September 13, 2006
Manage Your Small Business Well or The Consequences Could Hit You Where It Hurts
Imagine having the chance to run as state senator but because of bad financial management of your family business, you face the prospect of having to stand down. Well that's exactly what has happened to Joy Padgett, R-Coshocton.
Joy Padgett's aspiration as state senator has been temporarily halted because she has to explain her family’s $1.16 million of personal bankruptcy filing.
I don't want to go into the political aspects of this story, instead you can read it for yourself. There’s a lesson here for you as a small business owners.
If you run a small business it pays you to diversify your income – “don't put all your eggs in one basket.” Try to build more than one business to mitigate or reduce the risk of failure. This is critical if your pension is directly dependent on the success of your business. If one business fails, your pension is still safeguarded because you have other businesses to rely on.
You should also ensure you have good management in place to manage your business. Don't make the mistake in believing you have the all skills to manage a growing business. You must hire good people who have the range of skills to develop / expand your business.
Finally, develop a succession plan. This is vital if you want to manage your exit in an efficient manner that mitigates your tax liability and the handover of the business.
Statistically nearly eighty percent of small businesses fail within three years of starting up. The main reasons for failure are lack of cash and poor management.
Joy Padgett blames her family’s personal bankruptcy on the failure of Main Office Supply Co., the Coshocton-based small business she and her husband owned and operated for 30 years.
She said when every bit of her husband's retirement is built into the company and that is suddenly gone, it is a shock to your system.
Note: It's not enough to want to start a business and make money; you must be savvy enough to make your business a success and to extract the benefits of your hard work. Associate with winners, brainstorm with winners, hire the services of winners, hire good managers, continually tweak you game plan and know when to exit.
David
Small Business Resource
Posted by David at 1:12 PM | Comments (0)
January 17, 2006
Raising Funds For Small Business Schemes
Small business owners find it hard to raise money before they prove their product but there are ways around this
Small companies require capital. Small companies’ starting up especially innovation-based companies that present high risk and reward frequently need considerable more capital than the founder's wallet holds. This means that small business entrepreneurs have to seek other investors - and the success of the business will be heavily influenced by the extent to which they take account of the needs of these investors when drawing up a business plan.
Investors need a return on their investment. The return they can expect is largely governed by the amount of risk the investment presents: the greater the risk, the greater the reward.
Investors usually measure return using based on IRR or internal rate of return. This shows the return in terms of the annual percentage over the lifetime of the investment.
Oversimplifying slightly, an IRR of 60 per cent means investors receive the sum of the original capital for each year of the investment.
Smart investors do not rely solely on IRR, though, because it contains assumptions that can be misleading. Also, and much more importantly, most of the variables upon which IRR depends are hard to know in the early stages of investment - especially how long the investment will last and what the selling price will be.
It’s important to realize that investors are never merely making an investment in your company. They are building a portfolio of investments, which they view as a group. They know that the vast majority of the small companies will fail, that some will succeed and that only a few will be very successful. So every small company in a portfolio has to be potentially a big winner, because those big winners are covering the losers.
Some simple arithmetic illustrates the investor's hurdle. Let's say an investor intends to put £1 million into each of 10 companies for five years. The investor requires a return equal to the average return for early stage investors in venture capital in the USA, which is an IRR above 20%. That means his total fund must double in size in five years. Assuming six of ten companies fail and two companies achieve a 20% IRR, the other two must each return IRR of 140%. In other words, they must be worth £8 million in five years. That is breathtaking growth.
While smart investors may not depend on IRR, smart entrepreneurs will ensure that their proposition shows the potential for an IRR of the sort that investors want to see.
In the UK, the difficult for start-up small business entrepreneurs is compounded by the fact that the types of capital available for investment are variable, and not necessarily targeted at them. There is, for instance, an abundance of low-risk capital, such as bank loans.
There is also an abundance of funding for the purchase of companies or for management of an established division of a large company to buy the division. Once again, the risk of such a transaction is lower because the business already exists and can be analyzed.
There is a third category of capital available for innovation companies that establish themselves. They have already built a product or service (thereby diminishing technical risk), they have made some sales (diminishing market risk) they have an effective management team (diminishing people risk), but have not yet hit the fast-growth curve. Although these companies are still put in the high-risk category, they present an attractive balance of risk and reward from the investor's point of view.
It is very hard to find investors for start-up small companies that do not have the finished product or service, have not sold anything and have not hired the people who will be critical to running the business. It is harder to find investors when they are most needed.
In this situation, the only way for a small business start-up to get capital is for the entrepreneurs to focus their attention on demonstrating to the investors that they understand the risk factors, and present a robust business plan with whatever data they can find to show that the risk will diminish.
Not having the finished product should not stop a small business entrepreneur from illustrating what the likely demand for it will be when it is ready to sell. Prospective customers can be approached; their problem or need can be analyzed, the cost of the problem can be measured, and their willingness to purchase a product that is designed to solve it can be properly established.
In short, although there is not easy way to get venture capital for small business start-ups, it can be done. Those entrepreneurs who succeed are those who can empathize with the investor - they understand and support the investor's needs as well as their own.
Summary of Wooing Investors:
1. Try to empathize with prospective investors: if you understand what they want, you are more likely to succeed in the long run.
2. Ensure that your business can deliver investors with a good internal rate of return. That means an IRR of 20%.
3. Make clear to investors that you understand the risk factors of your business
Prepare a robust business plan showing how the risks will diminish over time.
Posted by David at 2:29 PM | Comments (0)
November 14, 2005
Small Business Entrepreneurs Are Key To Britain’s Future
Everyday I get 400 or so visitors to my website all searching for small business ideas. Of those who arrive, the majority is looking for government grant or small business finance. I point them towards Business Link, the DTI, and Local Enterprise Agencies, but they come back to my web site because they meet blank walls.
How on earth can Gordon Brown expect entrepreneurs to take their ideas and build businesses that create wealth for this country when many aspiring entrepreneurs cannot even navigate the first hurdle to starting a small business?
I watch with envy at the American system for helping small businesses with grants, loans and Small Business Innovations Research funding. The Small Business Administration (SBA) that's responsible for providing grant / loan funding operates within a legal framework and is empowered to champion all small businesses; every type of small businesses including those owned by ethnic minorities. The SBA is set targets and is evaluated on performance.
Compared to the SBA and associated State structured funding agencies our system falls way short. Not only that, entrepreneurs in the UK are confused about where to go for funding and whether they’ll even qualify.
Every week I receive announcements of yet another small US companies being granted Small Business Innovations Research (SBIR) funding that allows them to research and develop innovative technological and other products with the USA government as possible stakeholder.
When I read about our research grant scheme that is suppose to be equivalent to the USA's SBIR scheme I smile because I know there's no comparison. Our scheme falls way short!
When I read about young Londoner's not wanting to start a business of their own, but would rather work in paid jobs because they are adverse to stress, I'm saddened because at the same time, young people in the USA are winning prizes for showing entrepreneurial flair and starting businesses.
If the Chancellor or Prime Minister in waiting truly believes that entrepreneurs are the key to Britain’s future my advice to him is "don't tinker with tax incentives, instead create an environment that supports, encourages and mentors budding entrepreneurs to build thriving businesses"
David Davis
Small Business Resource
Posted by David at 2:14 PM | Comments (0)
May 17, 2005
UK Small Business Finance
Are you looking for finance assistance for your UK small business? Don’t worry, you’re in good company. Most small businesses look to outside sources of finance at some point during their existence.
Whether it’s to launce a new product line, expand into a larger operations center, or to acquire commercial vehicles or other equipment necessary to remain in business and stay competitive, there likely are sources of UK small business finance ready and available to help. The British Banking Association maintains a list of approved UK Small Business Lenders and has set up a search page at Money Facts Online
Even if your UK small business has been denied finance by traditional lending institutions, there are other sources your small business can pursue. While securing the needed finance is a tedious and time-consuming task all by itself, properly managing the funding once it is made available can be equally daunting. Every business owner needs solid financial management skills or needs to seek out someone with these skills so crucial to the success or failure of any business.
What types of finance options are available to the UK small business?
Business loans are probably the most common form of business finance arrangement. As with any type of loan, however, the monies distributed must be repaid, with interest, over a period of time. Grants differ from loans in that they are an outright distribution of cash and do not need to be repaid. Grants are awarded to those businesses that can show the monies will ultimately be used in a manner that will further economic growth. Another aspect of grants is that they won’t cover 100% of a business’s financial needs. A business must be able to prove it has the ability to match the amount being awarded.
There are also several sources of EU funding available to help finance UK small business specializing in agriculture, the environment, transportation, education, technology, communication, and information technologies.
Venture capitalists are always on the look out for innovative businesses so if you’re a UK small business seeking finance assistance, don’t forget to investigate these sources. In addition to providing financial assistance, many venture capitalists also provide other types of assistance such as growth and management. Also check into regional venture capital funding, a source of funding provided to small and mid-sized businesses that demonstrate a clear potential for growth.
Getting paid on time is sometimes a significant finance-related problem many UK small business owners face which is why the Late Payment of Commercial Debt Act was passed in 1998. This law allows small businesses to collect interest on late payments. While it’s better for a business to be paid on time, the ability to collect interest does offer some financial consolation.
UK small business finance programs are available to businesses willing to locate in economically depressed areas. Why? Because it’s in everyone’s best interest to turn these types of areas around. The swing from depressed area to vibrancy often begins with one willing company.
If your UK small business needs finance assistance, you’ll be able to find it. You will, however, have to prove your business is worthy of such an investment first.
David
Small Business Resource
Posted by David at 1:45 PM | Comments (0) | TrackBack
March 11, 2005
Starting a Small Business Aided By Family Finance
Starting a small business by borrowing from relatives is often the only way to get started.
Take James McAnerney who decided to open his own business, he needed €50,000 to buy into a franchise but without a track record approaching the bank would not be easy so he looked closer to home to raise the start up finance.
Mr MCAnerney said , “I reckoned franchising was the way to go rather than start a business from scratch, I found Cartridge World within four weeks.”
Mr MCAnerney had less than half the finance required himself so he decided to borrow the rest from his family.
Just more than 18 months ago he opened his first Cartridge World store in Dundalk about 18 months ago specialising in recycling printer cartridges at bargain prices.
“I had the option of going to the bank but I would have been able to give only projections,” he said. “It was easier to borrow from my family with the promise that, after one year’s trading, I would be able to get a bank loan to pay them back.”
Many successful small businesses look to family and friends for start up finance says Pat Delaney, the director of the Small Firms Association.
Delaney says it's a good idea, “It is probably the biggest source of start up capital available to very small companies.”
Delaney pointsout that there's plent ofthis type of funding available to finance start ups given that the first generation has inherited wealth.
Michael Dwyer is another small business entrepreneur who used a mix of family loan when setting up Pigsback.com, the online marketing portal says usingfamily finance can work well for those who follow a few rules.
Some of the rules include:
. If you are asking your family to invest, you must put in your own
capital too. This shows that you are committed.
. If funding is really an investment make it clear to your family
members that this is an investment that should be written off.
. Get family members to put in only as much as they are prepared to
risk.
If you are considering starting a small business and you're interested in raising finance from family members read Bank on family members for a helping hand
David
Small Business Resource
Posted by David at 9:23 AM | Comments (0) | TrackBack
