Important Lesson

I have been preaching about the need to build strong cash reserves in small businesses ever since I first started teaching entrepreneurship.

While some people have taken my words to heart, many assumed that the good times will always roll.  This latter group of entrepreneurs acted as if the truism “cash is king” was a mantra for spending more, rather than saving more.

Most of the ventures that come out of the other end of this recession intact and ready to roll, will be those that went into the recession with healthy cash balances in their bank accounts.

Times are getting tight for many entrepreneurs, as seen in this piece by Simon Covel in the Wall Street Journal:

During past downturns, business owners might have turned to a home-equity line of credit, a personal loan or credit cards to shore up finances. But this time, real-estate values have plummeted, leaving many with less equity to tap, and bank credit is virtually nonexistent.

It’s not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual where to buy topamax even for a recession.

So what should you do if your cash is tight and you are hanging on by a thread?  Realize that your options are few and that it is time to tighten your belt both for your business expenses and for your personal finances.  Employment continues to soften, so the prospects of a paycheck from someone else’s business are not that great.  And starting another business to replace the one that is struggling will likely require even more cash that it will take to keep this one afloat.

And once you survive?  Remember the lesson you have learned.  Cash is indeed king.  Don’t ever let yourself get complacent about your business’s future success again.

Once your business begins to recover, build up your cash as soon as you can.  Thirty days is the minimum you should always carry — it will get you through the short term bumps in the road.  Then work toward ninety days of cash reserves, or more if you can.

If this recession teaches you anything it is that rainy days are not your biggest worry — “rainy years” are what you need to plan for.

New Age Marketing

I am taking part in something that my colleague Dr. Robert Lambert would call the new age of marketing. 

Through my association with Forbes.com, I was contacted to try out a new model of HP printer, the Office Jet Pro 8500.  They said that they would send me the printer for my home office down here in Franklin, Tennessee.  I was asked to set it up, use it, and blog about it.

While I have been taking ads at my blog for quite a while, this is the first time I have been asked to integrate information about a product in my blog by a sponsor.

I reminded them that I am a blogger, and as such, tend to rant on and on about what I think about things.  I asked them, “Do you understand what that might mean?  I will not say something unless I really believe it to be so.

They assured me that they understood – they get it.

Since I have had HP printers in the past and been satisfied with them, I agreed to give their new printer a test drive.

So let me be completely clear – this is a sponsored project, so this is a sponsored post.

Now I am like a kid on Christmas when I get a new piece of equipment – I can’t wait to open the box and see what is inside.  Unfortunately, the box arrived the day I flew out to California with our students this past week.  So tonight is the first chance I have had to open the box, see what is inside, and set it up.

This is Not Your Father’s Oldsmobile

As I opened the box my first thought was, “This puppy is really big.  Will it even fit on my desk??”  Well it did – as it turned out its footprint was not that much bigger than my old printer and it fit just fine on my file cabinet.

While a bit more complicated than my earlier, more basic printers, the set-up was not overwhelming.  The pictures helped this Luddite blogger make it though with only a couple of moments of head scratching.

The print heads and ink cartridges were easy to access and easy to install – they are accessible directly from the front of the machine.

Then I turned it on…but, all I got was an error.

I looked up the on-line support and found the number for phone support, as I don’t do well with on-line chat support systems. 

I was connected quite quickly, and found out that I had a static problem.  It was easily solved.  Then the support person offered to help me with the rest of the installation, which I gladly accepted.  All in all, it was excellent service.

As part of this blog marketing initiative, my readers can receive a coupon code to get 20% off the HP Officejet Pro 8500 Wireless All-in-One by clicking this link.

(This is a sponsored post).

Bankers Going Old School

My column in today’s Tennessean looks at the changing nature of the banker/entrepreneurship relationship:

A lot has changed in banking during this economic crisis. But what can entrepreneurs expect from bankers once credit starts to flow again?

We should expect the rules to be more restrictive on bankers’ ability to lend to small businesses since they will be under tighter scrutiny from federal regulators.

Banks lending to small business will go back to a more traditional and conservative approach based on cash flow, personal guarantees and collateral.

Traditionally, bankers operate with a business model that tries to minimize risk. They are responsible for protecting customers’ deposits held in their banks.

On the other hand, entrepreneurs seek out opportunities that can result in high returns, but their ideas often carry significant risk.

Entrepreneurs need to understand which factors bankers will use to determine what is a “bankable business” based on the traditional business model of a typical bank.

Businesses must be able to qualify for bank credit on their own standing.

This has very little to do with the things that get entrepreneurs excited, such as opportunity, upside potential and vision.

To a banker, a bankable business is one that will pay back its loans with very little chance of anything going wrong. So, rather than getting excited about untapped markets or product innovations, bankers look to three main factors. They are:

Is there adequate cash flow?

Bankers define “adequate cash flow” not as being just enough excess cash each month to cover monthly loan payments, but significantly more than enough excess cash flow.

Also, bankers want to see this cash flow already occurring, not projected in the future within a business plan. That’s why bankers usually are not the best sources of funding when you open a business.

Get a track record and some cash flow, and you will find that bankers are much more receptive.

Can an owner pay back the loan?

Forget about the corporate veil of protection from creditors when it comes to bank loans.

A bank will require personal guarantees, which means that if the business cannot pay the loan, you will be expected to pay it personally.

Pricing in a Down Economy

Diana Ransom had a story yesterday in the Wall Street Journal on pricing in today’s economy:

The pressure to slash prices can be hard to resist. But businesses should try. Too often, dramatic price cuts lead to lower profits — and dilute a company’s brand.

But ignoring the importance of price in today’s economy also can be devastating. “Consumers are looking for value right now,” says Jeffrey Cornwall, the director of the Center for Entrepreneurship at Belmont University in Nashville, Tenn. The days are over when companies could demand premiums simply for providing stellar service and better-quality products, Mr. Cornwall says.

Ransom suggests five approaches:

1. Switch to Performance-Based Pricing — offer a lower base price and only get more if your service or product delivers as promised.

2. Offer Less-Expensive Products — add some lower priced options to your mix to keep people coming for business if their budgets are tight.

3. Use Less-Costly Materials — helps you offer lower prices, but keeping your margins in place.

4. Add Slimmed-Down Services — offer a simpler offering to customers to meet their more limited budgets

5. Offer Extra Services — stand out from competitors by offering more value for the price

Entrepreneurial Financial Management

I am in California with 23 of our students who are competing in the International Delta Epsilon Chi business event.  There are 1,250 students here competing this year.  Postings may be a bit spotty, as our schedules are quite full.

I did want to share the news that we have a new edition of our textbook Entrepreneurial Financial Management coming out in the next week or so through M.E. Sharpe.

We have add some new chapters and updated the rest.

 

 

CornwallEntFinMgtWeb.jpg

If you want to buy a copy from the publisher click here.

If you are an instructor and want a review copy click here.

I will be adding a permanent link at the blog in the next couple of days.

Just Bootstrap It!

The Nashville City Paper ran a cover story yesterday on entrepreneurial bootstrapping written by Candace Moonshower.  From her story:

Every generation has its inspirational maxim, and it is not surprising that these sayings are often associated with getting somewhere quickly and achieving something meaningful. Who hasn’t heard ‘Just Do It’?

Back in the day, when men and women wore boots and boots had straps, we were exhorted to pull ourselves up by said bootstraps and achieve the near-impossible through hard work, tenacity and our own initiative.

These days, our boots may be sneakers or flip-flops, but in the midst of hard times, we’re rediscovering our bootstraps.

Venture Capital Starts 2009 with a Thud

Venture capital investment retrenched to the lowest level since 1997 during the first quarter of 2009.  VCs invested just .0 billion in 549 deals in the first quarter of 2009, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association.

Quarterly investment activity was down 47 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion was invested in 866 deals. The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997.

Don’t look to VC backed deals to be the engine that leads us out this recession.  The biggest drop in deal flow was for venture receiving first-time financing.

Recession Sharpens Skills

Friedrich Nietzsche said, “That which does not kill us makes us stronger.”

So it seems to be for many entrepreneurs during this recession, according to the results of the American Express OPEN Small Business Monitor.

  • More than three quarters of entrepreneurs believe managing through the recession has made them better business owners.
  • Four in ten business owners have an optimistic outlook on near-term business prospects, on par with one year ago when the macroeconomic climate was significantly different.
  • Nearly four in ten entrepreneurs feel the current economic environment creates opportunities for their business.

While optimism has stabilized, business owners are still managing their firms with caution — bootstrapping more than ever.

Consistent with the NFIB survey I wrote about a couple of days ago, this survey found that capital investment plans remain very low, hiring plans are down significantly, and many entrepreneurs are adjusting their own retirement plans. Forty-two percent of business owners plan to make investments as a way to grow their business over the next six months, down from 53% last spring. Just over one-quarter of entrepreneurs have plans to hire this spring (28%), which is among the lowest Monitor readings in its history.

Small business owners are not taking this recession lying down. Many are finding new resources to tap and new ways to manage costs beyond the traditional steps of laying off staff or cutting back on staff hours. Nearly half of business owners (45%) are open to bartering for new products or services with customers or suppliers and nearly one-quarter (23%) report their barter activities have increased due to the economic environment.

Additional steps include:

  • 48% have instituted hiring freezes
  • 30% are no longer taking a salary
  • 27% have a family member working pro bono
  • 25% are renegotiating leases and supply contracts
  • 16% have cut benefits
  • 18% work a second job

Not all entrepreneurs view the current economic environment as a hardship; a distinct group (37%) says that the current economic environment actually creates opportunities for their business. Among these opportunistic business owners:

  • two-thirds have a positive outlook on the economy
  • half plan to make capital investments
  • just over one-third plan to hire.

Nearly all of these glass-half-full entrepreneurs (92%) say that managing through the recession has made them a better business owner, compared to 77% overall.