Tag Archives: Expenses

How Do You Finance an Early Stage Company? Three Considerations

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Situation: The CEO of an early stage web company is looking at steep ramp-up expenses. Many companies have bootstrapped their way to success. However outside investment may speed the process. How have others evaluated these options? How do you finance an early stage company?
Advice from the CEOs:
• Raising money takes time and is a major distraction to the development process. The two big variables will be investor interest and the timing of investment. Talk to Angels and venture capitalists now. Start by presenting a broad outline of your technology and business model. Ask what they will want to see to offer you funding at different levels. This will give you a reality check as to investor interest in funding the company. It also creates a roadmap to funding if the response is positive.
• What is the company seeking – money or accountability? One CEO bootstrapped her company during the early stages, then looked for outside investment to gain accountability and advice – a whip to help move things along. This CEO found that investors brought few of the anticipated assets, and added a new level of distraction and pain.
• If you are looking for funding to purchase content to serve through your Internet portal, consider a more creative way to gain content. Can you use a Web portal through which your target audience provides both the content and the consumer audience in a marketplace exchange? Establish the audience and then add premium services to monetize the model. This can minimize your upfront cash investment requirements, and may create a faster track to positive cash flow.

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How Do You Make Hard Decisions on Employees? Four Points

Situation:  A company needs to adjust expenses to control costs. It’s largest expense item is payroll. They are evaluating three options to adjust staff costs to anticipated revenue. Alternative A – Cut everyone back to part-time. Alternative B – Cut a few employees, but keep retained employees busy. Alternative C – A balanced approach between these alternatives. From others’ experience, which is best? How do you make hard decisions on employees?

Advice from the CEOs:

  • The unanimous response from the group – for employees, Alternative B is the most positive approach. Extended cutbacks in hours has been painful for all and led to grousing. Once staff were cut it helped retained employees to focus on their work.
  • When it comes to vendors, use Alternative A – don’t pay everything that you want to pay, but pay what can be paid consistently and predictably. It is critical as this is done to make sure that promises are kept.
  • When it has been necessary to make cuts – how has employee morale been maintained?
    • In the short term, those who remained have been happy to have a job. Longer term, companies have had to do more than this.
    • One option is to set quarterly revenue and expense targets. When gross or net margin targets have been exceeded, companies committed to share some of the excess with employees.
  • Before making any decisions, have a meeting with employees and openly ask them what they’d like to see that will help to build company culture and enthusiasm.

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How Do You Find the Right Funding Source? Six Solutions

Situation: A company is short of cash and needs a source to fund their cash flow needs. Their needs are mapped out for the next four years and they can fund current operations for a few months. However, their bank will not extend their credit line. How do you find the right funding source?

Advice from the CEOs:

  • Try another bank. Ask friends and contacts about their banks and see if they’ll refer the company to their bank.
  • Explore renegotiating the company’s lease to ease the cash flow needs.
  • Explore renegotiating payment terms with suppliers. See what can be worked out. The bottom line – if the company goes Chapter 7 or 11, they get nothing.
  • Consider going to a larger company and working out an arrangement.
    • Ask that they allow the partners to operate as an “independent” entity retaining their titles.
    • In exchange for funding the company’s cash needs, the larger company shares in the profits.
    • Seek a temporary arrangement to allow the company can get back on its feet financially.
    • Use the friends and reputation that the company has developed over the years. The company is a good outfit and respected. Others may help if asked.
  • A similar tactic is to approach a larger company to negotiate an arrangement that will allow the company to survive. Start with a business plan.
    • Highlight the company’s reputation and the quality of its products. Use references from highly satisfied customers.
    • Highlight the company’s key strength – developing the critical path and plan for a successful project.
    • The thrust of the presentation: the partner gets a quality team and shares in the profits from projects completed. The partner provides the cash to fund the projects. Compare the risk and return on these funds compared with other investment options available to highlight the value of the proposal.
  • Other CEOs shared similar situations that have worked for them.
    • The financial realities were kept secret from staff, customers, and competitors.
    • All unnecessary expenses were cut.
    • The focus was on making money today.
    • Supplier payments were delayed as necessary to manage cash flow.
    • The process was managed creatively, sometimes with the assistance of friends, and the companies were able to prevail.
  • There is no shame in facing and dealing with this problem. Determination will pay off.

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How Is The Economy Impacting Your Sales Plan? Five Views

A company is revising sales forecasts for 2016 and seeks the advice of others. A combination of low energy prices and shaky financial markets sparked by the Chinese decline has left many questioning whether they should revise their plans to account for an economic contraction. How is the economy impacting your sales plan?

Advice from the CEOs:

  • Niche Software Company – we are coming off of a good year. Our industry has seen low impact so far. Going forward we are cautiously optimistic. A couple of clients have delayed projects but didn’t cancel.
  • Services Company – hiring has been frozen. Adjustments to staff count have already been made. Clients are asking us to contact them again early in the second quarter. Opportunities exist in the health care area.
  • Hardware Company – we are running scared. We have cut business and personnel expenses to assure survival. A large customer just announced new plant construction earlier this week – this may help to turn things around. We are assuming this will be mean a longer term rather than a short-term opportunity.
  • Niche Software Company – cutting personal/business expenses. Long term things look favorable, but we have to survive the short term. Attendance at a large trade show this month was a little above last year but we don’t know whether this will yield a significant increase in sales.
  • Trades – Projects with big bank backing are on hold. We see large scale bidding wars for projects. Where there used to be 3-5 bids there are now 15 or more. Looking for consolidation of competition – especially union–based shops.

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Should You Use Project-Based Accounting? Five Thoughts

Situation: A company has been using the accrual method of accounting. As they approach the fourth quarter of the year, they are looking at project-based accounting to reduce year-end cash reserves and taxable income. How do you create and manage a project-based accounting system?

Advice from the CEOs:

  • The PeopleSoft Division of Oracle offers a project-based accounting package. There are a several issues that accompany a shift to project-based accounting: do employees work on more than one project, how do you plan to account for shared services such as administration and Human Resources, and do you plan to share revenue and costs across projects? These can entail a fundamental change in how the company is organized and behaves. If your primary motive is tax avoidance rather than organizational change, why would you pursue this level of change in the organization?
  • Looking at hundreds of companies with which the CEOs in the group have worked, nobody has seen any that utilize project-based accounting.
  • The company’s objective is to better understand the various projects that the company manages, and to have revenue travel with cost. A far simpler option from an accounting standpoint is to look for ways to pre-pay future expenses and thus reduce year-end cash reserves.
  • Another option is a hybrid between cash and accrual accounting.
  • If you have a strategic reason to pursue project-based accounting, look at firms that serve the construction and entertainment industries. These industries have similar challenges to those faced by the company.

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How Do You Control Expenses As You Grow? Four Foci

Interview with Andy Wallace, CEO, Maxx Metals

Situation: A company, noting that business conditions have improved, is planning for growth. This means keeping current customers and taking on the next tier of customers. They are also focused on improving customer service and the customer service experience. All of this costs money. How do you control expenses as you grow?

Advice from Andy Wallace:

  • As a small business, you can’t spend more than you have. You need to focus on all expenses from supplies to workers compensation. Major expenses are inventory and payroll. You need to focus on the line items, control the little things and control the big things.
    • There are three areas that we monitor frequently: inventory control systems, overtime, and assuring that safety is first to reduce accidents and control workers compensation costs.
  • Employees respect employers who respect them and their families. Recently we had an employee who was called by school because their child was sick. We told the employee to take the rest of the day off to take care of the child. The employee was back in an hour, having made other arrangements for the child’s care.
  • As you grow your payroll, hire the right folks with the right skills. Take time and don’t rush – you need to fill the position with the right person. As a small company having the right skills is important and reduces the costs for training and on-boarding new employees.
    • Important skills for us vary by position but include solid computer and technology skills; attention to detail, as well as writing, communication and math skills; the ability to multitask and respond positively to interruptions.
  • The culture of our company is extremely important. It’s the foundation of the company and we want to perpetuate it. Culture starts at the top with the leadership as examples for the employees to follow. It can’t be “do as I say, not what I do.” Employees know who arrives early and stays late, who is attentive to details. If we don’t set the right tone as leaders of the company, we can’t expect them to follow.

You can contact Andy Wallace at [email protected]

Key Words: Plan, Growth, Expenses, Inventory, Payroll, Overtime, Workers Comp, Respect, Skills, Writing, Communication, Culture

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