Author: Jeff Cornwall

Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Some Reasons We Plan

My MBA students just finished up presenting their business plans last evening.  Here are some lessons they learned about why the process of business planning is so important (beyond the obvious external reasons tied to financing):

  • Business planning helps finds the things we don’t know about the details — attracting customers, staffing, managing inventory, and so forth.
  • Business planning tests your desire, your passion and your resolve.
  • Business planning helps to determine if all potential partners understand their roles, the time and financial commitment required, and the risk.  It allows us to discover important points of disagreement or incompatibility before it is too late.
  • Business planning can show us the true potential of the business — sometimes this is a pleasant surprise and sometimes it is a real disappointment.  If approached honestly and diligently, it is a true process of discovery.
  • Business planning lays bare the holes in your business model, your team, available resources, and your implementation plans.

Why We Reach Across Campus

A new study by Chad Moutray with the Office of Advocacy of the SBA shows why so many of us are trying to reach across college campuses to teach about entrepreneurship.

College graduates who specialize in social science tend toward self-employment as compared to those with bachelor’s degrees in other subjects, according to a working paper released today by the Office of Advocacy of the U.S. Small Business Administration.  The paper used data tracking a group of university graduates from the class of 1993 through 2003.

 

What is very telling is why these students want to be entrepreneurs.  It, once again, helps dispel the myth that entrepreneurship is “all about the money.”

 

Moutray found that a student’s motivation as measured by a series of “values” questions in 1993, closely tracked with employment decisions a decade later.  For example, those who valued job-security were more likely to be government employees, those who desired intellectual challenge were likely to work in non-profits, and those who did not highly value prestige and status were more likely to be self-employed

Check and Monitor Loan Covenants

My column in this week’s Tennessean:

With all the news about trouble on Wall Street and the banking crisis, many entrepreneurs are scrambling to figure out how it all affects their banking relationships.

The economy has been slowing down for the past year. Since the third quarter of 2007, there has been a slowdown in the demand for loans from small business owners as they become more cautious. The National Federation of Independent Business reports that this drop in demand has resulted not so much in a credit crunch for small business as it has in a softening of demand for loans for expansion and growth.

However, banks are coming under increasing scrutiny by federal regulators. This is going to lead to some changes in the relationship between small businesses and their banks. Owners must prepare for the fact that their loans will be getting increased scrutiny.

Every business loan from a bank has covenants. The bank may require that insurance and tax payments be kept current, while at the same time it may put limits on things such as distributing profits or taking on more debt without approval from the bank.

Covenants also may define minimal financial performance expected from the business. These typically define minimal financial ratios for the liquidity of the business, debt ratios, minimal cash flow requirements, and the necessity of meeting certain profitability ratios.

Read the fine print

Many entrepreneurs pay little attention to these covenants after they close the loan. When times are good this may not become a serious issue. But in times like these, any loans that are out of compliance with stated financial covenants can be “set aside” by the regulators. The bank will be required to set aside additional reserves to cover these loans.

The result is that the bank no longer makes money on these loans. If this happens, banks may be forced to call in these loans, demanding immediate payment of all principal owed by the business. This can happen even if the business has never been late or missed a single loan payment.

Business owners who have bank loans should read all covenants carefully. Make sure that they are in compliance with all actions required in the covenants, for example, keeping insurance policies current and not doing things that may be restricted, such as taking on additional debt.

Any financial covenants require constant monitoring. The entrepreneur or his accountant should calculate and review all required ratios every month. If any of these ratios fall below the bank requirements, swift action should be taken to get them into compliance.

In a recent survey of small businesses conducted by American Express, about one in five owners voiced a concern that the current economic crisis is putting their business at risk of failure. Don’t put your business at risk by ignoring the covenants in your loans, especially during times like these.

Important Questions

The Toronto Star (thanks to my graduate assistant Joe Ormont for finding things like this one!) has an interesting article about signs of trouble that small businesses should be watching out for:

Financial: Are you struggling to make payments like rent? Is it hard to buy inventory? Are you taking on more debt than you’re comfortable with just to keep the business going? Is your banker worried when he reviews your statements?

Customers: Is there a decrease in repeat business? Is there an increase in customer complaints? Are their lawsuits from customers?

Employees: Is employee morale diminishing? Are key employees leaving? Are departments fighting with each other?

However, I don’t really agree with the author’s comments that follow these quick and dirty diagnostics — might be time to shut down the business.  I would suggest that these are opportunities to right the ship.  But, I guess that is the difference in outlook between an entrepreneur who is a blogger and a journalist…. 

Tipping Point

An interesting observation from bootstrapper.com:

Now, most entrepreneurs usually start with a single idea and can think of nothing but that during their first company. However, somewhere along the lines, after about 2 years of running a company, just about every entrepreneur I know starts coming up with dozens of ideas for new companies. It is like there is some hidden tipping point where every hard driven entrepreneur becomes an idea junkie.

We need idea junkies more than ever right now!  Even in the toughest economic times there are real opportunities in the market. 

Stick to Your Values, Your Mission, Your Niche

I am in Portland, Oregon at the University of Portland giving talks with my co-author Mike Naughton on our new book, Bringing Your Business to Life.

We are here as part of the Bauccio Lecture in Entrepreneurship series.  The donors behind this series are Fedele and Linda Bauccio.  Fedele Bauccio is the founder of Bon Appétit Management Company, which is an onsite restaurant company that provides café and catering services to corporations, colleges and universities, and specialty venues. They have over 400 locations in 28 states.

At dinner last night Mr. Bauccio talked about the key to his company’s success.  He competes with some of the industry giants by a simple, but powerful recipe.  He stressed that he has grown by finding customers in his niche who share his values and believe in his mission: “Bon Appétit Management Company… food services for a sustainable future.”

.From their website:

Breaking bread together helps to create a sense of community and comfort. We recognize the important role we fill and take great care to honor our position on a corporate or school campus.

Entrepreneurs can get tempted to take on business for the sake of getting more business.  But Mr. Bauccio warns that this does not help the business build its brand.  Your brand is much more than simple name recognition.  A good brand encompasses your values, your mission and your reputation.  It clearly communicates who you are and what your niche is.

Word of mouth never just happens.  By staking a strong claim on your piece of the market you can develop relationships with customers who understand what you stand for, and who are eager to tell others.

More Thoughts on Weathering these Difficult Times

Chad Moutray, who authored the study I linked to the other day on the challenges and opportunities that lie ahead for entrepreneurs, has some good tips for small businesses on weathering these current difficult economic times over at his blog.  They come from over 1,000 responses to a question he posted at Linked In.

Here are the top 10 recommendations:

    1. Cut operating expenses and discretionary spending
    2. Tightly and diligently manage cash flow
    3. Improve liquidity, tighten working capital
    4. Streamline inefficient processes with technology
    5. Keep your number one focus on existing customers
    6. Increase marketing and advertising efforts
    7. Go after markets that are less affected by the downturn
    8. Diversify and expand product and service offerings
    9. Retain your best staff and recruit top talents
    10. Be transparent with employees and keep them motivated

Commentary on “Joe the Plumber”

Carl Schramm of the Kauffman Foundation has a great commentary on the importance of “Joe the Plumber“:

What appeals to me most about Joe Wurzelbacher of Ohio — better known today as “Joe the plumber” — is his dream. He speaks for men and women we all know, who want to own their own business, who want to make a job, not take a job.

Joe wants to join the nearly 600,000 other Americans who launch their own companies each year. The proposed solutions to our current economic crisis (and it seems there’s a new one almost every day) inevitably tilt toward the government as the answer.

Yet, today, more than ever, government is not the answer, and a recent telephone survey of 816 registered voters, sponsored by the Kauffman Foundation, shows that a majority of Americans agree.

In that survey, 60 percent said they had the most faith and confidence in the American people and the small business owner to guide the U.S. economy.

(Thanks to Andy Tabar for passing this along)..

A Slow Motion Version of the Post 9-11 Economy

I am beginning to believe that the shock of the bank failures will play out a lot like post 9-11, but in slow motion.

Instead of a sudden event that brought us all to an immediate standstill, the current situation played out over several days and even weeks.

The outcome was the same:  economic paralysis.  After 9-11 everything came to a standstill.  Everyone wanted to wait and see what would happen next before they re-engaged in normal economic activity. 

We have the same outcome today, but it happened more slowly.  Wave after wave of bad news from Wall Street and panic laden communications from Washington eventually put us into that same paralysis, that same “wait and see what is next” mentality.

Seth Godin commented about this tendency of human nature recently in his blog post “Do You Have 16 Boxes?”:

When something is going wrong, when the economy is out of sync, we panic….We talk ourselves into hysteria about how, “none of our customers have any money,” or, “in this bleak economy, we’ll never make a sale.” Instead of using the relative downtime to build…we just sit in the corner, keening, worrying….

I heard a consistent mantra out there from entrepreneurs I talked with over the past few weeks — “We just want to wait and see what is going to happen.” 

We are beginning to understand that although we have a mess; it is a mess we can all make it through.  As a result, economic activity is beginning to perk up a bit. 

Soon we will see both confidence and economic activity heat up.  We will have a slowdown for quite a while, but we should see improvement over the next few quarters.

Fortunately, panic is giving way to strategizing.  Hopelessness is giving way to planning.  Paralysis is giving way to prudent decision making. 

Changing the World

Blogger/entrepreneur David Weisburd offers this view of what success means in his entrepreneurial journey:

So why do it all? Why not do something more “productive” like writing and psychology, two of my favorite hobbies?

The answer is simple, nowhere in the world can you influence as many people as you can through entrepreneurship. It is the ultimate leverage of societal influence and change. Be it entrepreneurship in business, nonprofit, politics, etc.

You can create new products/services, give employment to hundreds or thousands, and have a place where people can come to develop their skills and grow as individuals.