the business), generates enough money to make payments on the loan. So Capacity is the proof that the business has the cash flow to not only make the payments, but to also cover all the business expenses, other debts and obligations, and pay the wages of its employees.

To evaluate a business’ capacity, lenders will review the financial statements and financial ratios of the business, including:

  • Debt-to-Income Ratio (DTI)
  • Debt-Service-Coverage Ratio (DSCR)
  • Current Ratio
  • Debt-to-Tangible-Net-Worth Ratio
  • Inventory Turnover Ratio
  • Accounts Receivable Turnover Ratio (ART)
  • Payables Turnover Ratio
  • Cash Flow Statement
  • Income Statement

When it comes to evaluating business capacity, a lender may also consider your managerial capacity. This is your business knowledge and professional experience.

3. Collateral

Any lender faces the risk that borrowers won’t return the money they borrowed. So lenders look for ways to reduce that risk and secure their loan, which brings us to the third C of Credit: Collateral.

Collateral is any asset used as security for the lender. Lenders could seize secured business assets of value such as real estate, equipment, and machinery to sell and recoup some or all of the unpaid loan if the borrower can’t pay it off. For example, a business may get a loan secured against vehicles or a commercial building.

4. Capital

Another factor that influences lenders’ willingness to loan money to a business is the owner’s equity. How much of your own money have you invested in your business? Your “skin in the game” indicates your financial commitment to the business. This equity, referred to as capital, gives lenders an idea of just how risky the owners consider their own business. Generally, the more of your own money invested, the better it is in the eyes of a lender.

5. Conditions

The fifth C of credit is one that you have little control over, yet it also influences business lending decisions. The current macroeconomic and microeconomic conditions could impact a business’ ability to pay back a loan. So lenders carefully consider the economic environment as part of a lending decision.

Demonstrate that you have a good understanding of current (and forecasted) economic conditions, and how they’ll potentially impact your business by referencing them in your discussions and correspondence with your lender. This shows lenders you’re a forward-thinking and responsible business owner who is committed to growing your business through changing economic conditions.

Once you know about each of the 5 C’s of credit, you can better understand how lenders use them to make lending decisions for businesses. And you’ll have a better idea of what to watch out for, and what to work on when making financial decisions for your own business.

https://kapitus.com/wp-content/uploads/2018/11/the-five-cs-of-credit-and-how-they-impact-business-financing-decisions-scaled.jpg 1707 2560 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-30 00:00:002020-12-14 21:03:11The Five C’s of Credit and How They Impact Business Financing Decisions
Growth Hack: Offer Quality Goods and Services

Growth Hack: Offer Quality Goods and Services

July 27, 2018/in Featured Stories, Operations /by Wil Rivera

When making a purchase, what influences your decision? Branding, design, familiarity? While these are all important factors, the best way to build a loyal customer base is offering quality goods and services. These tips will help you figure out where to improve and how to keep customers happy.

Track mistakes and invest in training

Before committing to quality, you must define what quality is to your company. Set standards and measure how closely your products or services measure up. When they don’t, figure out why and adjust accordingly.

This process becomes easier when everyone is on board. In order to provide the best possible experience to your customers, all employees must have a commitment to quality. Make it a part of your long term strategy. Provide training sessions and emphasize the connection between an employee’s performance and the success of the company.

Make small improvements to existing ideas

“Excellence is doing ordinary things extraordinarily well.”

This quote from John Gardner illustrates how to make your company stand out from the competition. It does not require additional features, the flashiest marketing schemes, or even a new product. All it takes is doing an ordinary thing exceptionally well.

So what does this mean? Consider Stephen Key’s story of developing the Michael Jordan Wall Ball basketball hoop. Other people were already selling similar toys. However, he found a way to make a wall ball basket more interesting than anyone else. Find a way to do this with your products and services.

Listen to your critics.

No one is happy to find a bad online review. However, customer complaints can be your greatest source of learning. People are telling you what they don’t like about your product, which gives you the chance to change it. If you pay attention to it, you can then improve, win them back, and bring in new business.

So, listen to what pain points exist in your customer journey. Then, adjust accordingly. Maybe customer service is unresponsive or the website is difficult to operate.  Provide training to employees. Update your web design. Addressing the needs of your customers will show them that you care and will keep them around. The improvements will also help bring new people in.

https://kapitus.com/wp-content/uploads/2018/11/growth-hack-offer-quality-goods-and-services.png 1981 3784 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-27 00:00:002018-07-27 00:00:00Growth Hack: Offer Quality Goods and Services
No margin for error: Calculating your profit margins

No margin for error: Calculating your profit margins

July 25, 2018/in Cash Flow Management, Operations /by Wil Rivera

Krystal Stubbendeck comes from a family of seven, but it wasn’t until her friends started having children that she noticed the challenges of staying in style as bodies changed from day to day. She launched Borrow For Your Bump, an e-commerce platform that lets women borrow maternity and nursing clothing during pregnancy and shortly after they give birth.

At first she focused on clothing that provided the most value to customers, like casual clothing they could wear daily. However, those pieces came back so worn they couldn’t be rented again. After careful analysis, she realized the most profitable items were formal wear and focused more on clothing that turned over more quickly. This change allowed her to boost her profit margins, and ultimately keep her business running.

Not All Sales Equal

Most small businesses strive to increase revenues, but they often fail to take into account their profit margins. “Not all sales are equal; you want to increase those sales that maximize profit without a significant or equal increase in costs,” says Michael Gallagher, an official with the Small Business Administration.

Profit margins come in two forms:

Gross profit margin: Typically, this equation is used to determine the profit margin of a single product or service, allowing you to figure out the profitability of each of your offerings and determine if you’re mispricing a product or service. The calculation is made by taking all the costs associated with producing a good or service, subtracting that from the revenues that are generated from the good or service, and then dividing by the revenue. If you sell a product for $50, and it costs $40 to make, your gross profit margin is 20%.

Net profit margin: This equation, which determines an entire organization’s profit margin, requires you to subtract total expenses from total revenues over a given period, and then divide that figure by total revenue.

Determining profit margins requires exactitude. You need to keep track of everything including expenses like payroll, utilities, and shipping and every source of revenue, even smaller items such as transaction fees.

Ways to Boost Margins

Profit margins vary by industry. According to Investopedia, farmers make about a 3% profit, while the alcohol industry has a net profit of 19.13%. Because of the variance, it’s important to benchmark your profit margins against companies in your industry to determine if you’re doing well or need to make adjustments. There are a variety of ways to boost your profit margins, including trimming expenses, eliminating services and products that aren’t pulling their weight, or adding more products and services that don’t increase your overhead.

Profit margins can indicate whether a company is in solid enough shape to weather a rough patch. “Many analysts and investors take profit margin so seriously because it can contain an enormous amount of information about a company into one efficient, easy-to-understand number,” says Brian Beers, a writer for Investopedia.

 

https://kapitus.com/wp-content/uploads/2018/11/no-margin-for-error-calculating-your-profit-margins-scaled.jpg 1707 2560 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-25 00:00:002022-04-07 18:23:52No margin for error: Calculating your profit margins
Accounts Receivable Turnover: What You Don't Know and How It Could Hurt Your Business

Accounts Receivable Turnover: What You Don’t Know and How It Could Hurt Your Business

July 24, 2018/in Featured Stories, Operations /by Wil Rivera

As a small business owner, you know about accounts receivable because they’re critical to your cash flow. But what about accounts receivable turnover?

If you’re unfamiliar with this phrase, you could be overlooking an important indicator of your business’ financial health — one that banks and investors may look at closely.

Here’s what you need to know about the accounts receivable turnover ratio and how it impacts your business.

What is Accounts Receivable Turnover?

The accounts receivable turnover (ART) calculation quantifies a business’ activity in the form of a ratio. It measures efficiency, and represents how quickly a business collects the money owed by customers.

Other names for the accounts receivable turnover ratio include:

  • Receivable turnover ratio
  • Accounts receivable turnover
  • Debtors turnover ratio
Why Lenders and Investors Want to Know About Yours

When investors and financial institutions consider financing a business, they review the 5 C’s of Credit for Business, including capacity — how your business cash flow operates, and that includes ART.

Investors and financiers look at this ratio because it shows how efficiently your business collects on outstanding accounts. A business that is slow to collect outstanding accounts receivables could have cash flow struggles, resulting in difficulties meeting accounts payable (and debt) obligations.

Therefore, a poor ART could negatively impact investor opportunities and credit applications. And that, in turn, could stifle expansion plans and opportunities to grow a business.

How to Calculate Accounts Receivable Turnover

To calculate the accounts receivable turnover ratio, divide the net value of a company’s sales during a specified period by the average accounts receivable during the same period. Usually, the ART gets calculated annually, though it may also be calculated quarterly or even monthly to note any changes in trends.

It is easy to calculate the average receivables during a period. Simply take the receivables at the start date, and add the receivables at the end date. Then using the total, divide by two.

So the formula for ART looks like:

ART = Net Credit Sales/ Average Accounts Receivable

For example, say a company has $1.5 million in net credit sales for a period. It has accounts receivable of $100,000 at the start of the period, and $120,000 at the end. The ART is $1.5 million/ (($100,000 + $120,000)/2) = 13.64. This means that the company’s accounts receivable get collected or “turned over” 13.64 times during the year.

Bigger is Better

When it comes to the ART ratio, the bigger the number, the better. It’s easiest to see with an example.

With an annual ART of 13.64, we can calculate the average accounts receivable collection period as 26.76 days – (365/13.64). However, if the ART increases by just 1, to 14.64 ,the average accounts collection period gets reduced to 24.93 days. So a bigger ART means a more efficient, or shorter, collection period, which is good for cash flow.

What to Watch for When Comparing Account Receivable Turnover Ratios

If you’re reviewing or comparing ARTs, keep these three things in mind.

  1. Some companies use “total sales” instead of “net sales” in the ART calculation. And this may result in a higher number because it includes cash sales, which of course shortens the collection period because collection is immediate.
  2. The accounts receivable balances used at the start date and the end date of the period show the balances for two specific points in time. And they may differ significantly from the average accounts receivable balance for the period. That’s why it’s also considered acceptable to use an alternate method of calculating the average accounts receivable balance for the ART ratio, such as taking an average of 12 months of ending accounts receivable balances.
  3. Sometimes, a lower ART may result from areas of a business other than the credit and collections policies, such as if there’s a product or service quality issue resulting in customers who refuse to pay.
5 Ways to Increase Your Business’ Accounts Receivable Turnover

If you’re looking to boost your business’s ART, here are five methods to consider:

  1. Screen customers more carefully before working out credit terms. Researching a company and its previous credit history can help uncover poor payment activity.
  2. Shorten the time between product/service delivery and billing. The sooner the customer gets the bill, the sooner they can pay.
  3. Offer a discount as an incentive to customers who pay immediately or within a shorter period.
  4. Send reminder notices out sooner, such as right at the thirty-day mark instead of waiting until the bill is 40 or 45 days past due.
  5. Introduce a more aggressive late payment and collections policy. This may include taking action on late payments sooner, and introducing a small late payment penalty for overdue accounts.1

Understanding what ART represents and how to increase it not can help business owners make wiser decisions that may improve cash flow. This in turn could have a positive impact on your business’ overall financial health.

  1. “A Company’s Vital Signs—Accounts Receivable” Financial Accounting, University of Minnesota Press.

 

https://kapitus.com/wp-content/uploads/2018/11/accounts-receivable-turnover-what-you-dont-know-and-how-it-could-hurt-your-business-scaled.jpg 1707 2560 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-24 00:00:002018-07-24 00:00:00Accounts Receivable Turnover: What You Don’t Know and How It Could Hurt Your Business
7 Podcasts to Make You a Smarter Business Owner

7 Small Business Podcasts to Make You Smarter

July 23, 2018/in Featured Stories, Uncategorized /by Wil Rivera

Finding time for learning or personal growth can be hard for a busy business owner. But some of the smartest entrepreneurs make the time to learn from others.

One of the quickest and easiest ways can be to listen to podcasts. Even if you break up a single episode into 10- or 15-minute time blocks throughout the course of a week, listening to other owners and experts may help you run your business more efficiently and effectively.

Here are seven current business podcasts to check out:

1. Entrepreneur On Fire

John Lee Dumas, aka “JDL,” is the founder and host behind this podcast.  It features interviews with entrepreneurs focused on executing plans and “putting in the work”.  Tips and insights range from how to scale a business, to quickly growing your email list for free.

Every month this podcast features an income report with a behind-the-scenes look at the ups and downs of running a business.

2. Smart Passive Income

If your business is online only (or if want to start an online business) this podcast may help. Pat Flynn, a 30-something Dad who was laid off in 2008, says he was studying for an architectural exam when he realized he could create an income stream from a website. Hence his podcast that focuses on optimizing a passive income stream by running an online business. Topics range from writing more engaging marketing copy, creating a personal brand, making money with the skills you already possess, to the art of scaling a business.

Check out the interview with an Israeli-based designer, Sagi Shrieber, who hired a coach and was able to get out of $50k in debt in less than a year and launched his own podcast.

3. Masters in Business

This podcast offers current market insights and trends for business professionals who want to understand the topics making headlines.

Cryptocurrency, emerging markets, tariffs, the economy — Bloomberg columnist Barry Ritholtz delves into these topics with experts in the field and top journalists. Recent highlights include Grammy-winning guitarist Laurence Juber discussing IP and how to copyright harmonies, and Dimensional Fund Advisors co-CEO Dave Butler’s take on how top athletes should think about managing wealth.

4. So Money with Farnoosh Torabi

Inc. magazine named So Money with Farnoosh Torabi the top podcast to grow your business.  Entrepreneur magazine named it the top female-hosted podcast of 2017. Interviews range from a former Ringling Brothers’ employee who founded his own management consulting firm, to a residential and commercial real estate developer who grew his business from a $40,000 loan from his grandmother. Torabi also answers financial questions about helping family members, saving money, switching careerss and other business advice.

5. The Solopreneur Hour

Michael O’Neal’s focus is showing how “unemployable people” can make a living doing what they love. Started in 2013, this podcast now has more than 700 interviews with various “solopreneurs” who started working for themselves.

Each Friday there’s a coaching hour where listeners can send questions. Get practical tips and tools to help run a more efficient business with conversational interviews from other “co-hosts” who are business guests on the show.

6. Being Boss

Not sure if you want to run your own business, consult as a freelancer, or have a side hustle? Co-hosts Emily Thompson and Kathleen Shannon delve into what kind of boss you’d like to be. Learn about more effective habits, routines and mindsets.

Episode topics range from how to find your online creative community to how to spend less money while making more money, to getting a book deal and juggling daycare. While this is generally a female-focused podcast, it is relevant for all business owners and includes important tips on everything from how to say no to using social media tools.

7. How I Built This

Want to know how some of the world’s most well-known companies grew their businesses? NPR’s Guy Raz interviews the brains behind some of the largest brands. Interviews include innovators and entrepreneurs behind companies such as Lyft, Lululemon Athletica, Honest Tea, Airbnb, Instagram, Southwest Airlines and Bob’s Red Mill. This series will give you the back stories on how many big brands got their start.

https://kapitus.com/wp-content/uploads/2018/11/7-podcasts-to-make-you-a-smarter-business-owner-scaled.jpg 1707 2560 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-23 00:00:002018-07-23 00:00:007 Small Business Podcasts to Make You Smarter
Growth Hack: Run a Lean Operation

Growth Hack: Run a Lean Operation

July 20, 2018/in Featured Stories, Operations /by Wil Rivera

Though the idea of minimalism was not widely practiced, it has made its way to the spotlight over recent years. People have found that simplifying their lives leads to a greater peace of mind and a more efficient use of their resources.

This applies to business as well.

Lean management means cutting anything from a business process that does not provide value. Where some stick to how they’ve always done things, you make changes to improve. This may seem risky. However, when done properly, streamlining processes will save you time, labor, and money.

Even small adjustments can make a big difference. Toyota pioneered this concept in manufacturing during the 1980’s. When they realized building vehicles to meet specific sales projections led to wasting parts, they adjusted and began to manufacture vehicles as orders were placed.

When evaluating your own business processes, make sure to take the following steps.

Define what value you are creating.

The first step to creating a lean process is deciding which output to focus on. This value can be a product created to sell to customers or a service offered to clients. Once this is defined, you can identify all of the steps taken in its creation.

Identify the steps used to create this value.

Follow the process of creating this value from start to finish. Clearly lay out each step involved in each part of the process. Then, determine which contribute and which do not. Find processes that lead to unnecessary stalls or create waste. Then, decide how to get rid of them.

Create a strategy to streamline.

Once you find what can be removed, get rid of it. Have a clear, step-by-step plan. This should include all useful steps from how things used to be done adjusted to remove waste. Once this is established, run the process and analyze the results.

Implement your strategy and see what results you get.

Measure the effectiveness of your new processes and see if your value is being created with less waste. Make sure it is actually an improvement over what you did before. Evaluate your results and see how you are already saving resources.

Repeat this process as necessary.

Things are rarely perfect on the first try. Like you have to practice your golf swing to get the best shot, you’ll have to adjust your processes more than once to reach peak efficiency. This should not be a discouragement, but an opportunity to continue learning and really become an expert in your industry.

Never become complacent and always look at how to become more efficient.

https://kapitus.com/wp-content/uploads/2018/11/growth-hack-run-a-lean-operation.png 1980 3785 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-20 00:00:002018-07-20 00:00:00Growth Hack: Run a Lean Operation
Small Businesses Mismanage Sales Tax

Small Businesses Mismanage Sales Tax

July 19, 2018/in Featured Stories, Uncategorized /by Wil Rivera

When Strategic Funding was in its early days we began to look for bank lines of credit so that we could expand our business of financing small businesses across America.  The banks liked the idea of working with an alternative lender as it gave them a way to indirectly serve that market without the direct risk of lending to Main Street businesses. Strategic became the borrower and, in turn, provided working capital directly to the individual small business.  This was necessary because so many small businesses lacked the financial management skills to provide adequate financial statements and cash management disciplines to qualify for bank loans.

Because many of us were once small business owners we understood our typical small business customer better than the banks. Cash flow determined how sound their businesses were, but certain traits were common amongst our applicants.  Many of the applicants had tax delinquencies, liens and judgments against them.  This was unfathomable to bankers who assumed that paying your sales tax was a priority – not understanding that keeping the lights on, meeting payroll and inventory took precedence. We also know that how the business owner managed their tax payments and general cash flow was as important as how much it was. We understood these customers well and could help many of them through education and often an injection of working capital to get them on the right path.

When I owned my first restaurant a hundred years ago, I experienced the wrath of the taxing authorities when I missed successive tax payments as I was trying to survive my maiden voyage in this business.  I was so busy managing, cooking, covering vendors, paying utilities and keeping the place clean and well staffed that I didn’t pay much attention to the mounting taxes. I thought it could wait and thought the state would offer me an easy and manageable payment plan. I’d be happy to pay reasonable fees and interest since I hadn’t put the funds aside. I looked at it as a loan from the government. That was just delusional on my part.

One day just before Christmas, I got a call from my bank telling me that revenue officers had come to the bank and levied my accounts. They grabbed everything in them and everything I had just deposited from the previous business day – including the revenue from that big fat holiday party I did.  I had never even heard the word “levy” until that day.  Now I was in real trouble as I had no money for my vendors, landlord or payroll. I was dead in the water. All my credit card receipts were being processed and were going directly to pay the taxes. By this time I woke up – the judgment amount had doubled my outstanding balance as penalties, interest and fees surpassed the liability.  As a new business owner I was in trouble and realized I had made a dumb move that I vowed would never happen again.

Over the years, I opened up more businesses in a variety of industries. Each state I operated in had it’s own system for collecting sales tax and, of course, you always had the Feds to deal with on payroll taxes.  Regardless of the state or the payment schedules, I put procedures in place to prevent this costly error from ever happening again.

RULE #1 – SALES TAX COLLECTED IS NOT YOUR MONEY!!  You need to realize that you are just holding this money for someone else – as if a customer left her purse at your business. It’s not yours and you will return it to them.  Many small businesses charge and collect sales taxes as they are required to do. The real mistake comes when owners use the sales tax revenue as part of their operating capital.  They float their operations with sales taxes money to keep them from going negative. They do this until taxes are due and hope the funds will be available when they have to file. Well, guess what?  Very often they can’t scrape together everything they owe and end up either not filing the return (really bad) or filing the return and sending a partial payment (better – but still bad).

If you need to use this money to steady your financial boat then you really need to evaluate the health of your business.  Without using tax money, is your revenue enough to cover your expenses, payroll and direct operating costs while yielding you a profit? If you are using tax money you aren’t making it and need to take a hard look at your business and figure out how to fix it.

I recommend that you immediately separate and impound the sale tax funds in a dedicated “tax account” – every single day.  That means when you close out your register for the day – identify the sales tax charged to customers and collected by your staff and separate it.  That amount includes any taxes charged to a credit card even if you have to write a check to cover it. Impound those funds and deposit them directly into the separate dedicated tax account.  Get it out of your cash flow. This makes it available and easier to track, audit and account for.

Resist temptation. Do not raid this account if your operating account is short.  Set up a relationship with your bank or an alternative lender to provide working capital  when needed. It’s easier and less costly to work it out with them and pay their fees then risk being short on tax payment day.  The other dark truth is that liability from tax delinquency will also follow you personally even if your business fails and you have to file bankruptcy.  Tax obligations are not discharged in bankruptcy so you are on the hook forever. They will never go away and will compound at an astronomical rate. A very expensive mistake.

A good tax policy and strategy will help your business stay healthy and grow.  If you want to discuss your business questions, you can email me at [email protected]

https://kapitus.com/wp-content/uploads/2018/11/small-businesses-mismanage-sales-tax_1920.jpg 1281 1920 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-19 00:00:002020-12-14 21:15:30Small Businesses Mismanage Sales Tax
Decoding the Investor Pitch for Small Business Owners

Decoding the Investor Pitch for Small Business Owners

July 18, 2018/in Featured Stories, Financing /by Wil Rivera

As a serial entrepreneur and retired COO of a small business finance company, I am most often asked WHERE business owners can obtain financing.  Most of these folks believe that if they are pointed in the direction of capital, they can knock on the door and simply ask for it.  There is a profound lack of understanding about the fact that how one presents their investment opportunity (their business), along with how well prepared they are for this presentation, can significantly affect the outcome in their quest for financing.

I’m not going to talk about the creation of a solid and understandable business plan, or possessing professionally prepared financial statements and projections. My goal is to decode some of the subtleties of the pitch you must make to investors.

The process begins long before you get in front of investors, fund managers or investment bankers. You have so much that you wish to convey and understand the concept of the “elevator pitch” that you were taught in business class, but now the game is real and you are going out there to raise money.

Over 40+ years in business – as both the person pitching a deal and someone being pitched to – I’ve learned some very valuable tools from being beaten up by the best and, ultimately, obtaining financing for my businesses…including an IPO.

It’s fairly universal and simple – all developing businesses need capital to start and grow.  The initial investment may have come from your savings, friends and family, or an Angel Investor –  it doesn’t really matter.  But once you’ve broken free from that close orbit, you need to learn ways to negotiate the new frontier of obtaining capital in a highly competitive world.

When I first started out, I thought I would go in front of a potential investor with nothing more than my smiling face and enthusiasm and convince them to write a check for my budding venture – just because “they got it”.  Not so.  I met a lot of people who were very nice and some not so.  None of them saw my vision and I ended up raising zero dollars to start my new venture. As with most entrepreneurs in this position, it was ultimately my home equity line and family members who put up the seed round to get me going.  Nice to be in business, but I learned nothing about raising money from outside investors.  That came later when I built out a multi-unit restaurant chain and was convinced that the way to grow exponentially was to “take it public”.

We were lucky that our Investment Banker was well versed in our industry and that the partner in charge of our offering was patient and an excellent coach.  My partner in this venture thought of himself as a PT Barnum type promoter and salesman who would ramble on for days if allowed to but was lazy when it came to facts and financials.  He would talk about the showbiz aspects of this great casual theme restaurant concept that we created and all the sizzle but not the steak.  Keeping him on the rails was a task for the banker in charge, which frustrated him to the point where after one presentation he blurted out – “just shut up, and speak only when I tell you to, then stop and say nothing else”.  I originally thought that the colorful way my partner told our story was a plus not a minus.  I was wrong.

To paraphrase Franklin D. Roosevelt, it is far more valuable to “Be sincere, be brief, then be seated”. Professional investors see hundreds of business plans, many of them with interesting ideas or strategies, but unless there is something that grabs their interest they will not want to hear your life story.  The idea of the classic elevator pitch applies.  How do you get the investor interested in just a few short minutes?

One of the prime directives that I learned was not trying to accomplish a major data dump or an expert level understanding of my business model in my first pitch to a potential investor. My goal was to get a next meeting, not close a deal.  A few years ago, I was introduced to an interesting concept for effectively communicating your business vision, which after I heard it produced one of those silly “ah ha” moments as it was quite obvious.

A young professor at Columbia University named Simon Sinek, introduced a unique concept in communicating their vision.  Simply put, he argued that businesses shouldn’t be presenting what they do or how they do it – they should start the discussion with WHY. Presenting WHY this business is important and an outstanding opportunity for investors focuses them on WHY they should take their time to listen to you. At first it may seem that return on their investment answers the “why”, but most investors are seeking more. Does your why statement express what makes your business unique, scalable, market ready or any other trait that should arouse the interests of the investor? You may want to get down to the details of how you make the sausage, but the investor wants to know why this sausage is so special that they should listen to your story.  If they like what they hear – you will get invited for a follow-up meeting.  Goal accomplished.

Trying to get a sense for what hot buttons can trigger interest in a particular investor are key to a successful pitch.  Listen as much as you talk when going to pitch – as you may have to change strategy on the fly.  The return on investment is always attractive, but what other features of your pitch make your business attractive?  Is it technology? A large underserved and growing market? Is your process patented? Is there a grand obstacle to entry for competitors?  Feel them out and things they say will lead you in the right direction.

Your presentation can also set the tone for success. Confidence is good. Arrogant, know it all attitudes often go down in flames. Too often, presenters try to sell the opportunity too hard as opposed to making the investors “feel” that the business has real potential.

Being succinct and focused is another prime element. Tell the story beginning with why this is important without rambling all over the place. A beginning, middle and end to the story done as briefly as possible. Details can be added but your goal is to get to a second meeting where you can take a deeper dive. Make sure your representations and projections are accurate and realistic because you are done if you can’t defend your presentation. You cannot be oblivious to the facts, so know what you are talking about and if you don’t know – say so.

Many investors want to determine if you see the potential flaws and weaknesses in your business and if you actually thought it through. Be honest and transparent because truthfulness and candor are valued.  Along the same lines investors will typically ask how much money you have put into your business.  They want to know hard dollars not sweat equity.  If you haven’t put any cash in, you need to honestly explain why. Many investors believe that founders must have skin in the game in order for them to back you.  After all, if you don’t believe in your business enough to put hard dollars in – why should I?

Two other key elements may trigger strong responses from investors.  The first is having a realistic valuation for your business.  What is the basis for your belief that your company is worth X?  Don’t pull it out of the sky.  Your assumptions should be tied to comps in your industry that reflect revenues, earnings, time in business – not pie in the sky assumptions.  In an early-life negotiation on valuation I had a go round with an investment banker.  He gave in on my price but came back with some very aggressive terms that yielded far more to his side than I anticipated.  He said, “OK, your price, but my terms”.

Most important to any investor is the management team. If you are a startup or have a small company, investors are really getting behind the management and growth of a good idea.  If you have an experienced management team that can deliver results…you win.  If someone on the team falls short, don’t be surprised if a condition of investment is the replacement of that person.  This could also include you, as the head of the company.  To grow your equity, they may want you to step aside for a more seasoned executive.  Not common, but it has happened.

You should hope for an investor that will be eager to work with you and for the benefit of the business, not just themselves. It’s not just money that you are seeking, but also support, experience and connections to help grow the business. You need to come to grips with control issues and shareholders rights and remember that your new investor will be with you for a long time, so choose wisely. When working with investors it’s a good idea to remember the Golden Rule of business… “He who has the gold rules”.

https://kapitus.com/wp-content/uploads/2018/11/decoding-the-investor-pitch-for-small-business-owners-scaled.jpg 1975 2560 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-18 00:00:002018-07-18 00:00:00Decoding the Investor Pitch for Small Business Owners
That cheap business finance rate could cost you a bundle: interest and your business

That “Cheap” Business Finance Rate Could Cost You a Bundle: Interest and Your Business

July 17, 2018/in Featured Stories, Financing /by Wil Rivera

The last decade has been an era of cheap money for businesses, with interest rates at historical lows. But those days may be ending. How you look at financing — in particular choosing between fixed and adjustable rates — may have to change.

These are the good old days.

Access to capital can often make or break a business. Each year, fifty-three percent of business owners kick in additional funding, according to the Small Business Administration. Almost a quarter add more than $50,000.

The adage that it takes money to make money is fine — if you have the cash on hand. If you don’t, it’s time to look at outside financing. But that may take some unlearning of recent lessons.

The global economic collapse beginning in 2008 was brutal, but it did have one benefit for some businesses: Because the U.S. Federal Reserve and other regulators slashed interest rates to stimulate buying, over the last decade the cost of money has been incredibly low.

Businesses who were approved for traditional forms of financing had enviable choices, including taking adjustable rates over fixed ones to keep borrowing costs down.

The Two Types of Interest Rates

A quick refresher: whether talking consumer or business financing, there are two general types of interest rates: fixed or variable.

A fixed rate is just that; the borrower pays a set interest percentage of the principal. Monthly payments don’t change.

Variable rates start at one rate. After some time, they shift to an amount based on any one of several common benchmark rates.

The Fed’s federal funds rate is one example of a benchmark rate. So is the prime rate, which is based on the federal funds rate, and is often what a bank’s best customers get. Another benchmark is the London Interbank Overnight Rate (Libor) — the rates banks charge one another on short-term borrowing.

The variable financing rate will be some number of percentage points over a benchmark rate. When the benchmark goes up, so will the variable rate. If the benchmark drops, the variable rate does as well.

Most people are familiar with variable rates from mortgages and credit cards. They are common in small business financing as well.

Variable Rates Have Been Low

In the past, business owners chose variable rates that were initially low. The idea was that when the rate increased, either revenues would have grown enough to more than offset it or refinancing at a lower rate would eliminate the extra costs.

For the last decade, however, variable rates have acted strangely. Because benchmarks were so low, you could effectively get a great rate for the life of the financing. There was always the gamble that the rate would climb, but in hindsight, for years you could win the game. Variable became almost the same as fixed.

No longer. By June 2018, the Fed had increased the federal funds rate seven times in three years.

As job growth remains brisk and the economy improves, regulators could keep increasing their rates, making all the benchmarks increase. Variable rates will follow, making the era of super-cheap money over. Opting for a variable rate instead of a fixed rate could now cost you.

Create a Financing Strategy

If you’re looking for financing, you’re best off doing some calculations in advance to see how a variable and a fixed rate might compare. Consider that a variable rate loan might increase a couple of times during the life of the financing:

  1. Look at how much the Fed has raised the key interest rate over the previous 12 months and assume for a moment that the increases will continue in the near future, given how low rates have been.
  2. Calculate the full principal, the length of the loan, and the initial rate. Then use an amortization schedule to calculate how much you pay in the first year.
  3. For the second year, calculate with an increased interest rate (initial rate plus the last 12-month increased in a benchmark) and the remaining financing time. Use an amortization schedule to calculate how much is paid in the second year.
  4. Keep doing this for at least one or two more years with benchmark increases.
  5. Finally, calculate the remaining principle, time left on financing, and the “final” interest rate. (Remember that this is an estimate and there might be additional rate increases.)
  6. Add the payments over all the years and compare that to what you’d pay with available fixed rates.

You might choose to run estimates for different numbers and amounts of rate increases. This modeling can help you manage risk and choose an option that works for your business.

https://kapitus.com/wp-content/uploads/2018/11/that-cheap-business-finance-rate-could-cost-you-a-bundle-interest-and-your-business-scaled.jpg 1709 2560 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2018-07-17 00:00:002018-07-17 00:00:00That “Cheap” Business Finance Rate Could Cost You a Bundle: Interest and Your Business
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