I’ve been on a hectic book tour the past several weeks, and I’ve listened to thousands of small business owners discuss their concerns.  One common problem:  we need more sales.

Yes, we’d all like to increase our revenue and build our businesses.  But hold your horses — not all sales are good sales.  Sounds counter-intuitive, doesn’t it?  In order to build a successful business, you must recognize there are times when less is more.

Allow me to explain.

Many small businesses reduce their prices in order to bring more business in the door — particularly in today’s economy.  However, in most cases the owner doesn’t stop to consider the profitability of the new business.  While the company’s sales figures increase, its profitability often narrows to a point where cash flow issues occur.  In the worst case scenario, the company lapses into a negative cash position.

All new business opportunities need to be carefully considered.  As the business owner, you should understand exactly what it is going to cost to deliver the product or service, including all your business overhead.  Is there enough profit to absorb changes or adjustments?   Do you have the current staffing and resources to manage the project without jeopardizing other business?

I’ll share a real-life example without divulging the company’s name.  ABC Company bid on a large government contract to deliver a particular service without a detailed and thorough analysis of the resources it would take to deliver.  After winning the bid, the additional internal resources and development required to fulfill the contract turned what the owner thought would be a highly profitable project into one that barely broke even.  Furthermore, because of the strain on the company’s resources, other, more profitable projects had to be delayed.

In today’s economy where cash is king, no business should jeopardize its financial health by selling too much for too little.  While it’s hard to turn business away, you can be more successful by concentrating on the types of business opportunities that are most profitable.  And it’s not always just about new business.  Some companies are choosing to fire their low-margin customers or to discontinue less profitable product lines and as a result they are enjoying healthier bottom lines.

So remember, nothing happens until you sell something.  Just make sure you sell it right.

image by Flickr user jakerome

There comes a time when every business must secure financing to cover their growing needs. Whether it’s to buy new equipment, purchase land, improve an existing location, or to just give your business a little breathing room, a loan can sometimes mean the difference between making it to the next level and falling behind your competitors. Unfortunately the world of finance can be a bit tricky, especially when it comes to business loans. So many elements come into play. Knowing what those elements are can mean the difference between acceptance and rejection.

From the lender’s perspective there are five major elements they consider when evaluating a business for a loan. Commonly referred to as the “Five C’s,” lenders strive to get a complete picture of the health, potential, and credibility of a business before they agree to hand over thousands (and sometimes millions) of dollars. The Five C’s are:

1. Character

The borrower must demonstrate strength of character. This includes producing a sound credit report with limited to no negative marks and a steady payment history. Know and understand your credit report before applying for a loan (not just your score, the data too). As a borrower you must take all of your financial obligations seriously. The smallest issue can create enough doubt in the borrower’s mind to turn their decision against you. Professional background such as work experience demonstrated in the business to which you are applying for a loan is also considered under character, in addition to lawsuits, bankruptcy to either the business or personally. The SBA considers additional character points when reviewing a loan request: criminal background, citizenship and legal status within the US. Just because you may have an offense or be a legal permanent resident applying for your citizenship does not mean you are disqualified, but make sure you are upfront and honest about your past.

2. Cash Flow

There needs to be adequate cash flow to repay the loan and allow the borrower to pay for all other existing business and personal expenses. The same is true for startups, existing businesses, and projected growth. There needs to be a comfortable buffer between what goes out (expenses) and what comes in (revenue). On this point it is important to have financial statements and understand them. If you do not have them, there are many resources that can help you create them. Additionally, if finances are not your strong suit, make sure you have someone on your team (employed or vendor/professional, such as a CPA) who handles this for you.

3. Collateral

Collateral are assets the borrower offers to the lender in the event the loan is not paid. The lender will consider business assets first, but if those assets aren’t enough the lender will also consider personal assets. This means there is more at stake than just the loan amount (giving you incentive to pay on time – every time).

Lenders take a lien on the subject collateral, which means if you don’t pay, they can take that collateral from you and either sell it at auction or sell the note to someone who will pay. This allows the lender to recover their loss in full or in part.

4. Capitalizations

This element includes all business resources such as fixed assets, retained earnings, and owner’s equity (cash)—basically all collateral (less debt against said collateral) plus liquid holdings and earnings. Borrowed funds, such as those from the seller of the property you are purchasing, are not considered and do not improve the borrower’s position. Business and personal cash are very important. Having cash and equity is what lenders call “skin in the game” – which lets them know you are serious and equally if not more vested into your business than the lender intends to be. If you are not vested, how can you expect a perfect stranger (lender) to be?

5. Conditions

Factors outside of the business are also considered. Anything that can affect the business’ ability to repay counts, including market conditions, competitors, and industry trends that will affect long term revenue growth. Be prepared to show how you differentiate from your competitors, how you will buffer yourself from market fluctuations, and how you are adapting to trends in your industry.

Bottom line, lenders can and will look at everything they think will affect your ability to pay. Be prepared by making sure all five C’s are in tip-top shape before you start the conversation with your lender.

While speaking at Entrepreneur magazine’s Growth Conference in Atlanta this week, I spoke to small business owners in a talk I’m calling 3 Weeks to Startup after the book that I co-authored. I went over the basic assumptions behind starting a business in three weeks – that it’s a tight schedule, and very quick, but doable with tools available online today – and I shared some of my favorite common startup mistakes to avoid.

Here are the top 3:

1. Starting a business with no real customer need.

You know the type: all businesses should be built on what the founder wants to do, but that has to be tempered with consideration for what people need, want, and want to pay for. And the image on the slide is the Apple Newton, which is a good example. There was a need – the success of the Palm Pilot four years later proved it – but the Newton didn’t meet it. Don’t just count on pride and persistence, make sure there’s a need for what you’re selling.

2. Running out of cash.

Starting costs are predictable, they depend on what you need to buy, the early expenses, your marketing costs, your strategy, resources, and so on. Some cash flow dynamics are predictable. For example, you need to know ahead of time if you’re going to have to wait for customers to pay you after receiving the goods or services you give them. You need to know if you have to stock a lot of inventory.

Cash flow is easiest to understand if you lay it out into rows and columns. It isn’t as simple as profits, because profits are an accounting concept that takes liberties with the timing of sales, costs, and expenses. A good cash flow plan will focus on the money, when you get the checks to deposit, and when you write the checks, regardless of the technical timing of sales and such you need in accounting.

3. Failing to plan.

There’s so much uncertainty in any business, now and since forever, that it’s just foolish to not break that all into a plan that puts it into perspective. It doesn’t matter that a plan will change – and it will – because just getting started with the planning helps you understand all the factors involved. And when you have a plan, you start immediately to review and revise and track results, so having the plan makes it easier to correct it as needed. Plan, and keep that plan alive.

(This is number 2 on my list of the top 10 startup mistakes)

It happens way too often: Startups that might have made it go under because they run out of cash.  Sometimes that means they didn’t calculate how much they needed to cover those early months when revenue was less than spending. That’s a common problem. Sometimes they underestimated one-time startup costs. Sometimes they didn’t allow for those lags that happen in business-to-business sales, the two or three months that go by between delivering the invoice and getting paid. All of these, and a lot of other things, boil down to just not having enough cash.

Unfortunately, we think in terms of profits, but we spend money, not profits. Profits are an accounting concept, a benchmark used for decisions and taxes. Profits are based on the assumption that the sale, the spending of cost of sales, the paying of related bills and getting paid for the sale all happen in the same months. That might be true for some very simple businesses, like maybe the handicraft maker who sells for cash at the Saturday market; but it’s not true for most businesses. Instead, we have to manage cash flow, which is related to profits on the long term, but just isn’t the same thing.

You can never accurately forecast the future, but you can do some decent educated guessing. Start with a good guess on how much you’re going to have to spend as expenses, and assets you need before you start. Then do a reasonable projection of sales, costs of sales and running expenses, so you can estimate how long it takes–and how much money.

So to start up right with a new business, understand how much you need; and if you can’t raise enough, then revise your plan, focus better, and make the money match the plan.

Reading this article about how American Airlines is planning to charge $8 for a blanket on certain flights got me started on one of my favorite rants.

When did we start getting so angry with large businesses for trying to make a profit?

No, no… I get it. I know it’s bad form right now to approve of “Big Business,” what with all their greed and corruption and stealing from the little guy. But really, in what ways are they different from some of the smaller companies out there?

A friend emailed me that a local restaurant back home recently announced they were no longer offering free baskets of bread with each meal. You now have the option to pay $3 for the customary basket of fragrant, fresh baked bread. Patrons revolted! There was a huge backlash of anger at being denied free bread! The media was called! There might have been a petition. (My friend was horrified and vowed never to go there again.)

Why? Why would otherwise loyal customers be so incensed at losing something that was free – added value – no cost to them – nice to have but not essential to the overall enjoyment of the meal… but most likely important to the restuarant’s bottom line?

If they’d been given a choice of all menu items increasing $.50 vs paying for their bread, do you think that would have made a difference?

To me, this is a case of bad marketing, not bad business.

Let’s go back to the airline.

The airline industry as a whole suffered its worst drop in passenger revenue in 2009. Revenue fell 18%. Think about that kind of percentage drop in your revenue for your own business for just a minute. What would that do to your business? You’d most likely be looking for your $8 blanket, am I right?

Getting back to AA, would everyone be as upset and in an uproar if American Airlines had instead raised all their flights by $100, then offered discounts for selections?

Want to sit in a middle seat? Discount.
Only bringing carry on luggage? Discount.
Don’t mind three stops instead of non-stop? Discount.
Bringing your own blanket and pillow? Discount!

Watching your flight total come down based on your choices feels better than being charged extra … right? It does to me.

What do you think?

‘Chelle Parmele

So, I do follow my own advice. Yesterday I posted here about how putting video on your site is relatively easy. So today I’m posting this video here. I did it last weekend. I confess; I was motivated in part by wanting to do something with my new FlipHD video camera.

The river seems to drown more people in the slow deep inviting part than in the crashing and splashing white water part. Similarly, unexpected Cash flow problems are more likely to catch the growing company that’s enjoying sudden growth than the declining company that knows it’s in trouble.

Here’s my video explanation of that, as posted on YouTube on Sunday. By the way, you can click here to go to the YouTube original, which includes an HD option.

Planning, monitoring, tracking, and managing your cash flow and cash balance is always important. In an economic downturn this becomes, perhaps, your most important business management activity.

In this next addition to our Global Entrepreneurship Week series of “Back to the Fundamentals” business planning articles we look at The importance of cash flow during an economic downturn.

Take a look at all our Bplans Back to the Fundamentals contributions.

Our part of Global Entrepreneur Week got off to a rousing start this Monday morning with Palo Alto Software’s founder and president Tim Berry conducting a Webinar on “Back to Fundamentals” of business planning.

One of the points Tim stressed to the 600+ webinar registrants is the importance of managing the cash flow of your business. You can be profitable, and still be broke.

One of the FREE online business tools we provide here at Bplans is a Cash Flow Calculator.

Here’s a short article explaining how to use this tool, right now, real time, to better plan and manage your business.

Steve Lange
Senior Editor
Palo Alto Software

On their Small Business page CNN.Money.com has published some interesting stories on small businesses in the U.S. who are feeling the credit crunch and how they are responding.

One page has a series of vignettes of small business efforts to cope. Business owners discuss many problems and solutions from moving their business locations, late accounts receivables, stunted growth, evaporating markets, to loss of lines-of-credit.

A longer article also discusses the problems businesses are facing in the current credit freeze. One family business was forced to close, another small business found local funding when big banks balked, and still another has had to turn away sales because no bank will fund their facilities expansion.

For many years home equity provided start-up and working capital for millions of U.S. businesses. In Hurdle: The Book on Business Planning, President and Founder of Palo Alto Software Tim Berry says:

Why do we say that banks are the most likely source of small-business financing? Because small-business owners borrow from banks. A great deal of small-business financing is accomplished through bank loans based on the business owner’s personal collateral, such as home ownership. Some would say that home equity is the greatest source of small-business financing.

However, this may no longer be the case as another article on CNN Money discusses how home equity as a source of small-business financing has recently changed.

All of this points out how absolutely necessary it is for business owners to focus on their planning processes every single month in managing their companies’ cash flow.

Steve Lange
Senior Editor
Palo Alto Software

Good, solid, well-thought-through cash-flow planning just became all the more important. The New York Times reported in a 28 July 2008 article, Worried Banks Sharply Reduce Business Loans, how banks nationwide have clamped down on loans and lines of credit to businesses.

“Financial industry executives say tighter credit from major banks represents a swing back to a realistic assessment of risk, after years of handing out money with abandon,” says the NYT. This new aversion to lending to businesses is putting a damper on the expansion and growth of business and industry alike.

Here’s where realistic cash-flow planning proves its worth. With it, businesses can moderate their yearly goals, adjust their accounts receivable and payables, keep tighter inventory control (such as just-in-time ordering), and weather the current financial storm without having to borrow money.

With a history of well-documented planning, correct accounting, and plan vs. actual analysis, coupled with well-considered course adjustments, a business which does need to borrow can overcome the reticence of newly risk-averse banks.

Without realistic cash-flow planning, you can be a profitable, successful business and still be bankrupt.

Business Plan Pro, published by Palo Alto Software, is the tool for planning and managing your business’ cash-flow. Use it to sail the stormy waters of this tempestuous economy. And if your planning process shows you will need to borrow money, Business Plan Pro can produce the plan and report documents you need to successfully navigate the reefs and shoals of bank financing. Show them that this is a planned part of the voyage, not just a desperate cash-dash to any port in the storm.

Steve Lange
Senior Editor
Palo Alto Software