1. Find Ways to Improve Cash Flow and Profits
Grow Your Business!
Find Ways to Improve Cash Flow and Profits

2. The SCORE Foundation would like to thank
for showing their support of America’s small businesses
by sponsoring this series.
The content provided in the Grow Your Business! materials is intended as a business resource only and does not guarantee a successful outcome when applied to individual business use.
To find additional resources on growing your business,
visit and
Note: Add your chapter contact information and list counseling locations

3. A Special Thanks to Our Local Sponsors
BE SURE TO ACKNOWLEDGE MANASOTA AREA SPONSORS WHO HAVE PROVIDED FUNDS OR IN-KIND DONATIONS TO DEFRAY SOME OF THE EXPENSES OF PUTTING ON THESE WORKSHOPS. THE BANK SPONSORS ARE ALSO WILLING TO WORK WITH OUR CLIENTS TO OBTAIN SMALL BUSINESS LOANS THAT ARE SUPPORTED BY THE SBA (SMALL BUSINESS ADMINISTRATION). 3

4. Please do not wander around the building!
Classroom Safety – Argosy U
Emergency Exits
Restrooms
Please do not wander around the building!
You are HERE 4 4

5. Please do not wander around the building!
Classroom Safety–ComCenter
Emergency Exits
Restrooms
Please do not wander around the building!
Note: Add your counseling locations slide
You are HERE 5 5

6. About SCORE
Successful and experienced business owners and executives acting as volunteers
Free ongoing mentoring:
One-on-one
Signup on our website – Mentoring Tab
Seminars and workshops
Resources for small business: manasota.score.org
Douglas S. Cavanaugh
Talk to clients about the benefits of working with SCORE. Follow the slide and point out the success stories presented in their workbooks.
This is also your opportunity to talk about your local chapter and all that you offer. Talk about community partnerships and what clients can expect from their relationship with SCORE once they start their business. Provide them with the website URL for your chapter.

7. Assessing Your Business
If you have not looked at the SCORE Business Needs Assessment, it is in your packet!
It will help you assess the current state of your business in 5 key areas:
Management
Marketing
Sales
Finance
Operations
Review with your mentor to help you:
Decide what additional workshops to attend Develop a customized business improvement plan
Some of you may have already taken the SCORE Business Needs Assessment. This simple online assessment helps you ascertain the current state of your business. It also helps you spot areas where you could improve and opportunities for growth.
You can take the test online at [INSERT URL WHEN COMPLETED] or in person with a SCORE Mentor. [IS THIS CORRECT?]
The Business Needs Assessment asks you about 5 areas of your business: Management, marketing, sales, finances and operations.

8. Workshops - Focused on key business processes
Improve performance to Grow Your Business!
Customers – Impacted by All Functions in Your Business
Marketing
Marketing Essentials to Attract More Customers
Focus on Customers to Increase Your Sales
Sales
Customer Service
Service Delivery
Improve Your Services and
Gain Productivity
Purchasing / Manufacturing
Distribution
Simple Steps for Growing Your Business workshops are focused on the key “functional” areas of your business. Whether you are large enough to have departments that lead these functions or if you have a few employees that manage and direct all of the activities, SCORE offers education to help you learn where there are areas in your business that can be improved to get better business performance.
When trying to attract customers, businesses use marketing. Sales follow and customer interaction with the company’s customer service process, for placing sales orders or future service after the sale begins. It is then up to Operations to acquire or make products and then deliver the products or services to the customer.
Human resources deals with employees in all areas of the company assuring that the many facets of attracting and keeping good employees is effective for the company. Finance insures that all financially related transactions, internal to the company or with external organizations are recorded and reflected properly for business performance analysis and required government filings.
It is the successful and efficient integration of all of the business functions that the business owners and management must manage and direct.
Find Ways to Improve Cash Flow and Profits
Finance
Business Owners / Management - responsible for Business Performance

9. Let’s Get Started Briefly tell us about you: Your name Your business
(30 second “elevator” speech)
Do you already have a SCORE mentor?
What you hope to achieve during and after this workshop
Conduct brief introductions with students—a maximum of one minute each.
Remind students that throughout the entire series, they will have many opportunities to interact and get to know each other.
Total Time: 25 minutes
Katrina Markoff

10. During this workshop we will discuss:
Importance of financial management to a small business owner
Using Financial Statements
Financial management practices, rules and tools for a small business
Funding: business growth, working capital, and/or assets
Common risks in a small business
Business warning signs and risk management plans
Marta E. Maxwell
After completing this training, you will be able to:
Explain the concept of financial management and why is it important to a small business
Identify financial management practices, rules, and tools which are commonly available to a small business
Explain how these financial management practices, rules, and tools work
Explain financial management basics for a small business

11. Good Financial Management Practices
After completing this module, you will be able to:
Identify the common warning signs of risk for a small business.
Implement, monitor, and evaluate a risk management plan for a small business.

12. Good Financial Management Practices
Reach YOUR goals by making good decisions
Use commercial business accounting software
Prepare a budget and measure performance
Understand and manage your cash flow
Keep track of profit /loss for your business
Find appropriate funding for operations and growth
Develop a business financial forecast – monthly, for the next 1 or 2 years
Continue to improve measurements and practices
Your accountant may help, but it is YOUR business!

13. Importance of Excellent Bookkeeping
Critical component of company financial management
Organized process of tracking all income and expense transactions
Transaction entries must be current
Basis for all financial management,
business decisions, financing, taxes, owner’s draw / salary, and retirement planning.
Bookkeeping is the organized process of tracking all income and expense transactions. Bookkeeping is a critical component of financial management, which leads to better business decisions regarding financing, taxes, owner’s draw, and retirement.

14. Basic Bookkeeping Steps
Obtain business accounting software
Discuss with your accountant:
QuickBooks – Pro (Services) or Premier (Manufacturing)
Peachtree Accounting
Open a separate business checking account
Deposit all sales receipts
Checks / Cash
Credit card sales – direct deposit by clearing house
Write business checks for business expenses
Reconcile your checking account monthly
Obtain a separate business credit card
Pay bill monthly – credit card financing is expensive!
Here are ten basic bookkeeping steps:
Obtain business accounting software. Proper software selection is critical for success.
Open a separate business checking account. Do not mix business and personal checking accounts.
Reconcile your checking account. Each month reconcile your account using business accounting software or a cloud computing reconciliation process.
Track sales. Create an airtight system for tracking sales using tools such as a register tape, invoices, and a sales book. Use this sales tracking system religiously.
Deposit all sales. Using the duplicating deposit slips, deposit all sales in your business checking account. Alternately, “remote deposit capture” (RDC) may be available for depositing checks. Total sales should equal total deposits. Do not spend cash sales. Link all forms of sales documentation (such as invoices, cash register tapes, and sales books) with a specific deposit.

15. Basic Bookkeeping Steps
Pay business expenses first
Track Sales – register tape / invoices
Pay yourself with owner’s draw / salary
Generate and use profit and loss (P&L) and cash flow statements – at least monthly
Note: Most small businesses use the CASH method as their tax basis and it shows the current cash status
The ACCRUAL method view shows additional “future” information:
1- Sales that have been made, but payment has not been received
2 - Purchases that have been made, but the invoice is not yet paid.
Look at BOTH with your software to get the best perspective on your financial status
10.
Here are ten basic bookkeeping steps:
Write business checks for all business expenses. Don’t use a petty cash system until you are experienced at bookkeeping.
Obtain a separate business credit card. Do not mix personal and business expenses on one credit card.
Pay business expenses first. Most businesses start out as a sole proprietorship. In sole proprietorships, you, the owner, do not get a salary; rather you take an owner’s draw. A common question is how much draw to take? Here’s a rule of thumb: Sales pays for business expenses first, personal expenses second (step 10, below).
Run a profit and loss (P&L) statement. A checking account balance is not a good indication of how much profit the business has made or what amount is available for owner’s draw. A P&L statement can provide a better picture of the financial health of the organization.
Pay yourself with owner’s draw. Owners should pay themselves by writing a check or doing an electronic transfer from the business account to a personal account. If you are a sole proprietor, assign those draw checks to an equity account called “Draws.”

16. Preparing a Budget A budget is a tool that helps you:
Plan for the future – usually monthly for the next year
Forecast and then track your actual financial transactions
Adjust activities when needed
Marketing to attract more customers to increase sales
Reducing costs
Consider the impacts of expansion
Estimate profitability
Creating a budget is the first place to start with your financial management practice. A budget is a list of all your (monthly or yearly) expenses, organized by categories. A budget is a tool that helps you:
Track all your business expenses
Plan for the future
Economize when you need to
Plan for expansion
Make a profit
Once you create a budget, use it to compare what you’ve budgeted with your actual expenditures.

17. Primary Elements of a Budget
CATEGORY
MONTHLY BUDGET
MONTHLY ACTUAL
SALES
COST OF GOODS SOLD
RENT/MORTGAGE
UTILITIES
PROFESSIONAL HELP
ADVERTISING
PAYROLL
INSURANCE/TAXES
OTHER
PROFIT
All line item income and expense areas should be included in the budget with a focus on profit and cash flow.
Your accounting software will provide detailed accounts for each category

18. SCORE Budgeting / Forecast Template
You may use a simple format like the last slide
SCORE also offers a comprehensive spreadsheet template for developing your budget or business financial forecast
Download:

19. Exercise 1 How Do You Budget for Your Business?
Discussion:
Do you currently prepare an annual budget?
Do you track your results compared to budget monthly?
How does this help with your business decisions / forward plans?
5 minutes
Review the sample budget. Discuss each category and ask what other items participants have for their business expenses. Ask participants if they keep track of their monthly expenses and how it helps them with their business decisions.

20. Understand and Manage Cash Flow
What is cash flow?
Moving cash in or out of a business including sales revenue receipts and expense transactions
Balance of cash received less the amount of cash paid out over a period of time
Cash flow can be positive or negative during the period
Cash flow can be defined two ways:
Balance of cash received less the amount of cash paid out over a period of time
Moving cash in or out of a business

21. Cash Flow Analysis
Generate Cash Flow reports at least monthly with your accounting software
Compare your Actual business performance to your Budget in all categories
Where were the gaps?
What impact did business performance have on Cash Flow?
What needs to change to increase positive cash flow?
Prepare a Cash Flow projection to help adjust performance when needed
Helps you manage your cash so you can pay your bills on a timely basis and keep the doors of your business open

22. Projecting / Estimating Future Cash Flow
Prepare a financial statement using assumptions to forecast for a future time period:
Use your Budget estimates and adjust assumptions based on current information
Current company cash flowing in and out
Future cash flow during a specific time period
Project whether cash receipts (in flows) will be sufficient to cover projected cash disbursements (out flows).
A cash flow projection is a financial statement that tries show how cash is expected to flow in and out of a business over a future specified period of time. A cash flow projection is used to see if projected cash receipts (in flows) will be sufficient to cover projected cash disbursements (out flows). A business can be profitable and still run out of cash. As an investment banker might say, “Cash flow projections provide the visibility needed to avoid liquidity problems.” In other words, a cash flow projection is a tool to help you manage your cash so you can pay your bills on a timely basis and keep the doors of your business open.

23. Projecting / Estimating Future Cash Flow
How can a cash flow projection help?
Set sales and expense goals
Plan equipment purchases for replacement or expansion
Determine cash needed to purchase inventory for seasonal cycles
Why do I need a Cash Flow projection?
Track liquidity when accrual accounting masks cash realities
Help you determine the need for financing
Show lenders your ability to plan and repay financing (Frequently required with loan applications)
Predict cash shortage period(s) that may require adjustments
A cash flow projection is a great tool for setting sales goals and for planning for expenses to support those sales. A related use for a projection is to determine your breakeven point during a start-up or expansion phase. If you need to plan for a large expenditure, such as an equipment purchase or moving to a new location, a cash flow projection is the perfect tool. Similarly, if you have a seasonal business with large inventory purchases, a projection can help you have the cash on hand to make a large inventory investment when you need it.

24. Cash Flow Projection Example
BT CONTEMPORARY CREATIONS, INC.
Year ended
CASH FLOW STATEMENT
12/31/2010
Net income
21024
Cash flow from operating activities
Depreciation
5237
Change in accounts receivable
-3747
Change in inventory
-3302
Change in accounts payable - trade
2055
Change in accounts payable - other
122
Change in prepaid expenses
1124
Change in accrued taxes
249
Total cash flow from operating activities
1738
Cash flow from investing activities
Fixed asset purchases
-21116
Disposal of fixed assets
Total cash flow from investing activities
Cash flow from financing activities
Retirement of long term debt
-5160
Change in cash
-3514
Sources of Cash
Operating Uses of Cash
Non-Operating
Uses of Cash
Cash Flow Projection Spreadsheet
Let’s look at a sample cash flow projection. The first set of rows, titled Sources of Cash, document all sources of incoming cash, including cash from customer sales, interest earned, loan funds, and current checking and savings account balances. The second section, Operating Uses of Cash, contains all those expenditures associated with the day-to-day buying and selling process. Most of these expenses show up on the P&L statement. The third section, Non-Operating Uses of Cash, show expenses that normally show up on your Balance Sheet: equipment purchases, the principle portion of loan payments, inventory, taxes, and owner’s draw. Subtract your Uses of Cash from your Total Cash Available, and you have Ending Cash for the month. Ending Cash for one month becomes Opening Cash for the next month.

25. Possible Ways to Increase Cash Flow
Increase the number of items sold
Increase the price
Reduce expenses
Change the timing of expenses
Obtain sources of cash other than sales (e.g., line of credit)
Reduce or change timing of Owner’s Draw
Buy inventory from vendor at lower price
Obtain credit from vendor(s)
Establish policy to get paid sooner by customers
Here are some strategies for creating a positive cash flow:
Increase the number of items sold
Increase the price of items
Reduce expenses
Change the timing of expenses
Save money to have sufficient Opening Cash to get through the “start-up” period

26. Exercise 2 How Do You Manage Cash Flow?
Discussion:
How many of you have had cash flow problems?
What were the causes?
What did you do?
Did it work?
5 minutes
Review the sample budget. Discuss each category and ask what other items participants have for their business expenses. Ask participants if they keep track of their monthly expenses and how it helps them with their business decisions.

27. Cash Flow Projection - Worksheet
The SCORE Cash Flow Projection spreadsheet can be used to estimate weekly cash flow.
Download at:

28. Profit and Loss Statement (P&L)
Measures revenues and expenses over a period of time
Tracks profitability: is the business making a profit on what it sells?
Shows how successfully the buying and selling process has been managed
Measures the ability of your business to grow, repay debt service and support you
The P&L statement is the best tool for knowing if your business is profitable. A P&L statement measures revenue (also called sales or income) and expenses over a month, quarter or year. With it you know if you have made a profit (and how much) or if you have incurred a loss.

29. Profit and Loss Statement (P&L)
Top section of the P&L shows Revenue
Gross revenue
(Plus or minus) Adjustments to revenue
(Minus) Cost of goods sold (COGS)
= Gross Profit
Bottom section of the P&L shows Expenses
Logical categories of expenses, including overheads
Revenue minus Expenses = Net (pre-tax) Profit or Loss
The income statement is laid out in a precise fashion.
At the top is a section called Revenues.
The Revenues section lists gross receipts at the very top (sometimes by category or division). For example, a service business may generate revenues from consulting fees, ongoing license fees, and other fees. A company may break out the sources of its income in the way that best helps management make decisions.
Below the gross revenue lines are any adjustments to gross revenues for discounts granted.
Next, COGS is subtracted out to arrive at the company’s gross profit.
On the bottom of the Income Statement, expenses are added up and subtracted from the gross income amount to arrive at the net profit. The net profit figure from the income statement feeds to the net profit for the period shown on the balance sheet. Profit contributes to the balance sheet category of stockholder’s equity and is either a positive or negative figure.
Like other components of your financial statements, your balance sheet helps you track which assets and liabilities are being used to create income, enabling you to better manage your business.

30. Profit and Loss Statement (P&L) Example
P&L - Revenue / Gross Profit
INSTRUCTOR NOTES:
See attached sample set of financial statements for a service company.
Note annotations on them and discuss how the income statement feeds into the balance sheet.
Page 3 of the attached set of sample financial statements is a page with all of the financial ratios discussed later in this session calculated based on the sample financial statements.
Theresa Alfaro Daytner
(statements in your handouts)

31. Profit and Loss Statement (P&L) Example
P&L Expenses Net Income before Taxes
INSTRUCTOR NOTES:
See attached sample set of financial statements for a service company.
Note annotations on them and discuss how the income statement feeds into the balance sheet.
Page 3 of the attached set of sample financial statements is a page with all of the financial ratios discussed later in this session calculated based on the sample financial statements.

32. Net Profit is a GOAL! Net profit pays for: Loan principal repayment
Future income taxes
Owner’s Salary (LLC [S Corp] / Corporation)
Owners / Shareholders Dividends
Owners Draw (sole proprietor / partnership)
Future expansion and equipment
Net Profit is what remains to pay for expansion, equipment, loan repayment, income taxes and owner’s draw.

33. Understanding and Using Financial Ratios

34. Understanding and Using Financial Ratios
Can be compared to RMA (Risk Management Association) average ratios
Available for business types by NAICS code (North American Industry Classification System)
Talk to your SCORE mentor to obtain the RMA data for your business type
Financial Ratios
Liquidity
Profitability
Leverage
Efficiency
Debt Service
There are five main categories of financial ratios. In addition to industry comparisons, these ratios should be compared to the prior month and prior year for evaluation.
Each measures a different aspect of your company’s financial health.
While there are hundreds of types of financial benchmark calculations that one can make, nearly all of them fall within one of these four categories.
Today we are going to discuss the most common liquidity, profitability, leverage, and efficiency and debt service ratios.
Trainer important take away: we don’t want to overwhelm participants with various ratios but do want them to understand the four categories. It is also important for participants to focus on the ratios that are most important to their business.
Your mentor can help you determine
what ratios are appropriate for your business

35. Liquidity Ratios
Used to measure the quality and adequacy of current assets to meet current obligations as they come due
Current ratio – overall liquidity
Current Assets / Current Liabilities
Quick ratio – short term liquidity
(Cash + AR) / Current Liabilities
Days of cash
(Cash x 360) / Sales
Surendra N. Kumar
We are going to give you the formulas and discuss three common liquidity ratios. In reality there are many more benchmarks that fall under the category of liquidity ratios.
LIQUIDITY IS NECESSARY TO STAY IN BUSINESS.  THE LACK OF CASH IS THE NUMBER ONE CAUSE FOR FILING BANKRUPTCY.
It is easy to get bogged down in calculating too many ratios for your company.
One of your goals should be to figure out which of the ratios can be best used in the analysis of your business.
The three we will discuss today are probably the most important. Your SCORE Mentor can help you pinpoint the most important ratio/s for your company.

36. Profitability Ratios
Used to measure performance of a company and how well its assets are being used to generate revenues
Gross profit margin
(Sales minus Cost of Good Sold) / Sales
Pre-tax profit margin
EBT / Sales
Return on equity
EAT / Equity
Compare to historical & Industry
Elizabeth Feichter
We are going to give you the formulas and discuss the three most common profitability ratios
From a day to day operational standpoint, gross profit margin is the most important.
Gross profit should be measured or estimated frequently to make sure you are selling your product or service for a high enough price to cover all COGS and general and administrative expenses. When you bid a new job or change product pricing, you should carefully evaluate where your gross profit margin is likely to be.

37. Leverage Ratios
Key measurements in determining a company’s vulnerability to business downturns as well as its capacity for credit and internal capital needs
Debt to Equity - Leverage
Liabilities / Equity
Compare to historical, or industry averages and trends to assess your risks
Leverage ratios measure how well your company uses debt and equity to produce revenues.
Healthy businesses are usually somewhat leveraged because it gives them an advantage when they are in a growth mode.
The other side of the leverage ratio is that when your debt to equity is too high, your company is more vulnerable to business downturn.
This is because having high debt is costly in terms of taking business assets (cash) to pay for it.
When your revenue to equity ratios are high, it means you are efficiently using your assets to produce income (assuming you have substantial equity in your company).
THE LOWER THE LEVERAGE THE BETTER.  CIRCUIT CITY FAILED BECAUSE OF LEVERAGE.
Andrew Dunn

38. Efficiency Ratios
Measurements of the effectiveness of managing current assets and current liabilities
Days of accounts receivable (A/R)
360 /(Sales/Accounts Receivable)
Days of inventory
360 /(Cost of Goods Sold/Inventory)
Days of accounts payable (A/P)
360 /(Cost of Goods Sold/Accounts Payable)
Compare to terms, historical and industry
Marta E. Maxwell
Efficiency ratios measure how well several specific short-term assets and liabilities are performing.
Efficiency ratios can be measured often because they have a tendency to change easily.
A good rule of thumb is that accounts payable should not exceed accounts receivable.
When examining days of A/R and days of A/P, you should be looking for trends that show A/R collections are speeding up (reduced days of A/R) and that A/P are not getting any older (slowing down).
Many managers measure these ratios by use of a dashboard. Dashboards will be discussed in detail in Session 6 – Managing Operations.

39. Efficiency Ratios: Debt Service Ratios used by Banks
Fixed Charge coverage and debt service coverage ratios used to measure borrowing ability
Earnings before Interest and Taxes (EBIT) / Interest
Generally 2.5 is the minimum credit standard
Earnings Before Taxes / Current Maturities
Debt Service payment coverage from traditional cash flow:
= Earnings after taxes / current maturities
 DEBT SERVICE IS PROVIDED BY EBIT/I (FIXED CHARGE COVERAGE ON BUSINESSES NEEDING PERMANENT WORKING CAPITAL) AND BY (EAT+DEPR)/CM (PAYMENT COVERAGE FROM TRADITIONAL CASH FLOW).
 EBIT/I IS A MEASURE OF FIXED CHARGE COVERAGE FOR BUSINESSES WITH PERMANENT WORKING CAPITAL LOANS (MOST SBA 7A CREDIT).  THE EBIT/I IN THE EXAMPLE IS 86X.  MOST BUSINESSES ARE UNDER 5X. GENERALLY 2.5X IS THE MINIMUM CREDIT STANDARD.

40. Breakeven Analysis
Valuable for all businesses so you know how much you need to sell to cover your total costs!
Breakeven when total costs
(fixed + variable) = total revenue
Breakeven = Fixed Cost/Gross Profit Margin
Important calculation if you have high fixed costs and variable sales
Breakeven - when total costs (fixed + variable) = total revenue
Important for all businesses, but more so for business that have significant equipment investments or high fixed costs
BREAK EVEN ANALYSIS IS IMPORTANT FOR EVERY BUSINESS.  MOST SUCCESSFUL COMPANY'S KNOW THE BE BY THE DAY.
Paul Cernuto

41. Breakeven - A View of the Analysis
Breakeven Chart
Breakeven - A View of the Analysis
Sales revenue over time for our example.
Breakeven - when total costs (fixed + variable) = total revenue
$20,000 sales
or 200 units
Note: May be additional “Semi Fixed Costs” influenced by volume but not associated per unit (example - commission tiers, temporary labor, office supplies)
Example Math
Annual Fixed Costs = $60,000
Unit Sales Revenue = $100
Unit Contribution Margin = $30
Contribution margin = .30
Break even (annual) = $200,000
Monthly break-even = $16,666
Breakeven Sales = 20,000 Units
In this example the break-even point is $200,000. If sales per month are relatively equal, the monthly breakeven point would be $16,666 per month ($200,000 / 12) The phrase “garbage in, garbage out” applies here. Make sure you total all estimated fixed and variable costs as accurately as possible and are realistic about your annual total sales.
Note that any “”semi-fixed” costs would need to be added in based on volume to get the true breakeven point! 41

42. Funding Business Growth

43. Financing Growth – Part of Your Plan!
Sales growth may require:
Increased inventory More employees
Larger space Increased receivables
Consider financial impacts of funding growth
Many companies in growth mode run short of $$ and fail
Make sure you are adequately funded!
Potential Source of funding
Internal
Bank / Lender
Customer
Vendor terms
Crowd Funding
Creating profitable growth is an important part of operations.
Creating growth leads to more growth.
For many small businesses it seems that reaching the first $100,000 in annual sales is tough, then after that it becomes $1 million, then $3 million, and so on. It isn’t important to focus on which sales level it is when your business will hit the glass ceiling, but it is likely you will hit those ceilings several times over the first 5-10 years in business.
Each level requires a bit more sophistication and organization in your operation and often also requires additional capital.
Successful small business owners spend quite a bit of time making sure they have the financial capacity to grow as well as have their priorities in order for the next stage of growth.
Finding peer companies that are not competitive in your market may help you learn what kind of challenges you may expect in your next stage of growth.

44. Financing - Equity vs. Debt
Debt Financing – a loan or line of credit that comes with a repayment schedule and an interest rate.
Upside: Don’t have to give up equity
Downside: Must pay interest and may require personal collateral such as home
Equity Financing – funds received from private or "institutional" investors in exchange for an equity ownership stake
Upside: No loan payments to make
Downside: You have new shareholders that may want a larger role in managing the business (think “Shark Tank” TV show)
Here are some “do’s and don’ts” for small business financing.
Invest your own money: You need to invest your own money first, before you ask for equity or debt from other sources. Having your “skin in the game” shows your commitment and also shows your skill in running a successful business.
Earn the right to borrow: Generally, borrowing is not a “right.” Rather, the ability to borrow is an earned privilege. To obtain others’ investment, you need to demonstrate your ability to manage debt well and run a profitable business.
Show profitability: Profits are what lenders or investors want to see. Don’t let lax management inhibit a healthy bottom line.
Understand and retain working capital: Experienced business owners know that working capital is critical. On the other hand, working capital is sometimes overlooked or misunderstood by new business owners. As your business grows, the amount of working capital cycling through the business to support operations should grow. Successful business owners stay aware of the working capital needed to grow and sustain their businesses.
Be lean on fixed assets: New business owners sometimes think they need to purchase fixed assets to start or grow a business. Fixed assets consume precious working capital (through down payments and monthly loan payments), so whenever possible new business owners should buy as few fixed assets as possible. When acquiring fixed assets, new business owners should consider buying used assets or leasing the assets.
Match sources and uses of funds: When financing, current assets (accounts receivables and inventory) should be financed with current liabilities (line of credit or credit card). Fixed assets should be financed with long term loans that match the use life of the asset. New business owners can make the mistake of buying a fixed asset with short-term debt, forcing them to pay for an asset faster than that asset can generate profits for the loan repayment.

45. Business Financing Working Capital
Bank line of credit – borrow repeatedly up to a certain amount Repay and re-borrow as required
Extended Vendor payment terms – gives you more time to sell product and get paid and pay vendors
Equipment / Fixed Assets Financing
Bank / Credit Union
Collateral for a long term loan may be the assets you purchase
SBA 504 Fixed Asset loans through financial institutions
Commercial mortgage if you plan to buy, build or enlarge a building

46. Managing Risk

47. Types of Risk Internal Risks External Risks Occur within the company
May or may not be controllable by the company
The company must respond to mitigate the risk
External Risks
Caused by events outside the company
The company cannot control the events

48. Internal – Human Risks Death Owner / Key person Employee Illness
Short term
Long term
Indefinite
Employee Injuries
Critical Employee(s) leave
The human component of your business is a source of risk. Think about these possible human risks to your business:
Illness and death. A business owner may be ill for a day or be unable to work for months. The same situation could happen to an employee. The death of a person involved in a business poses a risk to continued operations.

49. Internal – Human Risks Theft and fraud Product and inventory theft
Time sheet fraud
Accounting and cash fraud
Low morale, dissatisfaction
Failure to perform
Sabotage of systems, equipment or customers
Theft and fraud. Most businesses want to have an honest working environment, yet theft by employees and employee fraud are major risks businesses face. Timecard fraud is a risk. Diverting funds to fictitious accounts are accounting risks.
Low morale and employee dissatisfaction. Unhappy employees can cost money through negligence or through willful acts. For example, an employee who forgets to reorder inventory is a risk to sales because back orders lead to cancellations.

50. Internal – Equipment Risks
Equipment breakdowns
New equipment integration
Inadequate maintenance
Worn older equipment
Damage to property / vehicles
Failure cause by misuse
Physical plant repairs
Servicing lines or utilities
Routine maintenance
Older equipment may run slower or require more maintenance than new equipment. New equipment may require adjustments to work with older equipment.
Worn parts may cause damage or cause company vehicles to break down. What would a broken-down delivery van cost a business for one day?

51. Internal – Information Technology Risks
Unplanned downtime
Lack of backup or recovery system
Updates and repairs
Power and connectivity
Outdated systems than cannot be repaired
Physical damage
Lack of administrative controls
Data theft
Problems with new software apps
Downtime from physical damage or outdated systems may slow business profits. Most businesses rely on a computer system to process credit cards. These systems are risks to continued business when they are not working, especially if no backup plan exists. Lack of administrative controls may lead to downtime, in addition to fraud and theft.

52. Internal – Financial Risks
Cash flow changes
Unexpected costs
Loss of credit lines
Customers fail to pay on time
Expenses to establish lines of credit
Cash flow is the lifeline of a business. When unexpected costs affect the ability of a business to meet monthly expenses or when credit lines are lost, a business may fail. A plan to maintain cash flow is crucial.
Even new financing has its own cost-associated risks. The risks can include the following:
Appraisal costs
Closing costs
Costs for points to buy down rates
Deposits placed on hold as collateral
Are you prepared?

53. External – Competition and Market Risks
Loss of clients or customers
Loss of employees
Decrease in sales prices/fluctuating markets
Increases in vendor costs
Fuel / Energy price increases
Fixed cost changes (e.g., rent)
Market changes will cause businesses to change. Competitors advertise sales, wholesale costs go up and down, and oil and gasoline prices affect your costs and those of your vendor.
Employees may leave to go to a competitor’s shop, taking loyal customers with them.
Rent increases may be caused by increased demand for space. For example, getting a lease when construction on new space is not completed can start at a lower rent, but when the lease renews and there is a demand for your space, rent may go up.

54. External – Business Environment Risks
Laws
Weather
Natural Disaster
Community
Obsolescence
Your environment is more than the space you rent or buy. What happens around your business affects it. Here are some examples of environmental changes:
Federal, state, county, and city laws and ordinances can and will change.
Weather and natural disasters can shut down a business for a short period or close it.
Structural changes in the community may be the result of progress or may be due to empty stores and offices in a declining market.
Your community may change as the needs, age groups, spending habits, and incomes of the population change.

55. External – Personnel Conflict Risks
Employees or Contractors:
Family obligations, illnesses or deaths
Events or disaster that affect the home
Work / life balance
Owners:
Community involvement distractions
Personal conflicts are external risks that can be stumbling blocks to both business owners and employees. Families and homes do not cease to exist at the start of a work day. Children become ill. Medical emergencies, or worse, will happen. Broken heating systems and plumbing repairs will be required at home.
For a small business owner, involvement in the community creates visibility. However, the visibility comes with a cost, namely time. Employees and their children are involved in outside activities as well. We don’t usually think of outside activities as a risk, but consider how you would handle this situation: your most reliable manager wants to attend an out-of-town playoff game with her child on the busiest day of the month.
Even complacency is a risk. Complacency comes from being comfortable. Your business may be successful and has been for a while. You may be comfortable with the hours you are working, but you may miss opportunities for growth because you do not want to expend the extra effort. Now, multiply the effect of complacency because complacency also happens to employees.

56. Risk Mitigation – Insurance Considerations
General liability
Property
Business interruption
Worker’s Comp
Key person life and health
Other
The costs need to be weighed against potential impact of risk

57. Exercise 3 – Business Risks
Identify potential internal and external risks that could impact your company.
Think about actions you can take to minimize risk before or immediately after an event occurs.
5 minutes to identify your risks
5 minutes to share
What risks can a business owner control?

58. Business Performance – Risk Warning Signs
Look at trends in your business:
Excessive debt in relation to owners equity (total liabilities / owner’s equity)
Reliance on a small number of customers
Reliance on one product
Reliance on one or a small number of vendors
Cash flow problems
Irregularities in accounting, bank or timecard records
Irregularities in computer system administrative reports
High employee turnover rate
Owning a business means keeping alert to potential risks. Pay attention to risk warning signs.
Excessive Debt in Relation to Owner’s Equity
Use the following formula to calculate a company’s debt-to-equity ratio. First, short-term obligations and long-term obligations are added together to determine total liabilities. Total liabilities are then divided by owner’s equity (found on the company’s balance sheet). Generally, the debt-to-equity ratio for a business should not be above 40 percent or 50 percent. However, you can check similar types of businesses through a business reporting service or consult an accountant to obtain the normal range for your industry.
Reliance on Small Numbers of Customers, Products and Vendors
Relying on a small number of customers will cause a business to fail quickly if those customers are lost. Your business will need to always reach out to new types of customers with new products. Reliance on one product will limit your business when that reliance fails to allow for changes in customer needs, as well as changes in the market. Similarly, when your business relies on one or a small number of vendors, your business continuity plan is only as solid as your vendor’s business. You are not in control.
Cash Flow Problems
A very basic calculation of your cash flow starts with your business’s cash balance at the beginning of the month. Cash receipts from all sources are added to this beginning balance and then all cash payments are subtracted from this total. The result is your ending cash balance. If your expenses are greater than your income, adjustments should be made. In general, you want your business to have a positive cash flow. Is your business able to pay monthly payments with no overdrafts? If you are having a hard time covering checks, your business has a cash flow problem.
Irregularities in Accounting, Bank or Timecard Records
Audits or spot checks of your accounting system may uncover errors or fraud. Some questions to answer as you move through audits:
Do project or job sheets match what has been submitted for payroll?
Do time sheets match what has been submitted for payroll?
Does the payroll ledger reconcile with bank account statements?
Are there outstanding checks to former employees?
Are former employees still in the accounting system?
Irregularities in Computer System Administrative Reports
When reports from your computer system are generated, verify user access and system changes by considering these questions:
Has any user access been changed since the last review?
Is access for all users ordinary for their job functions?
Do users who are no longer employed still have access to the system?
Have changes been documented and approved?
Are any transactions or changes out of the ordinary?
High Employee Turnover Rate
Consider these questions when thinking about employee turnover:
Does your business have a high rate of employee turnover?
Is this a result of poor hires, lack of training

59. Risk Identification and Planning
Develop a written business plan
Use outside sources to assist in identifying risks
Consultants
Trade Association
SCORE mentor
Risks of your vendors or supplier
Identify needs for potential or planned growth
Discuss risks with managers
Communicate risks to managers
Identify needs and PLAN for business continuity
One of the most important investments you can make in your business is creating a business plan, especially when identifying risks. Creating a business plan will help you assess risk areas, those areas impacting your ability to continue business and to grow.
The continuation of your business, in the event of any risk, should be addressed in your plan. Look at anything that could halt, slow, or affect the profit of your business. List these risks, rank them in importance, and look at potential costs. Identifying and assessing risks is something that will require time and should be revisited periodically. Be sure to schedule time in your calendar to identify areas of business risk.
Get help from outside sources in identifying areas of risk. Many of these sources are business specific. Some sources for help are listed later in this training.
A business plan isn’t something to create and set aside, simply to be used later to obtain financing. Once completed, the business plan will become your guide, just like a map.

60. Review

61. Review Budgeting and forecasting help you plan success
Accurate financial statements are critical to the success of your company
Frequent analysis of your income statement, balance sheet and cash flow statement and spotting trends will help you manage your business more effectively
Find the most beneficial sources of funding your growth
Financial ratios help you analyze certain aspects of your operations so you can make adjustments to become more profitable
Beware of potential risks and planned mitigation

62. Next Steps
Set up your company’s cash flow forecast and/or annual budget / forecast using the instructions provided for the Excel spreadsheet – download at:
Calculate some or all of the financial benchmarks we have discussed that are important to your business
Ask your mentor to get the RMA ratios for your business type
Review the With Your Mentor handout for topics to discuss with your mentor
Don’t have a SCORE Mentor? Connect with one today!
SCORE has over 13,000 successful and experienced executives with small business know-how that want to help you
Visit manasota.score.org for more information
For your homework, we would like you to begin setting up your 13 week cash flow forecast.
Instructions are provided on sheet 1 of the Excel workbook.
Sheet 2 of the template has a series of benchmark calculations that you may need to complete your forecast. Just fill in the information requested and the spreadsheet will give you days of A/R, A/P, and days of cash on hand.
Lastly, review the formulas for the financial benchmarks we have discussed that you feel are important to your business and using a calculator figure how your company’s benchmarks.

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64. Thank You!

65. Other Sources of Financing
Friends or family Home equity loan Credit cards (VERY costly) Department of Community and Economic Development Department of Agriculture & Rural Development Service Angels and venture capitalists (equity financing) Crowd funding – may be donations, loans and/or equity investment Peer to Peer Loans – i.e. or More options will be available in 2013 Grants – generally NOT available with for-profit business
Discuss pros and cons of each one.
Equity investment rule of thumb = 25% to 30% of estimated capital requirements of the business.
Bring in examples of friends and family financing.
Business credit cards can be very expensive in terms of annual interest rate if you don’t pay off the full balance every 30 days, but they can be a great source of interest-free financing if you do pay in full every 30 days.
Grants—don’t exist for most for-profit businesses.
Group Discussion: What do you know about or think about the merits or drawbacks of each one of these sources of funds for your business? Any other questions?
Total Time: 10 minutes