Posts Tagged ‘Small’

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.

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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