Up Your Business LLC

Many business owners would respond with answers such as customers, our service, products, employees or stakeholders. These are all very important but what is it in your business that is like blood to the human body?  What is the asset, just like your blood, that once it is gone, so is the business life?

The most vital and important asset in your business is CASH FLOW.  My experience working with thousands of business owners for almost four decades is when the term cash flow is mentioned, like that of other ‘financial terms,’ many business owners turn or point to their accountant, CPA or bookkeeper as the one responsible and not themselves.

Working with and relying upon your accountant/CPA/bookkeeper is an asset; leaning too hard on one can be a flaw. Business owners have a tendency to rely heavily on their financial aids when it comes to tracking their company’s critical numbers.  As the owner of your business, you cannot afford to abdicate the responsibility for the financial health (cash flow) of your company to others, even though they have the education and training that is required to monitor the health and you might not.  As the owner, the most important asset in the company – cash flow – rests ultimately with you and you alone. If you’re someone who is a bit intimidated by accounting and all the jargon that goes with it, you are not alone. Stay with me.

The simple truth is that you don’t need an accounting degree, MBA or an in-depth understanding of double-entry accounting to know and understand cash flow and how this knowledge affects the health and risk management (intelligence) of your business and deserves your keen attention. I want to help you get over your fears, lack of knowledge and misunderstandings about cash flow.

As we get started, let’s do a review of the basic financial documents that track the flow of money within your company. Most critical numbers live on these documents.

Balance Sheet: This is a cumulative document that lists your company’s assets and liabilities, among other numbers, from the time your started your business. Reviewing your balance sheet gives you a quick handle on the financial strength and capabilities of your business.

Income Statement: Also known as the profit and loss statement, or P&L, or statement of operations, this document lists your company’s income (revenues or sales), minus your company’s expenses, and it shows you the profit or loss over a specific period of time.

Cash Flow Statement: A cash flow statement helps you stay on top of how much money came and went through the business for any period of time. This document is critical because it helps you understand why, even if your company appears to be turning a profit, you don’t have much money in the bank. It points out the sum total or result of all the decisions you and your team made in the business for the time period of the statement.

For this discussion it is important to understand the term net income or net profit, also referred to as net earnings, current earnings or the bottom line. This number is critical in that it reveals how much money is left after accounting for business operations.  The key word to recognize and acknowledge is accounting. There is a difference between net income and cash flow and business owners need to know, understand and be able to apply the differences in their decision making.

Net income is really an accounting term while cash flow is a very practical, common sense, where-the-rubber-hits-the-road business term. The key difference between profit and cash flow for business owners to know, understand, recognize and apply to their decision making is timing differences.  Based on generally accepted accounting principles (GAAP), profit does not factor into timing differences.

What do I mean by timing differences and why are they important to a business owner and the running and managing of their business?  Timing differences occur when you record income or an expense in accounting terms and when you actually receive or pay out cash. The key to running and managing your business (what keeps your business alive – like blood in your body) is CASH.

I hope I have wet your appetite for more, but you’ll have to wait for part two or contact me.  In the meantime, feast on the benefits to you and your business of establishing the habit and discipline of cash flow management via projections :

• Gives you forward visibility
• Gives you the ability to act rather than react to circumstances that you encounter
• Daily use and review provides the vital signs of health of your business rather than just assuming it is healthy
• Gives you greater insights into your business you might not have known or seen
• Provides an early warning system for potential problems
• Increases profitability
• Reduces the stress of managing the day to day affairs of your business
• Gives you greater control, confidence and therefore peace of mind
• You know the true cash position of your business at all times
• Gives you the opportunity to concentrate on other areas
• Reduces the chance of failure
• Enhance the perception lenders will have of you
• Improves your return on investment (ROI)
• Frees you to be alert for opportunities to expand
• Creates greater value and increases wealth of your business

May your Cash Flow!

The business owner – lender relationship is significantly different today, in 2010, than it has been in the previous five to ten years. The financial crisis put a microscope on failed risk management of both financial institutions and businesses.

I recently spoke to a business owner whose business was struggling and was being closely examined by his lender. He contacted me to run several scenarios by to get my opinion on his best course of action.  After listening to his story I told him the best way for me to help him was to ask him several questions. 

• As a business owner and borrower, do you have any idea what your lender, in today’s economic environment, sees when he sees you coming and what does he hears when you speak?
• Do you understand the basis of their perception? 
• Or worded another way, what is it that influences and determines their perception of you, your business and the current status of your loan with them?

All I heard next was 20 seconds of silence. My friend said rather, defensively, “But this is about me and my business and what I’m going through, and not them.”

Reminding my friend that normally we first look at things from our own perspective and stop there – the answer to the first question simply and correctly suggests what your initial step might be to change or determine their perspective.

I knew he was frustrated with his situation and my questions. I reached over to my computer and hit a link I had brought up and asked him to listen to a song by Shania Twain to help him better understand where I was heading.

http://www.youtube.com/watch?v=XqYp1jpzKCk

He relaxed and grinned when he heard the lyrics, “That don’t impress me much.” seeing the point I was leading to. “O.K., I guess you’re telling me I need to consider what they might be thinking.”

Now that he was beginning to understand I truly had his best interests at heart, I continued, “When you consider what they are going through at this time, what influences their perceptions and their frame of reference, you can then present your circumstances and needs in a way they might be willing to hear and consider positively.”   

I posed other questions for my friend to consider:

• How do you think attitudes towards risk at financial institutions have changed since 2008? 
• What risk challenges might your financial institution be going through at this moment?
• Do you know where you fit into their risk challenges? 
• Knowing that risk management – both theirs and for their customers is a much bigger part of their job now  – what might be the environment  of your individual loan officer, loan committee or person your loan officer seeks approval from for loan decisions? 
• How are regulatory changes affecting your financial institution, their risk management perspective and your loan?

As I listened to his answers to my questions, he said, “You know one of my favorite authors is Stephen Covey and he recommends we ‘begin with the end in mind.’  I now understand, I must address not only the end I want to see but my lender’s as well.” 

He was much more relaxed, “I now know what I need to do. I must think for my lender by providing him with:

• a written summary of where my business stands today,
• what I see for the near future for my business,
• how the risks are supported by my analysis and planned mitigation of those risks, and
• what solutions I recommend to bring about a satisfactory conclusion for the both of us

As we were saying our good-byes, I knew that my friend’s lender would be seeing a different customer and borrower than they had seen before and would most certainly like to see more of their borrowers looking like my friend.

Do you always know what your spouse or family members want for Christmas or for their birthdays?  When asked that question many just shrug their shoulders, “I’d have to be a mind reader to figure that out?”

In the 2000 movie comedy “What Women Want” Nick, (Mel Gibson) is an egotistic, chauvinistic, God’s gift to women (he thinks), advertising exec. Nick has his life turned haywire when an electrical accident enables him to hear what women think. At first Nick is surprised and disappointed when he discovers his macho behavior does not win him favor with the ladies. His psychologist points out his new skill of “hearing what women think” could be used to his advantage! 

The majority of the film follows Nick as he learns from his mind-reading skills and grows from being an insensitive schmuck to developing real friendships with his women co-workers and connecting with his daughter.

The bottom line to this new skill was that it gave Nick a totally different perspective of the people in his world.

Seeing the movie again recently raised the question, “What would happen if business owners could truly know what lenders want?”  What if business owners were able to hear what lenders think about them in their role as borrowers?

In the June 2010 issue of Success magazine, entrepreneur and co-star of the reality TV show Shark Tank, Daymond John, tells his story of rising to success in the field of his passion – fashion.  He stated on the way to his success, “I got turned down by about 27 banks;   I was turned down because I was poorly prepared. I didn’t know what banks needed to see; I didn’t know how to write a business plan; I didn’t know about business forecasting; I didn’t know anything.” One of Daymond’s “success strategies” is be prepared. He faults himself for being turned down. “Knowing what information investors need is critical”, he says.

Borrowing money in 2010 is about being prepared as Daymond Day suggests but more importantly, as I emphasize in my book, Romancing the Loan – 14 Ways to Open the Vault with Your Lender, as a business owner, you must ‘think for your lender’.

Thinking for your lender means providing your lender before he asks with all the required information and answers to questions he or she and the lending institution (loan committee, senior loan officer, any and all loan approving personnel) might have in regard to your loan request.

From your position and perspective as a business owner, how do you think for your lender?  Or, what is the translation of this ‘foreign language’ that lenders speak and how do you think for your lender?

• Ask – ask for professional help, like myself (someone who has been behind the loan desk for thirty plus years).
• Ask – successful business owners in your industry, community or church.
• Ask – lenders at various financial institutions you might submit your request to.
• Engage – hire professionals to perform work you are not experienced in or don’t have time for to enable you to keep your focus, time and energy on your business.  Make sure at least 80% of your energy is engaged in using your strengths and seek assistance from others who have expertise in all the areas you are weak (apply the 80/20 Principle).
• Reposition yourself – Seek and obtain coaching (I want to help you!) on how the lender will be thinking regarding your request and like a defendant in a legal case, be prepared to answer any questions the lender might have (without being defensive!).  Confidence is convincing and persuasive. 

Though many say business credit and financing is loosening up, many borrowers still are having a tough time getting money, especially to refinance existing debt or aid cash flow, rather than expanding their business.

A lot of reports are stating business borrowing has been helped by a current, short-term government stimulus program through the U.S. Small Business Administration. The program bumped up the government’s guaranteed backing on qualified bank loans to 90% and eliminated some borrower fees.

Even with it, banks are very reluctant to go out on that limb and extend business credit and thus the business loan recovery has a long way to go.

It is still difficult for small businesses and startups to get financing.  Some banks have re-opened the loan vault, however with more stringent requirements being placed on business loan proposals.  Many banks are still reeling from their own losses and upside down balance sheets resulting from lax credit standards over the past five to ten years and/or adverse economic conditions in their local economy affecting businesses negatively. Many businesses, because of this economy are no longer “bankable” – able to qualify for a loan.

Times Have Changed!

There is a new “basic or normal” in business credit and financing now. Some of the new “basics and norms” are:

• Reduced amount of leverage (debt of the company in relation to equity)
• Larger down payments on financing or refinancing the purchase of assets (25% – 35%)
• Increased loan to value ratios on pledged collateral (25%-40%)
• Adherence by lenders of debt coverage ratios (1.30 to 1.0 times)

What to Do?

• Visit with or engage a professional to help you evaluate your loan request need and determine if it is viable or to help make it viable
• Shop or visit with several lenders (3 to 5) to determine if your proposal might fit with the lenders’ appetite for your type of business and need. Determine what each lender’s terms and conditions might be if they were to make a loan to meet your needs and if these terms and conditions would be acceptable to you.
• Be prepared to seek advice, learn, change mindsets, plan, be persistent, be flexible, work with your strengths and understand the cost-benefit of letting those who are experienced in dealing with lenders and loan proposals work for you.
• Look to develop and maintain a relationship with the lender

Here is a true story of how an established business owner approached his lender hoping to do business as usual.  Running head on into the lending climate mentioned above he sought my expert advice and coaching, and changed his mind about his role in maintaining a positive relationship with his lender. For the Life of your Business.

I recently saw a very timely question on LinkedIn, “What meaning or utility can we take from the ash cloud?”

Hearing and seeing the news about the ash cloud, I was amazed at all the business ramifications of the cloud with regards to aggravation, worry, anxiety and loss of money, just to name a few.

Thinking about the question reminded me of what I believe to be a major part of any business that so often is left out, unattended to or weakly given just a passing thought and that is Risk Management.

There are many different definitions of risk and risk management and it can mean something different to each person depending on circumstances.  A good definition of both I recently came across was from the new book “Surviving and Thriving in Uncertainty: Creating the Risk Intelligent Enterprise” which states. “Risk management is the discipline of improving your chances of survival and success, particularly in uncertainty and turbulence. In this context, we define risk as the potential for failure in terms of loss or harm or missed opportunity.”

I spent the majority of my corporate work life actively involved in risk on a daily basis – lending money to businesses. In so doing the bottom line was always asking and answering the question, “Will I receive the money back that I loaned out?”  A large part of my evaluation of each business borrower was what I call Risk Management consciousness or mindset.  My intention was to provide the customer with the capital they wanted AND to help each customer become a better, more successful business owner after having gone through the borrowing process with me.

I would brainstorm possible risks that my borrowers might incur in their business and seek ways, with their help, to mitigate those risks to ensure their ability to repay my loan. I would also ask them to play the role of lender and come up with additional risks, knowing their business and industry better than I. I was often surprised at what additional risks they would mention I had not thought of.

From my perspective this meant they became more Risk Management conscious or aware with regard to all the decisions being made in the company. My hope was to help them incorporate a Risk Management mindset or filter to their regular decision making and planning process.  In doing so they, hopefully, would explore risk possibilities and determine a way to mitigate each risk. My purpose was to shine the light of possibilities and realities on their business rather than to create an attitude or atmosphere of fear or anxiety.  I wanted them to consciously change each business day from becoming a gamble to being a chosen, calculated risk.

The big difference between gambling and taking risk is options. One of the major character qualities of entrepreneurs is taking risks and many do it very well. In examining the lives and decisions of most truly great and successful entrepreneurs, we see their forward movement was based on considering or developing options.  When there are options you generally have hope – you can see light both in the mind’s eye and in reality.

Gambling in life and business is doing things with no or limited options, whereas risk taking has built into it specific options and mitigation of those risks. From my experience in addressing risk with business owner’s I have coached, many avoid the subject of risk thinking by avoiding it they are not giving it any energy. They feel if they entertain risk thinking they are somehow casting a shadow of doubt over their business. 

We all continue to witness or experience the results of new, greater and different risks in business. Take the financial crisis over the past two years. Who would have imagined such events – the trauma, destruction to companies and business failures, large and small – coming so quickly after seven to ten years of really great, high flying economic times?

My point is to suggest you become more Risk Management conscious. Look upon Risk Management as a big umbrella shielding or protecting your whole operation from some of the risks that can happen to your business.

Following are several suggestions that might give you additional options in your business and help provide a greater Risk Management consciousness and mindset:

• Get your entire team involved and seek their input; they see things you might not be aware of and this tells them you value their perspective and allows them to ‘share ownership’  in minimizing or eliminating potential risk. 
• Brainstorm with your staff and team what risks the business, your industry, your customers, your suppliers, all your stakeholders, your personnel and your local, regional and national economies have that might affect your business.
• Increase and improve the sources of information you and your management team receive from: your personnel, your customers, competitors, your industry, all your stakeholders and your local, regional, national and international economies, if applicable, to improve your awareness of what touches and possibly affects your business.
• Start/develop a mastermind group with owners of other businesses in your area, in your Chamber of Commerce, business association, church etc. to help each other develop and improve each other’s Risk Management consciousness. This includes discovery and developing plans to mitigate those potential risks you identify. 
• Consider getting an advisor or coach, like myself, to do a Risk Management audit of your business. Unlike having a CPA do an audit of your business, I come in as a partner, knowing what to look for and can help you develop a plan and practical steps for the future. For example, many business owners who borrow on a regular basis or now need to borrow are basically shut off from borrowing and were not prepared for the consequences of these times. Expert advice can help begin to open the door to the loan vault by taking proactive steps now to mitigate the effects of not being able to borrow. Since the economic turn a significant part of my advisory services are spent on Risk Management. 
• Prepare for the worst as a hedge against the unexpected.
• Consider what your business depends on the most (for example: computer access, specific skills or personnel, suppliers, travel, etc) and brainstorm ways to offset shortages, delays, shutdowns, loss etc. in each of the major areas and look for alternatives and trade offs in each critical and important area.