Potential investors, lenders, stock holders, and business owners all like to know how well a company is doing financially. One way to determine the financial performance of a company is to review the Balance Sheet. The Balance Sheet is basically a snap shot of the items a company owns, owes and the difference between the two, called net equity. Every section of the Balance Sheet is important, but this post will focus on the current assets.

Current assets are defined as the items that will be used by the business or converted into cash within a 12 month period, generally the calendar or fiscal year. Assets include items such as Cash (or cash equivalents), Inventory, Accounts Receivable, Prepaid Expenses, and Marketable Securities.

Two accounts to track on a regular basis are Accounts Receivable and Inventory. How quickly you collect payments your customer owes you will depend, in part, on the industry you are operating within. For most businesses, you should be collecting payment in full from your customers at least every 30 days. Failure to collect money on a timely basis will tie-up this much needed cash, which could lead to cash flow problems. Use the Receivables Turnover Over ratio to determine how often you “turn” your collections each year. Convert that information into the Average Collection Period to get the number of days your Accounts Receivable are outstanding.

It is important to monitor the balance in your inventory account too. Too much inventory will tie-up cash unnecessarily. Yet too little inventory will cause you to miss out on possible sales. Use the Inventory Turnover ratio to determine how often you are “turning” your inventory per year. Again, you can convert this information into the number of days inventory sits on the shelf.

The saying “Cash is King,” has merit, but if you don’t use the Balance Sheet as a tool to figure out where your cash is going or where it is tied up, you’ll never have enough cash to run your business effectively. While a Balance Sheet does not give you the entire picture, the current assets section of the Balance Sheet can be a great starting point to assess how you are doing and what you need to do next.

The economy is tough, but even when the economy is good there are many businesses that close their doors. Some of these failed businesses could have stayed open if they invested a little time in Contingency Planning. Many people don’t want to think of what might happen to their business if things don’t go as planned; however, this missed planning opportunity leaves them with few options when things do go wrong.

Contingency Planning is usually a tiered process. Usually, when you put a Contingency Plan in action you start with the easiest or least dramatic change. For example, your cash flow is low and you are having problems paying the bills. Your first plan may be to secure or utilize a line of credit with your bank. If a line of credit is unavailable or maxed then you need to cut costs. You can approach your landlord and ask for terms to be renegotiated so that you can afford to stay in your current location. You can evaluate your current expenses to determine where you can easily and quickly save money, i.e., reduce marketing or advertising expenses, reduce meals and entertainment, etc. Or as a last resort, you might ask your staff to take a pay cut or layoff some of your employees, which is my least favorite option. These changes may help to increase cash flow long enough to get you through the tough times.

If you offer credit terms to your customers, you could consider factoring your Accounts Receivable (AR). This is a quick way for you to get cash from your AR, but factoring does reduce the overall amount of funds you receive so consider this option carefully. If you are still in need of cash but do not have any more available credit with your bank another option is to sell an interest in your business. The amount of cash you receive will depend upon the type of business you own and your willingness to give up a portion of ownership in your business.

As a last resort you may decide that you would prefer to sell the entire business rather than adding another owner. If a willing buyer cannot be found, you might be able to find someone who is willing to take over the business “as is” including all debts; this is called a transfer of ownership. Ending the business by walking away is not a very good option. There are usually assets that can be sold and/or Accounts Receivables that can be collected. While not easy, you can try to sell the business assets or portions of the business so that you can generate enough cash to pay your outstanding debts.

Whether your business is new or established, Contingency Planning is very important. It does not hurt your business to have a plan in place in case problems occur. On the contrary, this type of planning could very well help you survive tough economic times or an unforeseen disaster.

1. Briefly describe the services offered by Scribendi.com.

Scribendi.com is an award-winning online editing and proofreading provider. We provide individuals and organizations with fast, affordable, professional document revision services.

Clients can come to our site and choose their service, get a free quote, and upload their document to our secure server in less than five minutes. The most appropriate available editor picks up the order, does the work, and the revised document is uploaded to the server, and the client gets an email letting him/her know the document is ready for pickup.

2. What prompted you to start Scribendi.com?

I started Scribendi.com in order to provide people with a more modern alternative to traditional editing services. Prior to launching the business, I was a freelance journalist, and it baffled me how many of my colleagues didn’t have access to a professional editor. I created Scribendi.com in order to provide writers with quick, convenient access to trained professionals, 24 hours a day, 7 days a week.

3. You have been in business since 1997. What strategies have you put in place to ensure your business can survive economic downturns?

Due to the international scope of our business, my partner and I have always monitored financial markets closely. So, when things went south, we were ready. When times are good, you need to put resources aside to use when times go bad. Too many people and companies alike assume that the good times will be around forever, and spend freely. We were more cautious and, as a result, we can continue to grow and expand our services without any problem.

4. On your website you stated that you have locations all over the world. How easy or challenging is it to manage employees working out of multiple locations?

Our developers spent a lot of time designing a pretty comprehensive administrative system that allows all of our international employees to check-in directly with headquarters. In this day and age, with all the communication tools we have at our disposal, it’s not exactly hard, but it does require constant attention and effort.

5. How do you use financial statements in your business? What is one major business decision have you made or not made based on the data from your company’s financial performance?

Yes, we review our statements on a monthly basis, and we do projections quarterly. The results usually affect our decisions on when to go ahead with the various capital projects we have queued up, although typically our projects are less subject to monetary constraints than they are human resources constraints.

To learn more about how Scribendi.com can help you with your editing or proofreading needs visit their website.

To be considered for a future Entrepreneur Interview profile, please leave a comment on this post or contact me via email.

In my last two posts I discussed the financial tool, Net Present Value (NPV) in detail (NPV and NPV Example). However, often times the Payback Period method is used to evaluate a purchase or expansion project. The difference between NPV and the Payback Method is that the Payback Method doesn’t discount the future cash savings/cash inflows for the time value of money.

The formula for the Payback Method is: payback period = initial investment divided by annual savings/revenue. For example, you need to buy a new machine that will improve your efficiencies, thereby reducing your expenses by $20,000 per year for the next 6 years. The machine costs $100,000 in today’s dollars. Formula: 100,000/20,000 = 5. Therefore, using the Payback Method, you would see a “payback” on your investment by the end of the 5th year. Note: the payback method does not tell you if your purchase will provide positive profits over the long-term, but rather the length of time it will take for you to “recoup” your initial investment, ignoring the time value of money concepts.

This purchase might make sense at first look, assuming the machine will provide cost savings for more than 5 years. The Payback Method can be used to perform a first level evaluation of a potential purchase. Using the Payback Method you might determine that one purchase isn’t feasible because the payback period is just too long. However, run a quick NPV calculation to make sure the project truly isn’t profitable for your business.

As I showed in the NPV Example blog post, when you convert the $20,000 per year cost savings into their Net Present Values the true net cash flow for the investment will be a ($11,723). This is because a dollar tomorrow is less than a dollar today and the value lessens the further out in the future you go.

While the Payback Method might be easy to use, it does not take into consideration the time value of money. Relying solely on the Payback Method might result in poor purchasing decisions. A quick NPV calculation may save you the disappointment from future low returns on the cash you spend today.

In my last blog post I discussed a financial tool, Net Present Value (NPV). In this post I’ll use an example of how NPV works. You can refer back to this information whenever you need to make a large purchase decision.

In order to perform the calculation you will need to know:
1. The discount rate (usually a target return on investment rate or the current market rate),
2. The number of years the project/equipment is to last, (note: MS Excel doesn’t require this item)
3. The cost of the initial investment, i.e., cost of equipment or new project,
4. The estimated the cash flow for each year of the project or cost savings from the more efficient equipment (or increased revenue).

Let’s assume a discount rate of 10%, 10 years, initial cost of $100,000 and annual cost savings for 6 years of $20,000. Note: Input the initial costs as a negative number, i.e., -100,000 in your formula. Using MS Excel, find the Finance formula function for NPV. It will ask for the rate, input this as a percent, such as .10. Then it shows a field for Value1, input this as a negative number, as discussed above, -100000 (this is your cash outlay). Then input the value 20000 in the Value2 through Value7 slots (for the $20,000 of annual savings for six years). Using the NPV formula this equipment returns a value of ($11,773), so this equipment is actually costing more money than it is saving. For this purchase to provide a positive value the annual savings of $20,000 would need to occur for 8, not 6 years or the interest rate would need to be about 5% instead of 10%. This MS Excel calculation took less then 2 minutes to complete!

Of course these figures are based on estimates, so you need to be as realistic as possible. Since you use estimates in order to calculate the Net Present Value keep in mind that the results are not guaranteed. However, this is true for any similar evaluation of future outcomes. It is also helpful to perform two calculations; one as a best case scenario and one as worst case scenario. Combine the results from these two estimates and evaluate if the purchase would still show a net positive result.

Many business owners rush out and make purchasing decisions without doing any analysis on whether or not that asset will add value to their business. While many purchases cannot be avoided, such as repairs or replacement of old equipment, it is still worth the time to assess the cost and/or benefit of the purchasing decision.

They are predicting a very slow economic recovery. But that doesn’t mean you should wait to make purchasing decisions for your business. On the contrary, you should buy that asset — if you do so wisely.

It can be challenging to determine whether or not you should make an investment. You make every effort to invest in equipment or a project that is going to earn you more money than it costs. Therefore, it is important to use some sort of calculation to figure out how much the project is likely to earn so that you can determine whether it is worth the initial investment. There are a number of different methods to do this, but one of the better options is the Net Present Value (NPV) method.

In the Net Present Value method, you determine how much your return on a project will be using today’s dollars, so you can figure out whether the initial purchase price or investment makes sense. If the NPV is more than what the initial investment costs would be, it would be a profitable investment. If, however, the NPV is lower than the initial costs it would most likely lose you money so you should pass on the investment. This can also help you to choose between two different options that you are considering as you should choose the one with the higher NPV.

The Net Present Value calculation isn’t all that difficult to do if you have a calculator with special functions. You can find the formula online. However, you will also find Excel spreadsheets work well, or online calculators such as the one at Investopedia.

In my next blog post I’ll provide an example of how to use NPV in your business.

Wishing you and your family a happy holiday season.
I’ll be back in January with more great content.
Kelly

There are three main sources to obtain funding when starting a new business. If you don’t quality for a bank loan, the two other most popular ways to obtain capital, i.e., funds, are through Angel Investors and Venture Capitalists (VCs). These two funding options are similar yet different. An entrepreneur who appreciates these differences will be able to make an informed decision on which funding option will work best for their business.

Angel Investors are individuals that are looking for a higher return than they can earn in traditional markets so they put their money into non-traditional investments, such as start-up businesses. Most Angel Investors will invest large amounts of Capital into businesses that they have experience in or industries that they like. They can then use their expertise to help the business succeed.

VCs are investors that also invest large amounts of money into businesses. The main difference between Angel Investors and VCs is that Angel Investors will typically invest into start-up companies while VCs will invest in established companies. Both VCs and Angel Investors look to invest in businesses in which they can get at least a 25% return on their investment.

The amount of money an Angel Investor invests is much smaller than the funds invested by a VC. Angel Investors tend to invest less than $150,000. In return for their investment, they often want to to participate in managing the company. Because VCs invest in already established companies, generally they will not try to manage the company. However, VCs will invest $1,000,000 or more. If the business fails to perform as expected, the VC might require significant changes of the management team.

For a company to receive Venture Capital, they will need proof that they are an established and successful company. To get funding from Angel Investors, you need an idea and a good business plan. In general, it is easier for a company to receive funding from Angel Investors. Once the business is established and has proven successful, it is possible to receive additional funding via a Venture Capitalist.

Keep in mind that the money you might receive from an Angel Investor or VC is expensive, with required returns starting around 20-25 percent. Also, they might want to exercise their power to manage or dictate who will be the members of your management team. The best advice is to do your homework and make sure the investor or VC group is a good fit for your business as well as your personality.

There are many businesses out there that need start-up funds for their new business. Often times, the business may be
too young or may not qualify for loans from a financial institution and therefore need to seek capital elsewhere. This is what an Angel Investor does. An Angel Investor is an individual that provides any amount from a few thousand dollars to a few million to a new or young business. This investor is willing to take a risk if they think the business has potential to be success as well as the ability to repay the monies at a nice rate of return. Typically today, the most common return rate preferred by an Angel Investor is 20-30%.  

There may be other reasons why an investor would fund a business. They possibly would do it for ownership equity, to use their skills and experience as a extra-curricular activity, to keep ahead and/or updated on projects or developments within a a particular industry, or to simply mentor an entrepreneur. The benefits to having an angel would be the funds received to start up the business, getting management advice and potential access to valuable contacts they may provide to help you grow your business.  

Being an angel investor is also risky business. For an investor, if the business that he invested in does not succeed, he may lose part or all of his investment unless an “exit” strategy was arranged prior to funding the business. As the business owner, you may have to relinquish some management control over the business in return for the funds that you receive. You need to have a honest and cooperative relationship with the angel investor in order to keep him from taking over the business, but you also need to be able to follow through with your promises too.  

Now finding an angel investor is a different business altogether. You need to know where to look to find the investor that will best suit your business and is willing to fund and take a risk with you. The typical investors usually are in their 40’s, educated and wealthy. They’re usually community orientated people who want to help potentially successful entrepreneurs which in turn makes them more successful. Make your business presentable. Ask people in your network if they know of any Angel Investors or groups in your area where Angels gather. Angel investing is risky but can be extremely beneficial.

Today I had lunch with a gentleman that I had met about six years ago in a professional networking group. He was shy and timid when I first met him, but very competent in his field. Today, that same man is no longer shy and timid. He is very sure of where he belongs and where he wants to be. It was great talking to him and watching his face light up as he discussed how much he enjoys his career, the people he works with, and the flexibility he has to service his clients the way he thinks is best.

We connected in a way I never expected; we both have had children with major medical issues. Unfortunately, his child is on multiple medications and may have to be for the rest of his life. We discussed the challenges of being a parent, of being a small business owner, and relationships too.

I find that when I share my story – the infertility, the premature birth of my daughters, marital struggles, etc. that other people can often relate, even if it is not exactly the same issue, and they open up in a way you would never expect. However, you have to be cautious. Since I have known this person for so long I was comfortable telling him some of my life struggles — and the conversation lead us down this path when he asked me about my book Tiny Toes… In the end, he could relate and sent me some information that I am going to be able to share with women and couples who are not in my professional network, but in my personal network.

I left the meeting with a totally different perspective than the one I walked into the restaurant with. While I knew that we would have a lot to talk about since it had been such a long time since we had seen each other, I was pleasantly surprised that our lunch wasn’t all business. When you have something in common with someone, whether it is a life story or your favorite vacation spot, it makes referring business to each other so much easier.