Posts Tagged ‘Business’

A common term in finance but one rarely used in business is “plowback.” 

Plowback is taking all or a portion of retained earnings (profits) and essentially plowing them back in the company for working capital (such as inventory and material purchases), overhead (such as marketing or R&D) or capital purchase (such as new plant and equipment) – items that are usually financed through outside capital acquisition such as debt or equity. 

With capital raising options dwindling by the day, finding additional cash flow within the business has become the only surviving factor that many small, growing firms have left and should, regardless of the economy, be something that all businesses make a solid practice of. 

Think about it this way: 

Let’s say that your business earns $ 150,000 in revenue each year and that it expenses that same $ 150,000 in direct and fixed costs – leaving the company with little or no retained earnings.  Now, this year the company needs to purchase a new piece of equipment costing $ 15,000. 

This new piece of equipment will improve the company’s efficiencies and reduce its overall direct costs by a combined net of 5% annually over the next three years (the useful life of the equipment). 

This means that after the equipment is purchased, changing nothing else, the company should be able to realize a net income (profit) of that 5% or $ 7,500 per year.  While not a lot, much more that what the company has been realizing to this point. 

But, the company does not have the cash on hand to make this purchase and thus, has to borrow the $ 15,000. 

Now remember, the company is making no profits at this time – neither net profits nor operating profits – profits that would be used to make the payments on the loan.  So, if (and that is a big “IF”) – if the company can get a lender to loan those funds it would eat into that 5% saving as long as the loan was outstanding. 

Let’s say that a lender did agree and made a loan for 36 months at 10%.

The loan would cost the company $ 484 per month or $ 5,809 per year.  Take this from the $ 7,500 in savings and the company is left with a mere net profit of $ 1,700 per year. 

However, let’s say the company took a different approach.  In this case, the business scrutinizes all of its costs – line item by line item – and finds an average 10% savings on its expenses: 

It found that it could alter its workforce using part-time or temporary workers instead of paying full-time employees to be idle between jobs.
It re-negotiated its lease into a longer term contract at a lower monthly rate.
It leveraged bulk inventory and material buying as well as the timing of its purchases to reduce its material costs.
It sought better, more targeted marketing avenues that provided improved results at a lower cost.

The list goes on. 

In fact, the company sought and found ways to reduce the expense of all its cost items finding a net savings to the business of 10% annually. 

Now, not only will the company have a net profit or retained earnings of 10% (or $ 15,000 per year) but could use those funds to buy the equipment outright. 

Thus, the business purchases the equipment (without additional loan costs), realizes the 5% in savings from that purchase for the next three years and STILL continues to realize the 10% cost improvements for the life of the company.  This is a win/win for the company. 

If we compare these two scenarios over the next three years, we see: 

In the first scenario, the company realizes a net $ 5,076 in benefits over the three years then reverts back to the way it is today (no net profits). 

In the second scenario, the company realizes the 5% savings from the equipment ($ 7,500 per year) as well as the overall 10% cost savings in the business ($ 15,000 per year) for a total three year realized benefit of $ 67,500.

Big difference! 

Plus, the 10% in overall business savings will continue long past the three year useful life of the equipment. 

Even if the business could not find all those expense savings (maybe just half or a third) – those savings will go a long way in reducing the amount of money the company had to borrow as well as continue to bring more net revenues into the firm for years to come. 

Finding cost savings in your business is not rocket science and does not require an advanced business degree from an Ivy League school.  You set a cost saving goal – then simply manage your business to meet that goal. 

You set your mind to open and run a business – now set your mind to better manage that business (to your benefit).  What is the worse that can happen?

You just might find enough savings within your own company to finance it to that next level of success.

Every business needs financing. Vendor financing is one way to find money for small business financing.

Stretching out trade payables from, say 30 days to 60 days, is a pretty common method for companies to improve their cash flow. Usually vendors are not very happy when this happens, and some even voice their disapproval in no uncertain terms. Most businesses are small businesses and stretching out payables only hurts everyone in the long run. Think about it: if you are depending on one of your customers to pay you within 30 days, and that customer doesn’t pay for 90 days, it can significantly affect your cash flow. If it’s one of your major customers, the impact can be quite serious. You don’t have the cash to pay your bills and so a ripple effect is caused on down the line.

This suggestion is different. If you’ve established a good relationship with your vendors, sometimes it’s possible to get them to agree to finance part of your company by extending their terms for a particularly large order for an extended length of time. If you’re a new company with little or no history, you could approach vendors showing them your business plan and documentation of orders you’ve already received. If the vendor is convinced that your company will be successful, and one of their better customers in the future, they may be willing to give you a break now.

Another alternative is to guarantee the vendor that they will be your exclusive supplier for an agreed to length of time in exchange for longer credit terms. Or you can offer to pay slightly higher than market price in exchange for longer credit terms. This method can be dangerous, because it sets the precedence of a higher price. When the longer terms are no longer necessary, it may be a challenge to decrease the price you pay the vendor.

Occasionally, it’s possible to convince a vendor to exchange a trade payable owed to them for a note payable instead, or possibly an equity position in your company. If you decide to offer an equity position, document it thoroughly and have your attorney draw up whatever papers are required. Make sure you include a buyout clause in case you sell the business. If you don’t have the buyout clause any investor can forestall the sale of the business.

Vendor financing is one option for small business financing.

(www.abndigital.com) ABN’s Samantha Loring is in Durban at the Cop 17 conference, and caught up with Rachel Kyte, Vice President of Sustainable Development at the World Bank.

As a business owner, you need to find out that picking the wrong type of funding may lead to undesired situations just like feuds between you and your financier, a shift of control that is out of your hands and total waste of time and money, as well as other unwanted consequences. The thing is that you have to look for and go for the most beneficial business finance option which best fits your small business. As a way to aid you to find the ideal financing alternative, we’ve outlined various financing options which you may find appropriate for your business.

Before proceeding, it is important to emphasize that small business finance options are often more complicated than anticipated by many business borrowers. We are definitely not attempting to characterize business loans and working capital financing as either straightforward or simple. In fact, quite the opposite is the case. The unfortunate reality that most business financing processes have always been excessively complicated and that meaningful improvements are not on the way is one of our ongoing observations. We nevertheless feel that it is critical for each small business owner to have an absolute and total understanding of the entire commercial finance process in the face of the prevailing commercial lending complexity. To help in providing more understandable insights about commercial loans and business banking problems, this particular report is one of several thorough efforts on our part.

Many banks have funds available and seem willing to increase small business lending, but have other issues preventing them from doing so. The demand for business loans has decreased because many companies are cutting back or forgoing expansion. As discussed above, there are fewer creditworthy companies. Many banks are facing increased pressure from regulators to reduce risk while experiencing difficulties with some of their commercial real estate loans. Although small business loans can be very profitable, they are very risky.

When the time comes to present your case for financing, take all of the knowledge and tactics from steps one and two and turn it into a presentation that is clear and concise.Other than clarity, be honest about your business’s performance over the years. While this may sound counter intuitive, fully disclosing your business’s performance and explaining the data that they see can help build an accurate case for your business.

Small business finance can be sourced from banks or financial companies. But online lenders are considered as best source of lower rate finance for any business. So better apply to an online lender. Before that, compare all lenders for rates to find a suitable offer.

Starting your own corporation can be a big task in itself, and establishing corporate credit in order to financially support your corporation can be even more difficult. Many banks these days are very selective with the corporations that they choose to work with. If you have just started a small business and it is very new, you aren’t going to have much luck with getting good corporate-credit. If you are trying to build-up your corporate credit, there are a few basic things that you should know.

First of all, you should not think that just because you are a small business that you cannot get corporate-credit. Small businesses can and do get corporate credit if they are trustworthy and profitable. If you are currently running a small business, you need to give the bank a good reason that they should allow you to take out corporate-credit. Most banks will not loan to your company if it is extremely new because they are not sure as to whether you will be able to make it work.

After a couple of years, the banks will see that your business practice has more credibility, so your small business will have a much better chance of getting corporate credit.

Secondly, you shouldn’t assume that it will be easy for you to get corporate-credit. A great majority of people offering corporate credit are not going to loan their money out to you if you are not well-established. Obtaining corporate-credit is going to be a difficult process that will require persistence on your part. When you think you are ready to get corporate credit, then go out and put your negotiating skills to the test. Do not get discouraged if you get turned down by a couple of lenders, just keep trying until you finally get the corporate-credit that you deserve.

Finally, you should use your corporate-credit wisely when you finally get it.

Make sure that you are putting your business-credit to the best possible use and that you are not wasting it by spending money on something that will not help to build your income. There are corporations that have had good corporate-credit and then decided to spend it wastefully; which is one reason that businesses lose money. If you are managing your business credit, make sure that you understand how to use it properly. If you are unsure of what you should be doing with your corporate-credit, you may want to seek advice from a trustworthy business partner or financial adviser.

Realize that corporate credit can have the potential to make or break your business. If you use it to your advantage, it will actually increase your profits. When you abuse or have bad corporate credit management, then you will likely set yourself up to lose money.

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Advanced help is usually a good idea when faced with complex problems, and the use of a small business financing expert is a prudent step for commercial borrowers to take in view of continuing business lending difficulties. Small business owners are currently confronting what appears to be the worst commercial banking climate in several decades.

When it comes to running their own business, most small business owners probably have a very independent perspective. It is normal for most small businesses to postpone seeking outside consulting help even when facing a business loan rejection by their banker. Many previous business finance options are no longer available from traditional banks, and this might not yet be obvious to some small business owners. Realizing that they have a commercial finance problem requiring outside advanced consulting help will often be an appropriate starting point for a business borrower to seek a small business finance expert.

For most this realization will occur after being turned down for a commercial loan by their current bank and not knowing what to do next. Some business owners might have already had this experience and then unsuccessfully tried to find new financing. In a growing number of situations, the decision by many banks to permanently stop making commercial loans to small businesses will be the last straw that prompts a call for expert assistance.

Some potential pitfalls should be anticipated during efforts to find a qualified and experienced working capital expert. Qualifications to act in the capacity of a small business loan expert are exhibited by very few individuals or companies. For an individual being asked to provide advanced help which can be used to formulate effective business financing options, problem-finding and problem-solving are both essential components.

An adequate stock of these skills that are so critical to the success of a business financing expert are generally scarce commodities in any field but commercial financing in particular seems to be suffering from an ongoing shortage of these positive traits.

A large number of former residential mortgage consultants have no meaningful experience involving complicated commercial real estate loans but have still attempted to add small business loans to their line of products. Small business financing is more complicated than realized by many borrowers. It is appropriate to seek a qualified individual who is engaged in it as a full-time occupation and not a part-time venture because it usually takes at least several years to master the field. Finding a suitable full-time expert in an established commercial financing business with extensive experience should be emphasized when building upon this observation. It will also be prudent to avoid a current banking relationship when seeking advice about who to contact as prospective business financing experts. This will eliminate potential conflicts of interest and also properly reflect that a bank which has already been less than helpful in making needed loans will not necessarily have a trustworthy recommendation.

Business owners should not lose sight of their immediate objective when seeking small business loan expert help. Ensuring that all practical and effective commercial finance options are fully reviewed is ultimately the primary purpose in using a small business financing expert. It is essential that commercial borrowers receive thorough and candid advice before finalizing any working capital and commercial loan agreements.

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Employees credit helps your business function better by giving employees the responsibility of making purchases for the company and helping it run better and more efficiently.  When you give your employees credit you are delegating responsibilities and making use of your time as a manager more productive.  

There are benefits and drawbacks to extending employees credit through the company.  One benefit is that it gives the employee a say in how the company is run and gives them a chance to make small financial decisions.  This can go a long way in creating an employee who is happy with their job and happy employees are far more productive.  You are giving them responsibility and saying that you trust them enough to make decisions about the company’s purchases.

On the other hand the drawbacks can have the opposite effect.  You just need to make sure that you choose an employee who is grounded and responsible from the start.  You can do this by checking employees credit rating through one of the credit rating companies.  Often, you will find a few negative marks but if the record looks good overall you know that the employee is pretty much responsible with finances.

Giving employees credit through your company will open them up for ideas and realizations about the company’s goals and mission statement.  It is sending a message to them that they are valued by the company and have a position of responsibility that few others have.  This can also increase employee morale which is so important in a business setting.  High morale means that your employees will do their best to function efficiently for the company and even share creative ideas about how best to perform certain operations which can make the company even more productive and increase sales overall.

Productive employees are every employers dream and by giving your employees credit you are making them even more productive in their jobs.  Your company must stay competitive in order to survive and making your employees part of the team instead of just the workers will go a long way in staying competitive by giving your employees the message that they matter to the company and that they company will provide for them.  It may have taken a long time to build trust among your workers, and extending employees credit says a lot to them.  That the company trusts them as a person and business partner to help the company reach its goals.

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