Category Archives: Finance

How Do You Update Your Accounting System Without Losing Data? Four Thoughts

Situation: A company has used the same accounting system for over 10 years. The current system produces information quickly and easily, and empowers management and sales to make good decisions. However, it doesn’t respond to customer information requests as well as newer packages. What are best practices for updating your accounting system without losing data?

Advice from the CEOs:

  • One option is to keep your legacy system, but migrate to a user-friendly platform designed to work with a CRM system that can better meet customers’ needs.
    • Keep both systems up live until you no longer need the old system, except as an archive of your historic data.
    • Be sure to cross-train other employees so that your current system doesn’t become worthless if your key administrator gets hit by a truck.
  • Before you decide which direction to pursue, ask what your employees like the current system.
    • What do they find most useful?
    • What accounting features do you need to support your growth plans?
    • What key functions of the current system would you have to emulate?
    • How expensive is it to maintain your current system?
  • Is your business so unique that no off the shelf alternatives exist?
    • Could you adopt an 80-90% solution and customize the rest?
    • It may be difficult to do this on your own. Look for a consultant with a background in accounting applications to analyze your needs.
  • If you feel that you must make a change, but are not ready to do so, develop your solution gradually.

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How Can You Increase Cash Flow to Fund Growth? Five Options

Situation: A company is bringing in new business, but used up its cash reserves to stay afloat during the downturn. As it increases payroll and orders for components to meet production deadlines, it struggles to meet cash flow needs while waiting for customer payments. How can you increase cash flow to fund growth?

Advice from the CEOs:

  • Your customers need your product to meet their own deadlines. Have you talked to them about your needs and seen what they can offer? Offering modest early pay discounts on amounts due may help to ease your cash flow challenges.
    • Among discounts offered by other businesses is, for example 2% if they pay in 10 days.
    • Another option is to offer 5% off if they pay for new orders in advance.
  • As you bring in new business or projects, negotiate early pay options in your contracts. For example, offer the option to prepay on milestones in exchange for discounts on the final payment.
  • Factoring receivables is an option, but can be expensive. On the other hand with investors looking for good returns, it makes sense to check out options that are available on the web.
  • There are now web services which combine small contributions from a large number of investors into funds which can help you to finance short-term cash needs. There are also options which may provide lines of credit which are easier to secure than bank lines.
  • Look at local redevelopment options or funds which are targeted at local businesses. For example, in the San Francisco Bay area there is a organization called Working Resources which provides low interest loans local businesses to meet cash flow needs.

Key Words: Cash Flow, Payment, Discounts, Early Pay, Milestones, Prepay, Factoring, Funds

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What Are Best Practices For Managing a Due Diligence Process? Six Suggestions

Situation: A family-owned business received an unsolicited letter of intent to purchase the company. The Board is split on sale of the company, but has agreed to allow due diligence. Only a few key employees are aware of the LOI. What are best practices for managing a due diligence process?

Advice from the CEOs:

  • A due diligence process can be a major distraction. Put as short a fuse as you can on the due diligence process; insist that the information requested be limited in scope to essential materials to minimize distraction; and that the process not interfere with scheduled company commitments.
  • It is exceedingly difficult to hide reality from the troops. Good due diligence is incompatible with secrecy. Absent communication about the situation, if rumors develop at least a segment of employees will assume the worst leading to possible employee loss and erosion of leadership credibility.
  • It is better to explain the situation and put it in the best light. Here’s an example:
    • The company is not for sale but has received an unsolicited inquiry.
    • This is happening because the company is successful, is producing consistent value, and others appreciate our success.
    • Whatever happens, the company will continue as a going concern and if the company is sold, all efforts will be made to assure the retention and security of the employees.
  • Ideally, communicate this through a company-wide announcement, with video link to remote sites, and with the opportunity for employees to ask questions.
    • Brief all key managers in advance, with Q&A scripts to deliver a consistent message and address individual questions.
  • Strictly control the due diligence process.
    • Restrict direct contact with employees and, to the extent possible, with key customers.
    • Maintain your focus on the business – there is no guarantee of a sale.
    • Put retention packages in place for all key employees.
  • If the deal does not go through, assume that it will negatively impact company results for at least one quarter. Adjust your forecasts and incentive programs accordingly.

Key Words: Due Diligence, Purchase, Time Line, Distraction, Communication, Message, Coordinate, Q&A, Limit, Incentive, Retention Package

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Do You Need To Rely on Venture Capital Funding? Three Questions

Interview with Charles Bellavia, CEO, ElectraDrive

Situation: High tech entrepreneurs frequently see venture capital funding as a quick route to enabling their ventures. However VC funding is highly variable by tech sector and company cash needs, and few companies are ever funded. Do you need to rely on VC funding and what are the alternatives?

Advice from Charles Bellavia:

  • The first question to ask is what you want from VCs. In the past they brought both contacts and funding. Now, generally, they just bring funding. So ask three questions.
  • Can you fund the company out of your own pocket?
    • Far more companies are funded by founders, friends and families than by VCs. However self-funding demands conditions.
    • Cofounders should have alternate income sources so that they can operate without salaries for periods of time.
    • Watch the life stages of start-up cofounders. Avoid joining a start-up when your kids need your attention, especially during their teen years. Can you forgo regular income if you are paying for college? If an annual 2-week summer vacation is important, don’t join a start-up.
  •  What is the minimum funding needed for the company?
    • What funding do you need just to prove your technology and generate cash?
    • Focus is key. People will suggest variations. You have to know your path and whether variations will help or distract.
    • Stay with your core idea and think in terms of product generations. Build fitting variations into future plans if they will delay initial launch.
  •  How do you keep project workers motivated?
    • Plan for turnover. Know who is key to the project, and where you need back-ups.
    • Start-up life is all consuming. When the picture on the wall is crooked, everyone jumps to straighten it out.
    • Have fun and make it fun. This needn’t be expensive, like parking lot pot-luck barbeques with a CD deck and music.
    • Be generous with simple, low cost recognition. Acknowledge employees for who they are and where they came from. This is especially important when you have diverse employees and builds camaraderie. One company has pot luck lunches and employees are asked to bring their national dish; the food is wonderful and helps employees to appreciate one another.

You can contact Charles Bellavia at [email protected]

Key Words: Funding, Venture Capital, VC, Bootstrap, Self-fund, Friends, Family, Income, Salary, Founder, Life Stage, Focus, Core, Iteration, Turnover, Fun, Recognition

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How Do You Fund Growth? Five Points of Focus

Interview with Hannah Kain, President & CEO, ALOM

Situation: While funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growth?

Advice from Hannah Kain:

  • We focus on frugality and prevent wWhile funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growthasteful spending. However we invest in tools that enable staff to purchase wisely and stay ahead of customer demands. We also collaborate with vendors to manage costs.
  • As a result, the last two years have not forced us to change how we fund growth. We are getting large contracts and work globally to solve customers’ logistics challenges. Our challenge has been moving from centralized distribution to strategically placed centers around the globe, increasing inventory costs and cash needs.
  • Where we have changed is in how we negotiate terms and credit with our customers. We manage vendor accounts payable to maximize cash flow while treating them as business partners. This requires close vendor communications to assure that everyone’s needs are met.
  • We have been cautious with our banks and seldom dip into credit lines. Managing vendor payments has been more effective.
  • Essential to vendor communications are open sharing of information and goal setting. We work to create a team atmosphere. This is similar to what we do in our offices. In our experience, instilling the right culture is far more powerful than financial incentives.
    • We share information through all-hands company meetings and regular updates so that everyone gets the full picture.
    • We also share information with our vendors so that each side is aware of the other’s needs.
    • We create an annual one-page business plan for the company, and parallel plans down to the supervisor level. Performance against plans is updated regularly to assure that we remain on top of situations.
  • We focus training on new tools. Our staff gets technology they need to be successful.
    • We generously provide technology to our employees, provided that they give a logical business rationale. This includes home computers, iPhones or Applets to help them do their jobs.
    • Similarly, when a vendor or customer asks for a service improvement or a new service with a good business rationale, we invest to support this.
  • These methods have allowed us to finance most of our growth internally.

You can contact Hannah Kain at [email protected]

Key Words: Funding, Bank, Institutional, Growth, Spending, Tools, Empower, Customer, Demand, Costs, Vendor, Cash, Needs, Terms, Credit, AP, Partner, Payment, Information, Sharing, Goal, Culture, Performance, Technology, Service

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How do You Fund a New Venture in a Mature Market? Seven Strategies

Interview with Chuck Gershman, Founder and Former CEO, Bay Microsystems

Situation: Following a consolidation of equipment suppliers, the broadband network market has matured with a few large players. This potentially reduces diversity and creativity because barriers to entry are now enormous. How do you fund a new venture in a mature market?

Chuck Gershman’s Advice:

  • If you can get the venture off the ground, the opportunity is tremendous because competition for new approaches in a mature market is limited. Large players don’t move quickly. Their incentive is to change slowly to lengthen product life cycles.
  • The downside is fewer financiers interested in the space because of the barriers to entry, and because the likely exit is an M&A play at low multiples.
  • Given this, how do you attract investors?
    • In the hardware space, you must demonstrate a convincing go-to-market strategy with modest investment and a moderate cost of market penetration. If the cost of success is high, it requires too much investment and risk before you can accurately assess the possibility of success.
    • You must be able to show a substantial total available market.
    • You must be able to show that your capability meets the needs of the market.
    • You must be able to show that the customer base will respond en masse. This is critical!
    • With fewer investors willing to look at your product and technology, it takes more time and work to find interested investors.
  • Investors invest on perceived risk, so the task is to show that the risk is manageable.
    • In the past, investors were convinced by a committed strategic customer that would finance bringing the product to market.
    • In the current market, an effective strategy is to develop an early customer who is a strategic investor in your company from Day 1. This raises the likelihood of an exit, and appeal to investors, but reduces downstream options and ROI.
    • Another strategy is to pursue a creative IPO exit. For example, launching the IPO on a smaller foreign exchange. This reduces the long-term payout to founders, but may increase appeal to investors who prefer an IPO to an M&A exit.

You can contact Chuck Gershman at [email protected]

Key Words: Mature Market, Diversity, Opportunity, Investor, Go-To-Market, Risk Assessment, Strategic Partner, Strategic Investor, Exit, M&A, IPO

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What are the Best Ways to Manage Cash Flow in a Recovery? Six Suggestions

Situation: As business improves the Company needs to manage cash flow to support growth. How are you managing your cash flow in the recovery?

Advice from the CEOs:

  • This is a common challenge following a down period. You’ve reduced personnel and used up cash reserves to survive. As demand resumes, you may need to add resources as you increase production. It’s important not to let accounts payable get ahead of your receivables.
  • Ask customers for deposits on orders – giving you up-front cash. Give priority to those who do.
  • Redesign the work flow:
    • Add independent contractors on a project basis.
    • This requires good cost estimates and well-defined deliverables.
  • Work with your bank and Line of Credit:
    • An LOC should cover 1-3 months of operation.
    • Ask for a lot, and shop different banks for favorable lines and rates.
    • An LOC is a short-term obligation whereas debt may be long term. Watch your debt covenants for restrictions on obligations to assure that you stay in compliance.
    • LOCs are frequently Prime plus 1-2%
  • If you have a broker, see what rates they will offer on a business credit line to keep your brokerage business.
  • The best alternative is to plan ahead and develop a strong relationship with your banker – including a reliable credit history – so that when need arises, the banker will help you based on your past performance and the confidence that they have developed in you and your operation.

Key Words: Cash Flow, Recovery, Growth, Deposits, Contractors, Project, Estimates, Deliverables, Line of Credit, Bank, Covenants, Credit History

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What is the Best Response to a Price Cut Request? Eight Thoughts

Situation: A key customer just asked for a price reduction. Our raw materials costs have increased and eroded our margins. What is the best way to respond?

Advice from the CEOs:

  • Are you selling a commodity or a unique and differentiated product?
    • Commodities rarely command a premium above market unless you can bundle with differentiated delivery.
    • Unique or differentiated products justify a premium because the customer has only two choices: purchase at your price or try to develop an alternate source.
  • The customer may have valid reasons to request a lower price.
    • Counter with a combination lower price and lower level product to retain your margins.
    • If the sale involves service, assign less expensive resources in return for a lower price to preserve margins.
    • Define the trade-off to the customer so that it becomes their decision, not yours.
  • Adjust your terminology. Use “run rate” vs. “price,” and speak of balancing resources assigned. Avoid cheapening or commoditizing your offering to meet the customer’s price demand.
  • Don’t assume that there is such a thing as a “fair price” or “fair margin.” The price is whatever the customer is willing to pay for your offering. The price increases the more unique it is, and the more critical to the customer’s needs.
  • Do NOT share your cost and margin information – as company policy.
  • Consider combinations of pricing, terms and delivery that keep you whole while offering the customer different price points.

Key Words: Price Reduction, Margin, Costs, Commodity, Differentiation, Counter-Offer, Resources, Terms, Delivery  [like]

What are the Best Current Avenues for Raising Capital?

Interview with Sandy Lawrence, Past CEO, Therative, Inc.

Situation: The technology sector is growing following a couple of lean years. Whether you want to fund a new company, or a new effort within a smaller company, what are the best avenues to capital? How has the game changed?

Advice:

  • Funding and credit markets are opening but still tight. The bar has been raised because too many people are chasing too few available dollars.
  • The venture capital sector has consolidated. Over 80% of current focus is on technology, software and medical. Under 20% goes to the consumer sector.
    • It is important to target VCs who specialize in your technology, market and business model.
    • Research current VC portfolios.
  • Angels now act more like VCs – particularly structured angel groups.
    • Initial investments are typically under $1 million.
  • If you have a technology, investigate the grant world – e.g., NIH or DARPA. These organizations fund research, but not marketing, etc.
    • Look for specific programs or RFPs that align with your technology.
    • Target your grant request toward prototype development and studies.
    • Search LinkedIn for military people who can introduce you to contacts within programs like DARPA.
  • Investigate SBA Grants, and foundations with an interest in your technology or application.
    • Foundations sometimes will grant funds ($100k) to support the work of individual scientists and researchers.
  • Call on friends and family who believe in you and your work.
  • Whoever you approach, these rules apply:
    • Do your homework. Choose sources that align with your project and profile.
    • Presentations must be crisp and easily understood. Investing in professional assistance is wise.
    • Be able to make your case in 15 minutes or less. The first minutes are most crucial, so have your ‘elevator’ pitch perfected.
    • Your model and financials must support a high multiple exit, 5-10x their investment in a reasonable period of time (~5 years).
    • Team, Team, Team – credentials, experience, presentation – be a team with whom the investor can work.

You can contact Sandy Lawrence at [email protected]

Key Words: Fund Raising, Credit, Capital, Venture Capital, Angel, SBA, Foundations, Military, Presentation   [like]

How Do You Boost Short-term Cash to Finance Growth? Two Approaches

Situation: The Company is seeing an upswing in work and backlog, but doesn’t have cash on hand to support the work. The bank won’t increase our credit line. How can we increase cash flow and better position ourselves with the bank?

Advice from the CEOs:

  • First, try to speed payments from customers or delay payment to vendors.
    • Add a schedule of values to contracts to prompt earlier payment. Sweeten early pay terms.
    • Ask for money up front to cover out of pocket costs.
    • Ask vendors for additional time. They’d rather be paid later than not paid at all and can be surprisingly supportive if approached honestly.
    • Negotiate terms with customers and suppliers in advance. This gives you additional information to take to your bank.
    • Slow down longer pay term sales by raising prices to finance your cash flow needs.
  • Study the ratios that your bank requires in your line of credit agreement. Adjust assets and expenses to fit these requirements.
    • Can you time your sales between quarters to smooth performance?
    • Update inventory counts. Look for uncounted inventory.
    • Look at your equipment. Have you been expensing or depreciating it? Shifting big items to a depreciated basis can benefit cash flow statements.
    • Once you’ve gathered this information, see if your accountant can update or restate recent statements. You may be able to generate enough impact to go back to your current bank or approach a new bank to secure a larger credit line.

Key Words: Cash-Flow, Bank, Credit Line, Payments, Payables, Vendors, Early-Pay Terms, Terms, Inventory, Depreciation  [like]