Whether it’s the entrepreneur looking for start-up capital, the owner of the small business looking for growth capital, the CEO looking for acquisition capital, or the company founder looking to recapitalize for an eventual exit, there are certain rules which, if followed, will dramatically increase the likelihood of success. Many of these rules may seem obvious, but the financing expressway on-ramp is littered with businesses that neglected them.

1. Establish and follow a process. Haphazard casting about hoping to secure financing yields haphazard results. Identify a process for seeking financing and methodically follow that process.

2. Start raising capital before you need it. The time to begin is not “when the iron is hot.” Your sense of urgency and your immediate need will likely leave the financing source cold. You must allow the investor or lender adequate time to perform their due diligence. It’s part of entrepreneurial lore that banks are most willing to lend when you least need it. If you have financing lined up in advance, you will be in a position to strike when the time is right.

3. It is relatively easy to get an audience with investors compared to getting funding. Be prepared for the tough questions and know your business (get your house in order):

•       Know your market and competition (details).
•       Know your weaknesses and have a solution.
•       Define a clear use of funds (this leads to alternative capital structure and funding sources).
•       Be able to explain your strategy.
•       Identify relationships and levers (this sometimes reveals funding sources and partners).
•       Prepare the management team and rehearse your presentations.

4. Select only a few prospects; otherwise you waste time and get a reputation for shopping the deal.

5. Know what kind of money you need and how it plays into the overall capital structure of the company. If you are looking for additional financing, you must understand the effect it will have on your balance sheet. Your creditors, whether banks or investors, will monitor key financial statement ratios. Know in advance which ratios will be affected and will be a cause of concern. If this is not your strength, find an advisor who can support you in this analysis.

6. Sample the market for acceptance and issues; listen to criticism and learn. Go to sources where you have relationships for quick and candid feedback. Look for trends. Use mentors and advisors. Find out where the issues and concerns are before you go to your prospects.

7. Be realistic regarding valuation, issues, strengths, weaknesses, and timing. Anticipating concerns by calling out issues and concerns up front will cast you in a much more favorable light than having them called out by the potential stakeholder. It demonstrates thorough preparation as well as an absence of rose-tinted glasses.

8. Have alternatives and be creative. There are myriad types and sources of financing. Have not only “Plan B”, but sketch out C,D, and E as contingencies.

9. Follow the operating principles of “do what you say you are going to do” and “no surprises.” Nothing builds stakeholder confidence in a company and its management team like delivering on performance commitments.

All of this can be summed up in a single word: credibility. Nothing is more important to the process than carefully establishing and scrupulously maintaining credibility. The documents you present and the statements you make must be accurate. Bankers have countless stories of the business owners who come to them with incomplete and obviously inaccurate financial statements, yet are bewildered and frustrated by the bank’s reluctance to lend. Potential investors time and again see business cases that are based on an assumption of securing one percent of some enormous market or other. I recently reviewed one such plan. When I asked the entrepreneur where he got the one percent, his answer was, “I pulled it out of my [hat]“. Certainly candid, but not a help to the credibility of the business plan.

These nine guidelines will help you obtain the growth financing necessary for your business. Disregard them and risk being stranded by financing sources. Find a professional advisor who understands and can implement the recommendations here. He or she will assist you in navigating your way onto the financing expressway. At B2B CFO® we have long-term, trusted advisor relationships with our clients. Our many banking and financing relationships enable us to consistently deliver on our tag line: Cash. We help you get it®. Feel free to contact me for more information.

Adapted from the preface to “The Handbook of Financing Growth“, Second Edition, written by Kenneth Marks, Larry Robbins, Gonzalo Fernandez, John Funkhouser, and D.L. Williams; published by John Wiley & Sons.

Working Capital Problems?

Here Are 8 Signs That You Need To Watch

Does your business have working capital problems? Let’s take a look at what working capital involves. Basically working capital falls into four main areas. These are:

1. Cash
2. Accounts Receivable
3. Inventories
4. Accounts Payable

Most companies would say “yes, they have a problem in one of these areas.” Why? Because these factors most affect how a company can operate. Face it, if you don’t have cash in the bank, accounts receivables from sales, inventory to sell, and payables from the purchase of inventories, you are basically out of business. Therefore, these factors should be monitored very closely and on a regular basis.

There are many reasons why a business will have working capital problems. As a business owner, it is critical for you to determine why the situation exists, and correct the problem(s) immediately. So how do you determine why you would have working capital problems? Here is a short list of some of the usual causes of this issue.

1. Not enough sales, therefore not enough cash
2. Past due receivables are increasing
3. Customers are paying short, due to quality issues
4. Staff has been added to process orders and/or invoices
5. Detailed information on inventory not available
6. Inventory turnover problems
7. Interest incurred or late payment penalties from vendors
8. Overpurchasing

To avoid problems in working capital, the business owner should spend time carefully looking at what is going on in the business at this level. At the end of every month, a financial “dashboard” should be prepared for the business owner that gives him/her the vital statistics in the areas needed to monitor working capital. For instance, each month a report should be produced showing information such as aged receivables, inventory levels by category, inventory turnover, and days in payables. These statistics should be looked at and compared month by month to determine if the problem is getting better or worse. Action should be taken immediately when the numbers show a trend that will be bad for the company.

Monitoring working capital is not a difficult thing to do. A simple report put together every month will focus management in the right areas, and help to move the business into better times. B2BCFO can help business owners monitor their working capital by putting together simple, easy to understand reports that get to the heart of the matter. Tackle this problem early, and working capital will not be a problem.

One of my partners at B2B CFO®, David Kirkup, recently posted an excellent article on his blog. David provides CFO services in the Atlanta area. I have re-posted his article here, with a link to his blog as well.

Better Receivables Management – a Proactive Approach

March 9, 2012 David Kirkup

One of the biggest barriers to implementing regular cash flow forecasting is the unpredictability of incoming receipts. Accounts receivable is among the largest and most liquid assets on the books of most companies. A properly managed accounts receivable portfolio can expedite cash flow and support corporate cash requirements. The ultimate goal of accounts receivable is to increase working capital and reduce debt leverage.

So why do most companies entrust this key function to the lowly accounts receivable person? And worse, why do they then ask the likely introverted AR clerk to be aggressive about making difficult collection calls?  Because, in many companies accounts receivable management is reactionary, time consuming and often neglected. Consider that most customers are contractually bound to pay their invoices in 30 days.  Would it surprise you to know that nationally the statistics for receivables payment show that less than 50- 60% are paid within terms? Of course, by the time most companies are aware that a payment is late it’s already at 40 days and counting.

So what can be done to improve collections, reduce write-offs and improve cash flow? The four basic processes that make up the accounts receivable function are typically:

• Invoice Processing
• Payment processing
• Credit management
• Collections

There are many good articles on how to improve Accounts Receivable Management.  Since the squeaky wheel gets attention they often recommend:

1. Create and enforce credit policies and credit limits up front
2. Get invoices out quickly and accurately – by email, not snail mail
3. Make sure deliveries are correct and resolve disputes quickly
4. Call customers promptly when payment is late
5. Monitor Days Sales outstanding and Receivables Aging closely.

All good ideas and long tried by good Chief Financial Officers.  Unfortunately, there is one major flaw. You can’t call all 50, 100 or 500 customers on Day 30 to ask if they are going to pay – even if you could staff for that, it would annoy the customers.  Thus, you cannot spring into action until you can identify the late payers – and by then you are approaching 40 days before you begin collection efforts.

So what if you could quickly identify and deal with late payers, and focus less effort on collection and more on customer service?

I think I have a solution.  The problem with traditional receivables management processes is that they work on the Opt-In principle.  This means that all the power lies in the customer side of the relationship, and until the customer is late, you remain ignorant of their intent and thus predictability of your cash flow is impaired.  This is just the way things work…or is it?

Receivables management software firm TermSync is pioneering a new approach to pro-active receivables management to help our clients improve cash flow.  TermSync works with vendors to capture invoice information, and then sends simple email reminders to the customers upon due date.  The unique idea is that the emailed invoice gives the vendor three options or check buttons: Pay Invoice, Dispute Invoice, and Delay Payment.

In addition, TermSync has found that their “third party status” has helped them to put many problem customers onto a back-up ACH payment mode.  What this now means is that the vendor/customer relationship has subtly changed.  Now the vendor can receive advanced notice of the customer’s payment intentions, and can direct resources appropriately and quickly to resolve disputes and accommodate short payment delays.  But the mere act of asking the customer to take 30 seconds to confirm intent and give a short reason for delays or disputes seems to make a huge difference.  TermSync reports collection rates of 97% within terms for their customer base. Other unique features of this system include management of payment plans, dashboard summaries of AR stats, and the intelligent use of the network effect to ensure their vendors get to the top of the customer’s “must do” list.

Receivables management has always been the neglected stepchild of financial management, and it’s long overdue time for a rethink.

To discuss how we can start accelerating your cash flow, contact me at tomadkins@b2bcfo.com.

To learn more or request a demo, go to www.termsync.com and enter B2BCFO-TA in the comments.

(* When it comes to cash flow, there’s no time for a Top 10 list!)

Why do you need to concentrate on Cash Flow? Simply put, especially for a small to mid-sized business, cash flow equals life, growth, prosperity . . . and survival.

You need to free yourself to focus your unique talents and abilities on growing your business rather than fighting the constant cash flow fires. Remember . . . you are the only one who really cares about the ongoing viability of your company. It’s your future that you are most concerned about because, if your company is not successful, none of your employees will have a job.

Here are the Top 5 Cash Flow Rules you can implement immediately that will transform the way you manage your business from this point forward. But first, remember the two cardinal rules of managing a business:

• Never run out of cash. Make the commitment to do what it takes so that it does not happen to you.

• Cash Is King. Cash is what keeps your business alive. Manage it with the attention it deserves. Without cash, you have no business.

Now, the Top 5 Rules . . .

1. Know the cash balance right now. Even the most intelligent and experienced person will fail if they are making business decisions using inaccurate or incomplete cash balances.

2. Do today’s work today. The key to keeping an accurate cash balance in your accounting system is to do today’s work today. When you do this, you will have the numbers you need—when you need them.

3. Either you do the work or have someone else do it. Either you do the work or have someone else do it—those are the only two choices you have. The work must be done. So, either you do it or have someone else do it. (See Rule 3a.)

3a. If you are doing the work of determining the cash balance, you may not have the right people working for you. Unless you are a start-up business without any accounting staff, you must be sure that the financial people know that you need and demand that they focus their efforts on monitoring the cash balance, and keep you aware of what’s happening with your cash.

4. You absolutely, positively must have cash flow projections. Cash flow projections are the key to making wise and profitable business decisions. It’s impossible to run your business properly without them.

5. Eliminate your cash flow worries so you are free to do what you do best—take care of customers and make more money. This is the real key to your success in business. The reason you have to make sure you have the cash flow of your business under control is so you are free to focus all your time and talents where you can make the most difference in your business.

B2B CFO® specializes in helping business owners manage their cash flow. Give us a call for a free Discovery Analysis™ of your business. It’s a call worth making.

Top Six Strategies to Improve Cash Collections in December

December is typically the month in which cash collections from receivables are the lowest. This puts added stress on business owners as they try to meet the cash needs of their company, survive the holidays and try to collect bills without being branded with the “Scrooge” image. According to Jerry L. Mills, founder and CEO of B2B CFO^®, the USA’s largest Chief Financial Officer (CFO) firm serving mid-market companies, the top and most common reasons that cause cash collections to decrease each December are:

• Accrual-based companies like to show more cash on their balance sheet on December 31st and are sometimes reluctant to pay their bills in December.
• The person who cuts the checks takes holiday vacations and is not available to cut checks.
• Illnesses, such as the common cold, cause payables people to be out on sick-leave.
• Your company’s staff may be more interested in the holidays and vacations than in collecting cash from your customers.
• Your customers may have their own cash collection problems that they pass on to your company.
• The check signer may be on holiday vacation.

But business owners can still take measures to improve their cash flow outlook this month. “As a business owner, you can still sit down with the staff and create plans for cash collections,” says Mills. “The staff may need to be reminded that they need to focus on the company’s needs and be proactive in cash collections.”

Some suggested strategies to collect cash might include:

1. Collection Goal – Tell the staff the dollar goal in cash collections that you expect to achieve for December. Be positive, but firm about the collection goal.
2. Specific Identification – Have the staff give you a detailed report of the cash they expect to collect from specific customers by December 31st in order to achieve the collection goal. Communicate your concerns to the staff about customers. Help them understand the importance of collecting the cash without hurting the relationship with the customers.
3. Daily Reporting – Ask the staff to report to you (or a key employee) the results of the collections each day of the month in December. Any concerns about the collection goal should be communicated daily.
4. Internal Scheduling – Request your staff to give you a calendar of when they will be gone from the company during the month of December. Make sure someone is available to collect cash each day the company is open during the month. Make sure the receptionist knows who is available to take calls from customers who have questions or concerns about their invoice.
5. Additionally, have the staff call the customers to find out if there are any calendaring problems with your customer’s during December. There is no sense in calling to collect money if your customer’s staff is on a scheduled vacation – know the vacation schedules and plan for collections accordingly.
6. Performance Bonus – Give some consideration to giving a bonus to your staff if they meet or exceed the cash collection goal. This is a win-win situation for both your company and the staff as your employees earn some extra Christmas money while your company has sufficient cash in the bank to operate.

December can be a challenging month for business owners and lack of cash flow only contributes to a bad situation. Cash collections are an integral part the business cycle and strategic planning can help to keep businesses on track even during the holidays.

A business owner, or someone who works with business owners’ cash, has a constant and unrelenting problem. Do you sometimes wonder where your cash went? There are several “tricks of the trade” that well managed companies utilize to maximize their cash flow. These cash policies can be used by any business, large or small. Here are a few of them that will help you keep cash in your checking account.

Do you know what a cash conversion cycle is? Loosely defined, it is the amount of time it takes a business to convert a sale to cash. The shorter your cash conversion time, the better managed your cash flow will be. The cash conversion cycle is expressed in days. Know what company has the best cash conversion cycle? Dell. Their cash conversion cycle averages -15 days. Yes, that is MINUS 15 days. How do they do it? First, they get you to pay for your computer up front so they have your cash. Your cash is in their account, but they haven’t delivered anything yet. Second, they don’t order the parts to build your computer until the order is placed and paid for. Therefore, they don’t carry excessive inventory. Have you ever noticed that you pay extra for the immediate service? They are essentially getting you to pay for their inventory carrying cost. Lastly, they don’t pay their vendors until the bill is due, or even a little later.

Starting to get the idea? Here are a few things you can do to help your cash conversion cycle.

 Get Faster Collections

 1. Bill via email so your customers get their invoices more quickly. This starts the clock ticking sooner on the payment due date.

2. Use state of the art cash management tools such as remote deposit technology.

3. Contact the customers before the invoice is due! Make sure the customer is satisfied with your product or service and that the invoice is set up for payment.

4. Start a collection procedure as soon as invoices become overdue.

Reduce Inventory

 1. Don’t order inventory until you absolutely need it. Establish re-order points and minimum order quantities.

2. Limit access to inventory to prevent theft.

3. Get rid of any obsolete inventory, immediately.

4. Consider using contract manufacturers. Let them use their cash to hold the inventory.

 Stretch Payments

 1. Don’t pay vendor bills until they are due. If it says due on receipt, take at least 15 or up to 30 days.

2. Take all payment discounts.

3. Negotiate longer terms with your vendors. Don’t be afraid to ask for 60 days to pay.

There are many other actions that will help you convert that sale into cash, faster. Think about how your cash flows. Efficiency is the keyword.

We sometimes speak with owners of small to medium sized businesses who regard CFO services as being too expensive. Of course the services of an experienced CFO, even on a part-time basis, are not cheap.  But the question to ask is not, Can the business afford a CFO? The real question is, Can I afford not having a CFO?

There are many actual and potential costs that a business may face.  A number of them can be reduced or avoided entirely through effective financial oversight. Some of those costs include: cost of borrowed funds; cost of inaccurate, late or unavailable information; cost of incorrect estimated taxes; cost of late payments and missed discounts; cost of bad pricing decisions; and cost of internal or external theft.  Over the next few weeks I will discuss some of these costs in more detail, along with potential steps to avoid or reduce them.

Cost of Borrowed Funds

There are many avenues down which a company can turn in search of cash. For privately held small to medium sized businesses, the options include bank loans, SBA loans, equipment financing, asset-based lending, factoring, and loans from the FF&F (founders, family & friends). That’s not to mention equity investors of many types.

Of course the various borrowing options have a wide range of interest rates. Also, as most business owners have discovered, not all loans are equally accessible.  So while a traditional bank loan may have the lowest interest rate, you may be forced to resort to asset-based loans or factored accounts receivable, with interest rates that may be two or three times as high as bank loans.

Most, if not all, of the various lenders will ask for current and historical financial statements from a prospective borrower. Although the bank may have money to lend as well as a desire to lend,  if those statements are questionable, or patently wrong, the loan will most certainly not go through. The banker will have the unpleasant task, as one put it to me, of having to tell the business owner that “his baby is ugly”.

Robert T. Slee is President of Robertson & Foley, an investment banking firm that provides valuation, capital raising, and transfer advisory services to middle market companies. He speaks extensively on value creation for private businesses. His book, Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests, is regarded as the definitive work on the private capital marketplace. In discussing risks that are likely to be found in privately-held businesses, he writes the following:

“Most small private companies do not employ a chief financial officer; rather they have either a controller or bookkeeper that closes the books. Yet this “money-saving” decision often costs the company because it leads to inadequate financial management.”¹

The risk of not having a CFO to provide adequate financial management, according to Slee, contributes to the fact that the private company is likely to pay significantly more for capital than does its larger, public counterpart. Lenders charge more for loans that are perceived to be more risky.

The lesson here is not that you should take your company public, but that you should put a financial management structure in place. For the small to medium business, while a full-time CFO may still be cost-prohibitive, a seasoned financial executive can be engaged on a part-time basis to provide the needed financial leadership and management. The benefit to you will be improved financial clarity, and the ability to provide trustworthy internal financial statements to your banker. That very well could mean borrowing at a substantially lower cost to your business.

¹ Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests, Second Edition, p. 238.