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Financial Efficiency

Financial lessons include both business finance and financial management of the business. In addition to developing unique business strategies to get a competitive edge, many entrepreneurs show remarkable expertise in how they define their financial metrics, manage their company to meet the financial goals they set, and find the right financing for the business. They train themselves to understand the numbers affecting their business. Many of them know that they won’t qualify for venture capital – even if they wanted it. And most did not want it, because they would have to give up control. By finding unique combinations of financial and financing strategies, these entrepreneurs keep control of the business and keep most of the wealth they create.

 

To Bootstrap or Not? That is the Question

Financial EfficiencyYou are an entrepreneur faced with a troubling question: How do I get venture capital? Before you answer that question, consider another one that should be more important – should you bootstrap?

In my new book Bootstrap to Billions: Proven Rules from Entrepreneurs who Built Great Businesses from Scratch, I have profiled 28 entrepreneurs who built great companies from scratch, including the world’s largest medical device company (Earl Bakken of Medtronic), the world’s largest consumer electronics retailer (Dick Schulze of Best Buy), and the world’s largest private healthcare management company (Richard Burke of UnitedHealth Group). The 522 lessons in the book answer five key questions that each entrepreneur should consider. These include how to find the right opportunity with your unique competitive advantage, how to implement a capital-efficient sales and operations strategy in order to do more with less, how to finance to create wealth and keep it, how to build a dedicated and effective organization even without the resources, and how to be a better leader than your competitors. This column is a partial answer to the finance question. Read more

The Smart Way To Invest In Your Business

Financial EfficiencyThere’s only so much capital to go around. Here’s how to get the most out of it.

You are starting a new company and need to find customers. An ad agency just presented you with a slick new campaign promising to do just that. Cost: $250,000. Good investment or bad?

Millions of small-business owners find themselves in similar situations every day when trying to decide how to invest (and re-invest) in their companies. There are myriad nuances to making these decisions, but there is a fundamental principle that guides all of them: getting a reasonable, risk-adjusted return on each dollar invested.

This article originally appeared on Forbes.com.

How Much Debt Is Too Much?

Financial EfficiencyEasy money got a lot of businesses in trouble. Here’s some sober calculus.

You shouldn’t borrow what you can’t pay back–that’s how we got into this whole economic mess in the first place. But figuring out how much debt you can take on–or, put another way, how much a lender is willing to extend (for they may not be the same thing)–is a bit tricky.

Obviously, you need cash to cover your principal and interest payments. But how much exactly?

First, estimate the amount of money you need by use (working capital, equipment, real estate, etc.). Assume for the moment that you will use “term” loans, with monthly payments of principal and interest over a certain time period, similar to the loan on your house.

This article originally appeared on Forbes.com.

Nourishment For The Credit-Starved

Financial EfficiencySmall businesses may find cover under the TARP. Until then, there is the Small Business Administration’s ARC loan program.

And the bailout beat goes on. As of Friday, the U.S. government was noodling whether to give small businesses access to the $700-billion Troubled Asset Relief Program, in the form of an expansion to the Small Business Administration’s 7(a) loan program.

Forget for the moment that investing taxpayer money in small and struggling companies is more than a little risky. Or if the amounts available ultimately will do much to jump-start the economy.

Forget all that and focus on something a bit more tangible: available capital, right here, right now, at the right price.

This article originally appeared on Forbes.com.

The Most Expensive Way To Raise Capital

Financial EfficiencyWith credit still locked up, you may want to sell an ownership stake in your company. But understand the cost.

If your business can’t earn its cost of capital, you won’t be in business very long. But what is that cost, exactly?

The answer can be difficult to grasp depending on the financing arrangement. The cost of debt is the interest rate on the loan (if you can get one, that is), though there may a host of provisions that mess with the math (see The True Cost Of Debt”). With any luck, a bank may charge you prime plus 200 basis points, or around 5.25% currently, but it will surely ask you for a personal guarantee–a one-way ticket to bankruptcy should things go wrong. Then there are hybrid instruments, which combine characteristics of debt and equity (see “Financing For Troubled Times”).

This article originally appeared on Forbes.com.

Financing For Troubled Times

Financial EfficiencyHybrid securities, which act as both debt and equity, can help. Here’s how they work.

Wait long enough, and all the old fashions come back. The latest example: hybrid securities.

Hybrids act like both debt and equity. They come in handy when credit is tight (and it hasn’t been tighter in a long time), when cash is trickling (as in the early stages of a start-up) and when typical equity investors (friends and family, angels and venture capitalists) prove too skittish.

Hybrids became popular back in the 1960s, after the U.S. government started the Small Business Investment Companies program, which allowed wealthy individuals to form entities (SBICs) that could borrow funds from the Small Business Administration to re-lend to start-ups. The SBICs charged interest on that debt and also took an equity stake to compensate for the risk. SBICs were the start of institutionalized venture capital in the U.S.

This article originally appeared on Forbes.com.

The True Cost Of Debt

Financial EfficiencySo you found a willing lender. But what is he really charging you?

Most small and emerging businesses use debt as part of their financing structure. (The exceptions–and they have dwindled–are those high-potential ventures that can raise money through promises of potentially lucrative slices of equity.) The question: How much does that money cost?

The financial crisis is proof that too few people either 1) know how to perform these calculations or 2) bother to live by what the numbers are telling them. The first part is somewhat easily remedied; the second, sadly, is perhaps something only a painful recession can drive home.

This article originally appeared on Forbes.com.

The Right And Wrong Ways To Raise Money

Financial EfficiencyFlimsy financing can undo even promising businesses.

A good idea is nice; solid execution even better. But none of it means much without the capital to support it all.

And it’s not just about finding financing–it’s about finding the right financing. Pair a promising company with a poor capital structure and you could be in business hell.

Take it from Consumer Products Company. (I have disguised the real name to save the owner the embarrassment.) CPC was started by a young entrepreneur with a new product. He obtained his funding from a rich investor to whom he sold a controlling stake.

This article originally appeared on Forbes.com.

Raise Money When You Don’t Need It

Financial EfficiencyI recently got a call from an entrepreneur who wanted money that very same week in order to meet payroll. He also said he was willing to pay “any reasonable return” to get it.

This wasn’t exactly the sort of plea that inspires confidence. Though I could have commanded a serious rate, the guy didn’t get a cent from me.

See, financiers have this strange notion that they should get their money back, along with a reasonable risk-adjusted return. That’s why strong businesses have more financing options, enjoy lower interest rates and suffer fewer restrictions, while weaker ones go wanting.

This is completely intuitive, of course, and yet countless entrepreneurs make the same mistake: They go looking for money when they really need it instead of raising it–on far better terms–when they don’t.

This article originally appeared on Forbes.com.

How Financing Trends Impact Entrepreneurship

Financial EfficiencySmall businesses come in myriad flavors–but capital is a constraint, on some level, for every one. Unfortunately for entrepreneurs, the mechanisms now in place to finance them are inadequate. To wit:

Trend No. 1: Lemming-like behavior by regional banks

Securitization (the slicing up of loans into pieces, each bearing a specific level of risk) clearly has its benefits, but not when investors as a whole underestimate–or ignore–those risks. Having rushed headlong into subprime lending, banks, and thereby their small-business customers, are now dearly paying the price.

Implications: Tighter credit terms–or none at all–for entrepreneurs. (For more, see “The Real Scoop On The Credit Crunch.”) We have already seen banks try to recoup their losses by increasing rates on credit cards.

This article originally appeared on Forbes.com.

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