Thursday, April 21, 2011

Lesson #9: Securing the Right Financial Concepts, Part 2

Bankers probably won’t like what I’m about to tell you nor will many entrepreneurs but here it goes: When you start a business, don’t go into debt; start with exactly the amount of money you have right now. Adjust your business concept so that it takes advantage of your present financial means. In many cases, this probably means starting really small. An advantage? You betcha! Because when you lack capital, you got to get down . . . and dirty! What you lack in money, you’ll make up in sweat equity, more planning, information gathering, and force you to utilize more of your creativity. It will make you a superior entrepreneur down the road. And those brain cells will go into overload on ideas and solutions.

There are few entrepreneurship training programs that hold this concept, but I’ve launched a number of companies and each one was based on this simple formula:
  1. Build a client base first (by using guerilla marketing techniques and a client-centric culture)
  2. Save a portion of your profits first and build equity (to take advantage of future business)
  3. Slowly grow the company using the equity (for continuous marketing and innovation)
Debt Sucks
I was never in debt for greater than $100,000 and that was short term. At the time, my company was closing in on $5 million gross annual sales. What I’m about to explain to you about financial planning is no different than what many financial experts will tell you on an individual basis: don’t spend what you don’t have. (There is one exception to that rule and that’s if you have a signed contract to provide your product/service to a qualified client for which you need capital in order to fulfill.) It makes life more challenging but it also keeps you out of debt, and debt for many people can degenerate into panic attacks and suck the life out of them when they’re having trouble making the payments. Your success may take longer, but it’ll definitely be more rewarding and less costly, financially and personally.

Organically, you’ll turn into a business guerilla, attacking with imagination and getting out into the marketplace to offer your product/service because you need the damn money! You won’t get your money problem resolved, but you’ll be thinking about it and planning for it. But all that thinking, planning, training, information gathering, going after clients - all that hard work in lieu of money, will begin to show dividends because you’ve kept your expenses low.

The Purpose of Business
Here’s what Peter Drucker, the father of modern-day management had to say about expenses within the content of a broader statement on business: “Because its purpose is to create a customer, your business has two purposes: marketing and innovation. Marketing and innovation make you money, generate sales and produce profits. Everything else is an expense.”

Jim Collins, the best-selling business researcher and author of Good to Great (2001), stated: “Disciplined people who engage in discipline thought take disciplined action. This framework captures much of what separates greatness from mediocrity.” Nowhere do you see anything about money; it’s attitude and creativity.

As you stabilize your business, your perspective on money will be the right one because you never have money to skip steps. You couldn’t pay an outside consultant to do your analysis or buy a business plan or pay for a marketing campaign. You couldn’t be lazy because the money wasn’t there to afford any luxuries. You had to do it all. And for that, you know your business, you know the true value of money and the appreciation for your clients is more meaningful than your wealthier competitors.

Money Should Never Lead
The other way to look at money for your business is this: money does not initiate anything. It follows. Money will not make a brilliant idea or a solid business. You do those things with your intelligence and hard work. Money is a tool you use to carry out your existing ideas. It goes where you want it to go. And always use it at your comfort level because the more success you create, the more you’ll get to know Mr. Money. While your comfort level now may be $5,000, in five years, your comfort level may well be $500,000 because both you and Mr. Money have grown together.

And another cool trick that you need to implement as your business grows: don’t wait until you need a loan; anticipate your financial requirements using a realistic projection analysis. This should never be a pie-in-the-sky analysis showing growth at a factor of 10 when you’re trying to impress your banker. She knows better than that based on your past history. It should be a truly realistic projection that makes sense to you and your company. It might be ten percent or less. And in that case, consider applying for a business line of credit or a “microloan” available through a new breed of community loan companies. Do so months ahead so that when it’s time to borrow, you’re not scrambling and panicking for money. Be comfortable with the payment amounts you’ll be making each month. Finally, it’s a whole lot easier to stay in business when you don’t owe any debts. To give you an example of operating with minimal capital, here’s two of my experience from way back in the mid-80s.

Lots of Fish in a Little Pond
When I started a technology business back in 1985, I looked up the number of competitors in the yellow pages. There were 24 in San Francisco doing just about what my little company was doing. They ranged in size from the dinky one-person shop to the Fortune 500 subsidiaries. The bigger the company, the bigger their budgets and the fancier their offices. They had equipment and salaries that were way out of my price range.

So it forced me to think differently and more creatively in order to survive. It also made me work harder to get our name out to our clients. And sure enough, what I discovered was that many large companies did little to attract clients, thinking that the clients should already know them. They rode their glorified reputations, their glossy Madison Ave brochures, and fancy-pants sales people, but there’s something insincere about that approach especially when the client calls and finds out their contact quit two weeks ago.

On the flip side were the little guys, mainly made up of decent technicians who were really good at what they did but never studied business, sales, or marketing. They too sat around waiting for the phone to ring. So I was neither—couldn’t stand the phony, insincere large corporation and wasn’t quite anal enough to be a technician. Instead, I thought of myself as an urban guerrilla, an underdog, disguised as a mild-mannered business person moving tactically amongst the small business jungles of downtown San Francisco.

On the Cheap
Given my perception of my competitors, I decided the best and least expensive way for my company to gain business was stomp the pavement, go into the largest buildings, and start jotting down company names. (I thought about this strategy as an economy of scale—large building contained lots of companies and, if we could capture numerous clients in each of these big buildings, then it would be immensely more efficient and a lot cheaper for my technicians to park once and service multiple clients just by riding the elevators rather than driving and parking umpteen times.) I then ordered a reverse phone directory from PacBell (AT&T) which gave out the names and phone numbers of the addresses I visited.

You might think that there are better ways to contact potential clients these days, say like through LinkedIn, Facebook, and Twitter, but I still like the notion of talking to people face-to-face or by phone. There’s an emotional attachment that we all get by interacting with each other, although websites like provide an initial introduction that can then be parlayed with a phone call. Check it out. Given that your best business strategy will be through word-of-mouth recommendations, you should always make it a priority to go face-to-face because that emotional connection coupled with excellence in your service will build your reputation and increase the odds for paying customers.

The Paper Clip Game
Back in the old days when the phone was the main means of communications, I played a game called “100 Paper Clips.” Each day, I would place those paper clips on the right side of my desk. I would then call all the companies I wrote down earlier and gave them my best sales pitch. In the beginning, I was downright lousy but I’d go through 100 phone numbers each day and, as I made each call, I would take one paper clip from the right side and move it over to the left side. When I had emptied out the right side, I called it a day—that is, in making sales calls. What this little game did was take away the apprehension of making cold calls. It was a game and the emotional rejections gave me an eagerness to make the next call, quickly assess what didn’t work and optimism for the next call.

Talk about experience teaching us! After a few weeks of making these calls, I increased the response rate to my calls. From nine or ten respondents out of a hundred requesting information, I was able to raise that rate to 60 out of a 100 in about six weeks just because the more I made those calls, the more I learned what worked. I became more confident, I relaxed and I began to understand who should make up our ideal targeted client. With each positive response, I would do a follow-up call and make sure my potential client received the information, and it provided me with another opportunity to learn more about them.

Here’s a critical lesson I learned from the thousands of calls I made: you don’t need to blab much about the wonders of your company – whether by phone, by social media, website or in person - because the calls aren’t really about your company. It’s about learning who’s on the other end. You need to make a simple, short statement about what you provide, followed by asking questions about their company and then listen.

Listening to what your prospects are saying is the most important segment of your interaction. There’s an art to hearing and taking in the tones of key words as well as the words being used. By listening, you can actually adjust your tone so that it becomes more comfortable for the person on the other end. When that happens, you are building the first level of trust and putting one foot forward towards a meaningful relationship. If this sounds like the Platinum Rule, you’re right: “Treat others as they want to be treated.”

Better Than Cold Calls
From those simple calls, we were booking about 20 to 30 new clients from the 60 who expressed an interest. At one point, we were taking in over 500 new clients a month. And 20 percent of them were businesses I hadn’t contacted before; they were referrals. So, I concluded that being client centric and giving them the solution they needed, not only made them loyal, it made them an enthusiastic arm of our marketing regatta. (But a danger you’ll want to avoid at all cost is to not forget about your loyal clients. Many businesses tend to pay less attention to their loyal clients thinking they’re “in the bag” and needing no additional tender loving care. Not only will you lose their business, they’ll spread nasty things about you and your company just because they’ll feel like the neglected wallflower that you brought to the senior prom and abandoned.) There is a rule about bad reviews called the “Law of 250” which says that when someone has a bad experience with your business, 250 people will know about it through word-of-mouth.

In the meantime, my competitors were still waiting for the phone to ring. Three years later, of my 24 competitors, only three others remained. The moral of the story is that it doesn’t take money to win over clients; it takes three simple, cheap tactics:
  1. A well-honed message followed by your superb listening skills
  2. Your initiative to go after your prospects like diamonds in the rough
  3. Polishing them with tender loving care and assuring your TLC is constant
 Names, Names, Names!
In their bestseller Made to Stick (2007), Chip and Dan Health they tell a story about a newspaper publisher named Hoover Adams in North Carolina who has one of the few nationally known local newspapers on the planet—the Dunn Daily Record—that’s thriving. His secret: “Names, Names, Names!” His reporters are required to write stories that feature people in the community rather than events or people unknown to his readership. His rational: there are plenty of newspapers providing state, national, and international news. People in his city can get that information easily, but do any of these other papers include local news and names? People want to see their names, their neighbor’s names, and their friend’s names in local stories. For this publisher, it was that simple because he understood his client base.

Similarly, how many people do you think you could connect within the business world who would appreciate someone interested in them, their work and their company? You already possess what you need to get started, and it ain’t money—it’s the honesty and quality of your business and you.

Some Personal Issues about Money
Going into a business requires a decent knowledge of finance, enough to know whether you’re making money or not. But our understanding of money comes from how it was treated and viewed as we were growing up. I’m going to make an assumption that money is somewhat of a mystery to you because like me, you just never had much of it around when you were young. Nevertheless, we all know how important the role of money plays in our world, so it’s a wonder that we don’t teach it as required curriculum starting in our primary schools. Even if it’s as simple as helping our children start a dinky bank account at an early stage. Giving ownership of that money to kids provides a real world experience that will serve such a valuable lesson as they grow to adulthood.
 I remember in the second grade, we were visited by a representative from the Bank of America. He was this big guy with a bowtie and a gentle demeanor. He gave us our first lesson in financial literacy and encouraged us to start saving now either with a saving account or the now-defunct Christmas Account. I couldn’t afford the monthly deposits for the Christmas account (which was a way to save for Christmas gifts slowly over the year while earning interest) but I had $3.50 to put into a savings account making four percent interest per annum. Man, I was so stoked about growing my money that I would stand in line at the bank on the first of each month along with dozens of retirees to collect my interest! It gave me the incentive to make it grow through chores and entrepreneurial ideas even then because I wanted a baseball glove and later a bike. 

With that bank account, I was able to get both even though it took what I thought was a hellava long time—the glove in the fourth grade and the bike in the fifth grade! But looking back, the most rewarding part of that experience wasn’t buying the glove or the bike; it was in reaching my goals. I’m sure that little $3.50 was the best teacher of my financial literacy I could have had because it was touchable and provided a reward for my diligence.

Never Enough Money?
I know that for most of us, as we grew to adulthood, there never was enough money and as a consequence, we ended up borrowing, thinking that we could make payments in manageable increments. And sometimes, those increments kept growing because we didn’t understand how interest rates worked and how they accumulated on top of our original amount even as we continued to make payments. In the meantime, the bills kept coming, inflation was lowering our buying power and our ignorance about money left us anxiously clueless. For some of us, filing for bankruptcy was our only choice. For others, it came close but knowing the backlash of bankruptcy kept us from filing.

If we’ve experienced this embarrassment directly, we know the detrimental effect it has on us. If we haven’t, we know how devastating it has been to some people, even to the point of suicide. If you couple these scenarios and then watch TV or look through glamour magazine, you get a distorted, inflated image of what money brings and means. The federal guideline for poverty in 2008 is $10,400 annually for a single individual or $200 per week. For a family of four, it’s $21,200 or $100 per person per week. I saw a bumper sticker recently that read: “Fulltime Workers: 64 percent at the poverty level.”

According to the US Census Bureau, the present median income of Americans is $24,325 meaning that half of us are making more than that and half are making less. Given the overly inflated bonuses and salaries of many large corporate executives, that 64 percent who are in poverty may be right on. And according to United for a Fair Economy, a nonprofit financial training and advocacy organization in Boston, MA, more than 80 percent of the American wealth is held by 10 percent of the population—meaning that 90 percent of us own less than 20 percent.

A Messed Up Perception
Money has been given more power than it should and it has wrecked our sense of logic and humanity. How often have you been denied a special medical treatment by your HMO because it’s too expensive and how many stories have you read where the decision-maker for your denial is given a bonus or a raise for how much money he’s saved his company? In the meantime, we suffer through our ailments and in the worst case, we die because money mattered more than our existence. In 2010, the projected cost to each insured individual is now over $10,000. That means medical insurance is collecting an average of $10,000 from each person under their coverage.

This kind of scenario crops up in many other fields as well but its effects hurt us exponentially. Take Big Oil. During 2007 and 2008, Exxon, Gulf, and Chevron-Texaco reported combined record earnings upwards of over $30 billion for a quarter (April-June 2008), the highest profit in American history while many at the poverty level cannot eat nutritious foods because the price of diesel has made many foods too expensive. Instead, we’re heading for the fast-food joints because as greasy and unhealthy as they are, they provide a filling meal (and addicting) even at the expense of making us dangerously overweight and ready for the emergency room—an expense we’ll never be able to pay anyway, adding to our mounting debts and eventual bankruptcy.

Even though Martin Luther King made this speech in 1968 at the Riverside Church, sadly, it holds its truth 40 years later:
. . . We as a nation must undergo a radical revolution of values. We must rapidly begin the shift from a "thing-oriented" society to a "person-oriented" society. When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered... America, the richest, most powerful nation in the world, can well lead the way in this revolution of values.

When You First Start Your Business
Your knowledge of money will completely affect how you start your business. My advice is whatever your relationship to money is now, just go with it, and don’t worry about whether it’s enough. Well, it won’t be, but go with it anyway because you won’t have many alternatives. But as I said earlier, it’ll always be a blessing in disguise: it will be one of your best educations in financial literacy as long as you stay awake during the lesson.

I can’t tell you how many suffering first-year business owners I’ve met who skimmed over their entrepreneurial education, and were under the illusion that money would save their hides when things were tumbling. While too little money and too much money are always cited as two reasons that businesses fail, I would say the underlying root cause is the lack of financial understanding and their over-dependence on money as their savior. Always ask yourself: “who’s controlling the money?” It should be you every time.

Money to Start Your Business
While I don’t want to contradict my philosophy of starting your business with the available cash on hand, I think it’s also important to suggest a few ways to obtain money as you grow as long as you feel comfortable with the repayment criteria.

First and foremost, consider the Small Business Administration as a last resort. For the majority of you, you won’t qualify because 1) you’ll need to build up a track record and 2) you’re way too small for their loans. The current criteria for example require retailers to have an annual income of $3.5 million; for service companies to gross $5 million annually and manufacturing to have 500 employees. Yes, the definition of “small” is in the eye of the blind.

When I applied for their loan, I felt pretty demoralized from the experience. Back then, you also had to have been rejected by two conventional banks in order to apply for an SBA loan. So doesn’t that make an SBA banker take the attitude that you’re already a loser? The questions and attitude of the bankers was overly personal, demeaning and cluttered with unnecessary red tape. It’s a stupid way to encourage small business growth, but one thing I realized is that large banks who participate in the SBA-guaranteed loan program are also the brains who begged to have their money borrowed by foreign governments in the billions only to have those reneged. So who do they take it out on? Yep, the little guys because we’re so readily accessible. But we’re the guys with a much better repayment history than the dictator of some corrupt regime who probably pocketed most of the money into a Swiss bank account or partnered up with a drug lord to harvest heroin for the American market. (If you think I’m exaggerating, read Confessions of an Economic Hitman (Perkins 2006)—if even ten percent of it is true, you’ll get a better picture of our misguided and corrupt lending programs both here and abroad.)

I did finally end up with a SBA loan from a small community bank in Walnut Creek where the banker I was dealing with was much nicer and a great deal more helpful. Unfortunately, the bank eventually sold the loan to a large bank who hired the Evil Witch of the East to hassle all SBA clients to make sure we paid up on time even if we never were delinquent. It got so bad each month that I decided that dealing with such assholes was not part of our business plan. We had enough equity by then that we paid off the remainder of the loan and told the bank to kiss our corporate butts good-by forever.

In his book, Growing Your Business (1987), author Paul Hawkin calls the SBA “one of the strangest institutions known to mankind.” He too had the same experience as I did but goes one step further: the time it takes to get an SBA loan is so long, that by the time you get the funds, it’s probably too late.

Your Best Money Sources
  1. Your best bet is you. It’s the money you’ve saved whether it’s in a cash account or any investments that if you were to lose it, wouldn’t do too much harm. To keep it straight, loan the money to yourself as a sole proprietor or use it to purchase shares in your company as an LLC or corporation. Then deposit it into your business bank account; not your personal bank account. Possible areas of money you have right now are your savings accounts, earnings from your job, retirement fund, life insurance policies (whole life which has an accumulated cash value), lines of credit from your home equity loan and inheritance.
  2. Family and friends are also a decent source but the one thing you must be clear about is the lenders’ relationship to your business. If you do not want their voice or decision-making within your company, create a written agreement for the loan and make it clear that they are making a loan with no powers. You control everything. They either loan you the money on this basis and shut up or no deal. Believe me, there are family members and friends who’ll want a piece of the action when your business starts to fly. Also make sure you detail how you’ll pay back the money either in increments or a one-time payback and whether there is interest built in. Even if it’s your mom and dad or best friend, do the loan papers with the utmost precision as if you’re dealing with a stranger. Money has a way of screwing up even the best of relationships.
  3. Community lending programs offer micro-loans from $500 to $100,000 based on your equity, your company’s equity, and your ability to pay back the loan. In Oakland, there are several agencies including the Oakland Business Development Corporation, Opportunity Fund and Working Assets. (In the pipeline is a proposal by Goldman Sachs (of all people) to develop a microloan program with $300 million distributed through such organizations as those mentioned above.
  4. Community-based banks such as OnePacific and Community Bank of the Bay will work with you to secure either SBA-backed or special government backed programs. But you must do your due diligence and if you start the paperwork with them, be persistent until you get an answer.
  5. Some entrepreneurship training programs have accumulated a reserve or grant to help their graduates launch their businesses. Normally, you must be a graduate of their program in order to qualify.
  6. Private investors who are looking for high returns in lieu of other types of investments such as stocks, housing, etc. In these cases, you will need to have a strong track record and a well-conceived prospectus.
  7. Our Urban Luau fundraisers, which is made up of Urban FIRE graduates, coordinate and take part in raising monies for fellow graduates who don’t have the funds to pay for a business license, fictitious business name, and minor startup costs (up to $200 per).
  8. Other possibilities but unlikely: credit cards (unless you can pay back the principal amount each month to avoid high interest rates), venture capitalists, and going public.

So What’s Included In Your Business Plan’s Financial Section?
The critical financial information for your business plan starts with the initial capitalization. The information I’ve provided from the first paragraph onward of this section should be considered with all due seriousness in order for you to plan how you will finance your business. Our business plan  - which you’ll compose in Urban FIRE II or LaunchPad - is for a one-year period). Through the two dozen business plans I’ve written and hundreds that I’ve read, I can say without hesitation that 100 percent of all business plans are changed within the first year. And 90 percent of them have been written out of reluctance because their financial institution required it or the writers felt it was the required process to go through.

Our business plan is about reality and it only covers the first year to get you up, running and stabilized. This business plan is a living document for you, not for investors, the bank or your parents. First figure out where the money will be coming from, whether it is a loan or investment and the starting amount. Also describe how you’ll spend the money to launch your business. Will you buy office equipment, inventory, marketing materials, a website, or will you hold it as working capital for each job you’re able to win?

Just for the Heck of It
As an option when you have nothing better to do, draw up a three year projection of your sales, possible profits and expenses, and what your cash flow will look like. I use to do this with the utmost consideration for accuracy just to see how far off I’d be in the coming years. But it’s also good practice for using QuickBooks. Do this by creating an annual profit and loss statement for each of the three years. You can do this by inputting all your starting expenses and capitalization in a dummy account that you set up as a sample business. I am so adamant about you installing QuickBooks before you start your business, that if I find out that you haven’t started using QuickBooks, I will have to strip you of your designation as an “entrepreneur.” Instead you will be officially titled as “nincompreneur” (from the Latin origin “non compos mentis” meaning “not of a sound mind”).

With your best estimates, show your monthly income and expenses and continue to input these details monthly for 36 months. The finer the details, the more precise your projects will look, and with these figures, you’ll also be able to come up with a balance sheet showing the net worth of your enterprise. All financial considerations should be made including any loans and their projected payoff, lulls and high points in the year based on your Industry’s records.

Not that anyone will be disappointed if your figures are off in three years, but do the best you can to come up with numbers that you feel are attainable and realistic. As you complete each year, you’ll see how close you came to your projections. As you gain financial data over the months, your annual projections will gain greater accuracy so that each year, as you readjust your projections, the numbers will calculate more precisely, and provide you with a powerful tool in predicting the future.

Startup Costs Estimates
In this space below, write in your costs (or estimated costs) for starting your business. These are general categories with various expenses. QuickBooks has a resource that can break down a more itemized list for your startup. You can also use the Profit and Loss Statement below for additional ideas.

Legal Startup costs and licenses (legal entity, fictitious name, etc.)                                               __________
Capital Equipment (computer, phones, desk, chairs, copier, file cabinets)                         __________

Professional Services (legal, financial, insurance, marketing, webpage)                                        __________

Office Expenses (phone, Internet access, utilities, rent, insurance, office supplies)                       __________

Sales Expense (inventory, manufacturing, warehousing, shipping)                                     __________

Marketing Expense (business cards, letterheads, marketing materials, advertising, travel)            __________

Wages and Benefits (paying yourself and any partners, employees if any)                         __________

Some Key Notes:
You can deduct up to $5,000 of your startup expenses when they are taken in the year you launch your business. This will include everything except for capital equipment. The odds are, you won’t be spending $5,000 and really, you should conserve and watch your spending habits. The “good stuff” can come later when you can afford to splurge. Capital equipment is “depreciated” meaning that the government says over the course of several years, they will be used and in each of those years, they can be deducted from your taxes. For instance, if you purchased a computer (or other electronic equipment) for $1,000, you can depreciate it for five years at the rate of $200 per year off your income taxes for the business (or your personal returns if a sole proprietor, partnership or LLC). For furniture, it’s seven-year depreciation. Once your first $5,000 is written off, any further deductions must be amortized (equally distributed) over 15 years, not exactly worth the expense. 

No comments:

Post a Comment