119455 633643517959249335
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This document provides advice on financing small business growth through practical cash tactics. It discusses alternative sources of financing for small privately-owned businesses, including bootstrapping using personal savings and credit, friends and family loans, business operations like profits and accounts receivable, suppliers and customers through trade credit, and various government assistance programs. While these sources can provide needed capital, the document notes they may also carry substantial out-of-pocket and emotional costs for business owners. Effective management of cash flow, expenses, taxes, debt, and other financial operations is emphasized as a way to maximize resources and minimize costs.
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119455 633643517959249335
- 1. Financing Growth for the Small Business “Practical Cash Tactics” Dean Capper dcapper@fullerton.edu Finance Dept. - CSUF 949-370-8738
- 2. Why consider having your own business? “when you get the desire to have/start your own business, you should lie down until the feeling goes away”
- 3. Thank you for doing it anyway! “A large portion of our positive activities depend on spontaneous optimism rather than on mathematical expectation … if animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die.” -- J. M. Keynes
- 4. Perspective … • ~25,000 Publicly Owned Firms – Less than 1% • Several Million Privately Owned – More than 99% • Our Focus … the Privately Owned!
- 5. Touted Sources of Raising Money – The “Success” Hierarchy • Angel Investors • Venture Capitalists • Investment Bankers -Initial Public Offerings -Stock -Bonds
- 6. However … • 90% of Cos. in NASDAQ never received O/S funding! • Public Cos. make-up less than 1% of all Cos. … So, what are your chances?
- 7. Lets Look at Some Relative Costs
- 8. Choices available for funds – Opportunity costs Table 1-1 Expected Financial Returns of Investment Opportunity Investment Opportunity Expected Annual Return (%) Purchase stock 11 Purchase home 9 Purchase bonds 6 Place money in bank savings account 2 Purchase new car -15
- 9. Hurdle Rates For Venture Capital
- 10. Balance Sheet Assets Debt & Equity Current Assets: “Free” Debt: Cash Accounts Payable Accounts Receivable Inventories “Not-Free” Debt: Fixed Assets: Short-term Notes Machinery and Long-term Notes Equipment Mortgages Buildings and Land Equity: Ownership – “Really Not-Free”
- 11. Income Statement SALES − Cost of Goods Sold − Operating Expenses = OPERATING INCOME − Interest Expense − Income Taxes = NET INCOME Money for the Owners!!
- 12. A practical approach! … Doing more with what you already have
- 13. Its about Time Management! Don’t “waste” time looking “outside” for money … Sell Something! 1. Let Customers become your funding source. - Small Business Owners are 1st and Foremost … Salespeople. 2. Then manage the Income Statement & Balance Sheet to maximize the “Cash” you already have!
- 14. Managing the Income Statement
- 15. Why? • To reduce costs … increase “real” profits. • To reduce/delay Taxes … increase the cash you get to keep!
- 16. Some Bootstrapping Thoughts/Ideas … Reducing, Avoiding Expenses • Home office, Garage, Basement – Avoid rent and maybe some taxes • Husband/Wife as de facto receptionist – And the kids?! • Do you really need that new car?
- 17. Bootstrapping … cont. • Why the “latest/greatest” PDA? – Cell phones for all? • Focus on a market niche – If you are going to compete with Muhammad Ali … don’t do it in the ring
- 18. Bootstrapping … cont. • E-mail vs. direct mail advertising • Use independent contractors • Hire temps/lease employees • Student interns/consultants
- 19. TITAN CO. LTD. Sales $5,000,000 - Cost of Goods Sold 3,500,000 Gross Profit 1,500,000 - General And Administrative 250,000 - Selling Expense 250,000 -Depreciation Expense 500,000 Pre-Tax Profit 500,000 - Tax 200,000 - Ouch!! Net Income $300,000
- 20. Reducing/Delaying Taxes … “Private Business Mindset” • Advantages of a “Private” Business. • Do you need/want the “Sale” this year? • Be aggressive with “judgment” expenses. – Bad Debt “write-offs” – Warranty “reserves” – Returns/allowances • Inventory “write-off” … most popular …
- 21. Inventory Balance vs. Income – a Basic Rule • The Higher the Ending Inventory, the Higher the Income. • The Lower the Ending Inventory, the Lower the Income.
- 22. How to “Value” Inventory • Lower of Cost or Market – Materials – Labor & Overhead • Devaluing inventory: Obsolescence • Avoid the “Pack-Rat” syndrome!
- 23. ADJUSTED INCOME STATEMENT OLD NEW Sales $5,000,000 5,000,000 - Cost of Goods Sold 3,500,000 4,000,000 Equals: Gross Profit 1,500,000 1,000,000 - General & Adm. 300,000 300,000 Expense - Selling Expense 300,000 300,000 -Depreciation Expense 400,000 400,000 Equals: Pre-Tax Profit 500,000 Nothing - Tax 200,000 Sorry Net Income $300,000 Zip!
- 24. HOW TO SUCCEED IN BUSINESS! • HOW DID YOU DO THAT? However … There is a caveat!!
- 25. The View from Outside … • PATTERN OF EARNINGS – The IDEAL pattern: Earnings $’s Time Here you don’t have to be clairvoyant to see where this company’s earnings are going
- 26. Understand the downside! • PATTERN OF EARNINGS – The “We never pay taxes” syndrome Earnings + - Time Congratulations! Now how are we going to value your wonderful company?
- 28. Why? • Every dollar tied up in an asset is a dollar that could be used elsewhere!
- 29. Managing Cash … • Why should a firm worry about having too much cash? • Because cash is about the most unproductive asset of all! • Cash on hand indicates an Opportunity Cost – where could it be used to generate a return??
- 30. Managing Cash • Many Firms today utilize “sweep” or “zero balance” accounts • They “sweep” into and out of Money Market Accounts • Or better yet … into and out of a “Line of Credit”
- 31. Managing Accounts Receivable Where the real cash is … Collection Effort … be a Pest!
- 32. Managing Accounts Receivable … Understand the Cash Discount … Is it worth offering? Effective Annual Interest Rates in Typical 10 day Discount Period and 30 day Credit Period: – 1.0% Discount = 18% – 2.0% Discount = 36% – 3.0% Discount = 54%
- 33. Managing Inventory Effective inventory management is directly related to the size of the investment in inventory … ways to reduce: – Just-in-Time … JIT – Take on consignment – Vendor hold & deliver only when needed – Vendor deliver direct – Shorten production/turnaround time
- 34. Managing Fixed Assets • Rent or lease … don’t buy physical assets • Buy used furniture & equipment • Outsource … let someone else make the investment/take the risk
- 35. Managing Accounts Payable Everything I said under Managing Accounts Receivable … only in REVERSE! … remember: – Its “free” money – Rate of return on Discounts – If they don’t care enough to follow-up?
- 36. Some Tips for those times when things are not going well …
- 37. What to Manage First?? • Income Statement – Dollars are Gone forever! • Balance Sheet can come later – Dollar in Inventory, A/R, A/P = Cash! • The “Fixed Cost” Myth!
- 38. Another Thought … Letters of Credit!
- 39. Using Customers as a funding source! • Back-to-Back Letters of Credit • A Transferable L/C • Assignment of Proceeds
- 40. Debt Management … a Cash Flow approach Say you have $100k per year to service debt: 1. At 10%, Interest only, you can service a loan of $1,000,000. 2. At 15%, Interest only, you can service a loan of $666,666. 3. At 12%, Principal & Interest over 7 years, you can service a loan of $455,000. 4. At 10%, Principal & Interest over 3 years, you can service a loan of $250,000.
- 41. Debt Management … Subordinated Debt Debt that serves as Equity … something to consider when: - Buying a business - Selling a business - Structuring your debt.
- 42. Thanks for your Attention! Dean Capper Finance Dept. - CSUF dcapper@fullerton.edu 949-370-8738
- 43. What Mom Taught Me • Don’t owe anyone • Pay your bills on time • Do good in school, learn how to add & subtract • Be a good citizen • Be nice, respectful of others
- 44. What I Really Needed to Know! • Its better to owe than to be owed • If they don’t follow-up its their problem • Forget adding & subtracting, learn how to deduct • Don’t ever pay taxes any earlier than you have to • When someone owes you money its OK to be a pest
- 45. Financing Sources for Private Business … a partial list • Self (Bootstrapping) – Savings – Home Equity – Credit cards • Friends and Family – Bank of Dad ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 15
- 46. Financing Sources for Private Business … cont. • Business Operations – Profits – Employee-provided Financing – Accounts Receivable Discounts • Suppliers and Customers – Customer Financing – Vendor Financing (Trade Credit) ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 15
- 47. Financing Sources for Private Business … cont. • Government assistance programs – Small Business Administration – Economic Development Program – Small Business Investment Companies-SBICs • Commercial Banks/Finance Cos. – Equipment Leasing – Asset-based Lending – Factoring – Term Loan ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 15
- 48. Most of these can have substantial associated costs … - Out-of-pocket - Emotional