Category Archives: Finance

How Do You Manage Cash Flow Gaps? Nine Suggestions

Situation: A company has a significant monthly payroll, and business is growing. Accounts payable collections are 90-120 days. Their challenge is to finance the gap. They have tried, but can’t get their bank to provide financing. An SBA loan will help. How do you manage cash flow gaps?

Advice from the CEOs:

  • Look for private non-bank financing.
    • Your AR is safe, low risk, and from reputable companies.
    • Non-bank financing offers better rates than banks, with access to cash from the lender on reasonable notice.
  • Investigate Lendingclub.com. They offer business loans up to $300K at 5.9%. Lendingclub.com operates by spreading the risk over thousands of investors.
  • Talk to lots of banks – not just those with whom who’ve worked in the past. Given your cash flow needs and good credit history, if you offer to shift all of your business to another bank you may get a more positive response. Once you have talked to other banks, let your current bank know your plans. They may become more responsive.
  • Change your service policy so that you give your best service to customers who pay you fastest. Once the purchasers at companies with whom you work learn about this, they will pressure their AP people to speed their payments to you.
  • Put more focus more on services which pay up front.
  • Going forward switch as much business as possible to ACH payments.
  • Offer customers early pay discounts – 1% net 10 or ½ of the Lendingclub.com rate to your biggest clients.
  • Befriend lower level employees in client companies. Particularly those with whom you have regular business contact.
    • They can tell you how to get to the top of the AP pile.
    • Let them teach you their company’s practices.
  • Plan finances going forward so that you can finance the gap yourself.

Category: Finance, Operations

Key Words: Payroll, Financing, Accounts, Payable, Bank, Lendingclub, Non-Bank, Service, ACH, Payment, Early, Pay, Discount

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Do You Focus on Taxes or Investment? Eight Considerations

Situation: A company’s accountants advise them to make distributions for tax purposes. Simultaneously, the company’s future is based on technology and staying ahead of the competition. This requires ongoing investment. Do you focus on taxes or investment?

Advice from the CEOs:

  • The focus of the answer is distributions and company morale, not tax planning. Think about the impact on the team. Are there considerable differentials in compensation within the company? If so, this may be impacting morale.
  • Differentiate bonuses from variable compensation. Make bonuses special. This starts at the top. The attitude should be that if someone works hard, they will be compensated. Once bonuses become assumed, they are just regarded as part of the overall compensation package.
  • Smaller geographical units can help retain a small company atmosphere and drive. As a company grows, similar results can be achieved with Tiger Team projects.
  • If the organizational structure enables this, foster friendly competition metrics between offices – and publish the results.
  • One company distributes performance data to top staff – with color-color coded red/yellow/green metrics based on performance. All red and yellow numbers require an explanation. The company has seen a significant reduction in red and yellow metrics since they started this.
  • At company meetings – publicize and recognize top 10 performers in various areas. Recognition boosts morale.
  • Company events boost teamwork and morale. These may include company barbeques, in-house cooking shows created and run by staff, and quarterly outings – bocce ball, tubing, sailing on the Bay.
  • Growth is accompanied by change. When a company starts it’s a mission. After 15 years it’s a job. This is a function of growth, and it takes ongoing creativity to keep individual employees excited about their job and role.

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Do you Merge, Sell or Keep the Company? Nine Factors

Situation: A company has been approached by an international firm with an existing West Coast presence that is interested in expanding its US operations. A Letter of Intent is in place but will expire in weeks. The LOI is of interest because the company has cash flow challenges. The CEO seeks advice on whether and how to proceed with a sale or merger, or whether to continue as an independent entity. Do you merge, sell or keep the company?

Advice from the CEOs:

  • This is a personal decision. Do you want to be your own boss or to become an employee? It really is a question of what you want.
  • If you are burned out, there are advantages to having a boss, at least in the short term. However, 2 to 3 years out you may tire of this.
  • While cash may be tight, you can address this with other measures.
    • Can you save money by reducing office staff (hours or people) short-term until your cash flow improves?
    • Talk to private investors – offer up to 9% interest on a note. The company is a going concern and therefore likely to be able to pay off the note. You may be able to negotiate a note at a favorable rate.
    • Negotiate a 5 year note, with interest only payments for the first 3 years; sweeten the deal with an offer that if you get new business worth $X during the period of the note, you pay them Y% of upside.
    • You have revenue-producing business and receivables. Factor your receivables to raise the cash that you need. Adjust your prices to cover the cost of the factoring discount.
    • If you have the margins, or can increase prices to produce the margin, offer discounts for early payment of accounts receivable.
  • If you decide to sell, avoid a contract that takes away your flexibility to maximize your future payouts.
  • Can you be confident that the buying firm will survive until your payouts are completed?

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How Do You Forecast Sales & Revenue? Six Suggestions

Situation: A company is developing new forecasting metrics for both sales and revenue. The immediate future does not look robust, and they are concerned about mid-term future revenue. Ideally they want to extend a 3 month forecast window out to 6 months. What is an effective methodology for forecasting revenue out 6 months? How do you forecast sales and revenue?

Advice from the CEOs:

  • Get your team together and gather impressions on the direction of business through the end of year. How many see sales going up, staying the same or declining through the end of the year. Discuss the rationale behind each member’s estimate so that you fully understand their thinking and what metrics each sees as important to their forecast. Work to make the estimates and metrics as rigorous as possible.
  • Based on the metrics discussed, develop an algorithm that you can monitor on a monthly or quarterly basis, depending upon your needs.
  • As you develop your algorithm, test it against past sales forecasts and history. Can it accurately plot past performance based on the metrics that you had at the time. If not, what needs to be adjusted or better understood.
  • Do you ask clients for forecasts of their purchase needs and do you track the accuracy of their forecasts? Weigh their responses by the quality of their past predictions.
  • As an alternative to trying to predict demand, assemble your resources to fit the needs of your market and customers and arrange your resources for flexibility.
  • Look at industry resources. How far out do experts in your industry claim to be able to forecast demand and sales or purchases? How reliable are these forecasts? What can you learn from this exercise that will improve your own forecasts?

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How Do You Fund a Start-Up? Four Suggestions

Situation: Early stage companies often find it difficult to raise funds from traditional sources. An experienced CEO wants to help certain new companies of which she is aware in two ways – assisting them in receiving funding, and then helping to assure that they reach key milestones.  What is the best way to profitably address this ambition? How do you fund a start-up?

Advice from the CEOs:

  • Build relationships with a few select sets of local investors – venture capitalists, angels, and private investors – with whom you have strong credibility. For a retainer or fee, agree to bring them a number of new pre-vetted companies in the next year, and post-finding, help the companies to succeed and hit milestones. From the companies that you bring to funders, ask for equity in return for securing funding and providing guidance.
  • Put yourself in the shoes of the person who will pay you – what do they want and how do you deliver this for them? Develop statistics from your past successes that highlight your capabilities. Don’t be shy about your accomplishments.
  • What are you passionate about? If the answer is development – linking technology entrepreneurs to strategic partners and then being an accountability partner to assure that milestones are met – this will be your focus and your pitch to both funders and tech companies.
  • Your value is linking the entrepreneur to the funding source and being an accountability partner.

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How Do You Raise Cash Short Term? Seven Suggestions

Situation: A CEO has identified a new business opportunity that looks promising but will require raising additional cash short term. What are good sources of short term cash, and what will simplify access to these resources? How do you raise cash short term?

Advice from the CEOs:

  • You must be the biggest critic of this opportunity. If it doesn’t fly to your critical eye, it will be hard to sell to others. As a reality check, ask yourself whether the opportunity is something on which you’d bet your house.
  • Build the new capability around a web distribution system that compliments your other capabilities. This broadens the appeal of the offer.
  • Generate an investment proforma and revenue stream. Most investors or debt financers will want to see this. You can position it as an immature business plan backed by your best estimate of the numbers.
  • You’ll need a business plan unless you’re lucky enough to find someone who believes that you can turn any opportunity into gold.
  • Presell subscriptions to target clients to prove the value of the offer – both to you and for investors.
  • Assure that any payments due from you go into an escrow account, to be released on a quarterly or other phased basis pending performance from the other parties within this deal.
  • This is not a venture capital story. Angel investors will seek a lower return for lower risk than VCs. Set some milestones for the Angels that will help them to see that you are monitoring their risk.

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How Do You Structure an International Deal? Six Points

Situation: A CEO is evaluating a potential deal with an Asian company that is synergistic with the strategy of the CEO’s company. The structure would include a US entity, run by the CEO, and an Asian entity that would provide essential technology. How do you structure an international deal?

Advice from the CEOs:

  • Before you agree to a deal, raise your own level of trust with the key players of the Asian company so that you are comfortable with the investment of time and money that you will make.
  • Assure that you will have the focus and attention of talent that you will need within the Asian company. This is better done through mutual understanding and agreement than through contract. In Asia, relationships are personal, not contractual, though for legal reasons personal understandings must be backed by a good written contract. This will likely mean that you will have to travel to Asia to spend time with the key personnel upon whom you will rely.
  • Make sure that there is agreement on a clear road map for both the US and Asian entities.
  • You will need a solid bridge person who can speak both the language and culture of your Asian counterpart – not just someone who says that they can, but who can deliver. Test this relationship before agreeing to the deal.
  • Structure the deal so that the US entity owns exclusive rights to the technology world-wide with the exception of the home country of the Asian firm. Assure that you own an acceptable piece of the US entity.
  • Don’t complicate the exercise by creating additional shell companies in Asia. Shell companies can make it difficult to maintain accountability and assure that you gain the value that you seek.

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How Do You Finance a Ramp-up? Five Suggestions

Situation: A company has been growing within budget. In the near-term they anticipate an opportunity for significant growth. The challenge of this ramp-up is that it will sap existing financial resources as expenses associated with the ramp outpace revenues. In growth terms this challenge is known as financing the inflection point of the hockey stick. How do you finance a ramp-up?

Advice from the CEOs:

  • Investigate a number of different financing options and combinations of options. While historically the company has been financed by venture capital, as you finance your ramp think beyond venture capital as the sole source of funds.
  • Investigate corporate partners who would consider the company a strategic investment. This creates a higher valuation for the company than you will find with VCs alone.
  • Within the VC community, to raise a modest level of funds focus on 2nd and 3rd tier funds – particularly those who specialize in the company’s technology and market and who will see this opportunity as fitting their portfolio strategy.
  • Outside of the VC community, look at banking and fund options that offer creative ways of using both investment and debt to fund the company through the inflection until you are again cash positive. Examples are Comerica Bank that has been building its position among Silicon Valley start-ups and venture capital firms, and Paradigm Capital that will provide loans by collateralizing your IP.
  • Look closely at your IP portfolio to maximize IP value to either VCs or other funding sources. If your IP position is strong it boosts your ability to attract funding.

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How Much Should Management Own Post-Financing? Five Points

Situation: A company anticipates closing a Round 3 financing this year. The CEO has an idea of the range of management team ownership that is likely at this round. He seeks advice from others with experience. What can the team do to assure that their ownership is at the upper end of the range? How much should management own post-financing?

Advice from the CEOs:

  • The numbers change depending upon both company valuation and the funding environment. Currently, Silicon Valley venture capital firms are becoming more cautious and risk averse. This is because many companies that have received financing over the last 2-3 years have underperformed. Many have yet to even produce and release a product. In this environment, the chances for maintaining a larger share of ownership for management are not as good as in headier times.
  • Seek two outside counsel to generate two independent opinions on a fair management option pool, and to assist in negotiations. These will likely be boutique firms.
  • Approach the situation as an executive option pool objective. Determine what needs to be in place to attract new executives, as well as to replace existing executives should they leave or be unable to serve.
  • When discussing this with your board and investors, phrase the challenge in win-win terms. The objective is to lock-in key personnel and assure that key positions will be filled to meet company objectives. This is the best way to assure future financial success.
  • Key members of the executive team may want to seek independent advice, apart from the company or executive team.

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Is It Time to Raise Prices? Six Suggestions

Situation: A company will be losing a client in the near future. However, the client is still buying from the company as sole source supplier while they develop alternate suppliers. Should the company raise prices, and if so by how much? Is it timely to raise prices?

Advice from the CEOs:

  • A factor in this decision will be your history of raising prices in the past. If you have increased prices to keep pace with inflation and your costs, look at the frequency and magnitude of these increases. Provided that the increase that you are considering is not out of line with past practice, it should not come as a surprise to your client. If you have not raises prices in the past, be prepared for push-back.
  • However you decide, be sure to maintain the relationship. You have a long relationship with this client and you never know what their future needs will be. As to the amount of the price increase, if they are reducing the volume of their purchases, you can raise your prices by 10-20% based on the loss of volume to cover your overhead.
  • Be prepared with logical arguments to explain the price increase to the client.
  • If your discussions with the client’s representative have become tense, it may be better to have someone else within your company lead this discussion. It’s OK to tie the emotional component – having to lay-off employees, etc, – into your story.
  • If you have an advocate within the client company, involve them in the discussion and give your advocate the ammunition that they need to support your case.
  • Adjust your staff and costs to fit the new reality.

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