What do Venture Capitalists and Angels Have in Common?

Have you often wondered what the difference is between an Angel investor and a Venture Capitalist?  There really isn’t much difference except for the size of the investment in your business.

Angels are private investors who are looking for a better investment and return than traditional investment schemes, like in the stock or bond markets.  The age of the company and other specifics are on their checklist: early or formation stage and they look for a payback and a return on their investment where revenues are between $2 million and $10 million.  They would usually expect preferred stock in return for their money which would pay semi-annual interest for the use of their money.  After 5 to 7 years they would expect to be paid back and exit.

Venture Capitalists are on a higher plain than Angels and can be private equity funds or hedge funds.  They invest in early stage companies expecting a high return for the high risk involved where revenues are in excess of $10 million.  Venture Capitalists look for companies with a defensible market position, strong management team, positive EBITDA and discernible growth characteristics.

So what do these Angels and Venture Capitalists look for, you may ask?  Think about the program Shark Tank seen on ABC-TV.  You may have seen Angel investor Kevin O’Leary quizzing the presenting owners of small companies.  He asks, “How am I going to increase my investment?”  “What are your goals for the business?”  “I don’t like your valuation!” “What are your margins?”  “What are your sales and in what time period did these sales occur?”

What is making him salivate or not over the company’s products?  These attractions are not unlike what the Venture Capitalist looks for.  Take a look at the following:

  1. Unique or proprietary products or services.  A patent owned by you is a plus.
  2. Existing sales are evidence of consumer demand where revenue growth is greater than 20% to 50% year to year; gross margins are over 40%; and with a lean management team.
  3. Increasing sales would be the result of their investment by marketing or hiring additional personnel, which they will oversee.
  4. Realistic valuation based on your sales and profits
  5. Exit strategy must be included in your plans, like selling the company or merging with another company.

While some of you may say that seeking funding from these people is not worth it.  Think about this.  If you did not have their investment you would not be able to grow your business faster, gain market share and have the benefit of their expert opinion and management expertise.  Their contacts and relationships would help you gain clients and suppliers for increased revenue and growth.  So it is worth it, but make sure that you benefit from the relationship as much as the investor would.  It is a two way street — the investor is making money on his investment, and you are gaining a person who can direct you in your business with his expertise, open doors to business partners and add to the valuation of your business.

Thoughts on Hiring

Recently, I came across an aspiring entrepreneur who told me that his plans for his company would include hiring many of his friends from college.  He has trust in these friends and they bring a lot to the table in the way of creativity and business acumen.  Besides they would have a great time going to work every day and wouldn’t that provide a great working environment!

My initial reaction was to congratulate him on his plans for his business.  Then I told him that hiring your friends is not a good business practice.  A business is not a social club where you can continue the fun you had in your college days.  By hiring your friends you may not get the critical skills you require for the business, and you will not be able to get the benefit of different skills and points of view of people who come from different backgrounds and education.

A prospective business owner has to consider the business and what it needs to be successful.  Considering the kinds of skills one requires of an employee is essential and drafting out a job description with salary range for a position makes good business sense.  It offers a tool for planning your organization and the expenditure for human resources that you will have to budget for and cover with your sales efforts.

Of course, you don’t need to be friendly with a new employee.  After all, you want him to produce for you.  All you need in your business relationships with this new employee is to respect him and he you.  You may not like him, but if he is a good employee and provides you with quality work and you respect him, then that’s all you need.

The owners of a start-up company also have to keep in mind their budget constraints.  If they cannot afford the people they would like, then they may consider hiring an intern, or someone on a part-time basis.  Whatever you do remember:  you have money and time invested in your business and you want it to grow.  Poor employees can hold you back; you want to have employees who can do the job and help you make a success of your business.

How to Accelerate Cash in Your Business

As you manage your business from day-to-day you need liquidity, that is, cash.  Cash is required to pay your bills from suppliers to your utilities bills and even your employees.  So, where is this steady flow of cash coming from?  Your customers!  How do you increase your cash balances in your business? Let’s investigate the Operating Cycle and the steps that are involved in the conversion process.

In order to understand how to accelerate the cash conversion process is it important for you to understand your Operating Cycle.  That is the amount of time it takes for you to convert cash to inventory to sales to accounts receivable to collections to cash again.

In any business, you begin it with cash as you can see below.  You determine how to spend it whether it is on  furniture and equipment or your raw materials. As your raw materials are converted into product you start building inventory. As your sales people become involved and start selling, your billing department bills and your accounts receivable balances increase. Depending upon the way your customers pay their bills, you may receive your money anywhere from 45 to 60 days. Then it is deposited in your checking account and the process starts all over again. At each stage of the Operating Cycle there is an opportunity to shorten cycle times.Operating Cycle Chart

Strategies to Improve Your Operating Cycle

 Your accounts receivable levels are important to watch.  Bills are usually collected on a 45 day basis.  Some customers may even pay sooner than that.  Those customers are gold. Others are not.

You should indicate clearly on your invoices what the terms of payment are.  These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due.  You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days.  This customer is costing you money!  You are actually financing this customer to the tune of 36% a year.  That is an incredible financing charge.  Did you ever realize that you were becoming a bank by not collecting on these invoices?  Therefore, it is critical to your cash flow to collect the amounts due you promptly.  Hence, the time value of money:  a dollar today is worth more than a dollar tomorrow.

Consider the following actions to take:

  • Have your available cash reported to you daily and chart it against weekly Accounts Receivable and Accounts Payable Reports. These reports will indicate how long your invoices are outstanding and which ones to watch closely for delinquency.  Your current ratio will be improved with monitoring and you will understand your business better.
  • Get your bills out more quickly. Bill as soon as the shipment is sent out. Hire a person to do nothing but make sure invoicing is timely and follow up on payments.  Send out friendly reminders at least 5 days before the deadline that payments are due.
  • Follow-up calls to customers are important to remind them that the invoice is due. These calls will also reveal whether the order is received in good order and if the customer is happy with the shipment.  Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.
  • Understand each customer’s payment cycle, and time your billings to coincide. Offer credit card payment, leasing options to make payment easier for them.
  • If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away. Making an installment plan with him is beneficial to you and to him.  You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.
  • Shorten cycles for delivery of your product. Work-in-progress times should be shortened for faster completion of projects, and the faster your will get paid.


So You Want to Expand Overseas!

The idea of expanding overseas is an attractive one and you may gain new customers. 95% of the worlds’ consumers reside outside the U.S. (according to the Office of the U.S. Trade Representative) – those are all potential new customers!  Expansion is especially easy with the advance of the Internet.  Anyone with a computer and access to the Internet can see your website.  With an Internet company all you need to have is the ability to fulfill orders and ship them to their overseas destination and the profits will come.  But boosting bottom lines overseas is a dynamic challenge requiring thorough knowledge of international law and a cultural smorgasbord of tastes and aesthetic hurdles.  Let’s examine some of the issues involved in this expansion.

Cultural Norms

The most important knowledge that you will need is a thorough understanding of the target culture.  You will have to learn how each culture operates before you do business there.  Every country has its own way of doing business and its own type of people who have likes and dislikes.  Understanding the cultural niceties and changeable legal statutes and having a shipper who has this kind of knowledge and understands global trade will greatly enhance your success. It is also beneficial to learn the language of the target country so that you will have a better understanding of the culture and the nuances of the language.

Certainly there are other factors that may appear insignificant but will have substantial cultural ramifications on your success. Certain colors are inappropriate to use in certain Asian countries.  Pink and purple are sometimes unwelcome, and red signifies different things in different places.  White is a color indicating death in Japan. So, if you are designing something internationally, you have to keep these things in mind.

Time Zones and Currency Exchanges

Doing business in a different time zone, like in Australia or Japan, can be a strategic nightmare.  Running a business here and there requires strategic planning. So you must plan accordingly for the country you want to do business in and make some sacrifices with your family and sleeping routine.

Make sure that you collect as much payment in advance so that you can attack obstacles around currency conversion and have as many communications around setting expectations as possible, which will help ensure a successful engagement.

Technological Infrastructure and Usage

Understanding the technological abilities and infrastructure of different countries are also helpful.  What mobile devices, for example, does your target market use?  While  I-Phones and Blackberries are popular in the United States, Nokia is the device of choice in Brazil.  When contemplating a new market you have to make sure that your mobile website is coded for these devices and built with a compatible interface.

Business Model and Product Demand

While going international is a glamorous and exciting endeavor, there is one critical feature that we cannot overlook.  In order to be successful overseas you have to have a successful business model with a product that sells very well here.  You have to have adequate cash flow to support your present business as well as afford the costs and expenses of expansion. You also need thorough market research to understand where your product will be in demand internationally.

We must also get back to the basics of international marketing and expansion by first establishing partners in target countries, who can open doors for you.  Organizations like international chambers of commerce and industry-specific organizations can assist you in setting up business in countries.  These organizations can advise you on selecting reputable agents in the country to help you introduce your product to certain retail organizations that can sell your product and generate demand.

For more information on expansion internationally, see https://www.sba.gov/blogs/small-businesses-should-consider-international-expansion, and http://www.internationalexpansion.org/



Are Some of Your Customers Late Payers?

Having some of your customers pay late can cause you a lot of “hand-wringing”.  You can’t pay your own bills on time.  You ask yourself should you ask for a line of credit from a bank in order to pay your own bills.  It is a constant struggle for small businesses to get paid on time.  In fact, 64% of small businesses are paid late.

What are you going to do to alleviate this problem?  Charging a late fee could help late payers get up to date.  Are you reluctant to do that for fear of creating ill will with your customers?

But not charging a late fee would be a mistake, especially for chronic late payers.  Businesses have to realize that they need good paying customers if they want to make money.  Remember my earlier post, on January 13, 2016, about Sam Walton saying “if you want to make money collect on every invoice”.  Also, you could be financing your customer’s business to the tune of 36% a year.  Why do this, you’re not his partner!

If you decide to charge a late fee you should have a policy in place or even a contract with the client which would include your late-fee policy.Sample_bill  You can’t decide to charge a late-fee after the fact if it wasn’t in your initial agreement.  Your invoice should include a statement at the bottom of the page which indicates that late payments will incur a charge of 1.5% per month, for example.

Even if you don’t charge it, it can work well as an incentive to get people to pay.  Upon receiving an invoice which includes a late fee your customer may give you a call to settle the bill, or even negotiate the rate of late-fee charged downward in a new contract in lieu of other charges that may arise during the project.

Small businesses must be clear on their policies up front and implement a communication strategy to collect so they’re in contact with customers promptly if they are late on payment.  Even is they are late one day, you should be on the phone with them to tell them that you haven’t received payment as yet and when can you expect to receive it.  You can then gauge the customer’s response for sincerity when you do reach out.

It’s Spring and Its Tax Time


adding machine

As small business owners we have to be mindful of the fact that we have to prepare our taxes on the business as well our personal filings. As budding entrepreneurs we may not realize that there is a fair chance that we could create tax headaches for ourselves.  Since we went into business we may have more forms to fill out that are growing more complex as time goes by because of new laws coming into play in the federal and state tax codes.  And it can become difficult to keep abreast of the changes that affect us.

Just think about it. If we have employees we have to consider the new withholding taxes and the sheer volume of work that is involved. And it is not just the work; employees will need explanations as to why their pay stub is different. The employer must file federal tax Forms 941, Employer’s Quarterly Federal Tax Return, and 940, Employer’s Federal Unemployment Tax Return (FUTA), which address reporting of withholding for social security, Medicare and unemployment, as well as for federal and state income taxes.  So it is difficult for the small business owner to keep up with all this information and the changes in the withholding tax laws and rates.

With regard to the business itself, Schedule C, Profit or Loss from Business (sole proprietorship), revealing the sales and expenses of the business, must be completed. Some issues may come up in preparing these; for example, any change in the value of inventories must be calculated and the treatment for the related profits and losses must be addressed. The treatment for such changes can be a tricky situation for the entrepreneur.

If you have an online business and sell to customers out of state, there is another issue which can become problematic. Some states which are short of cash may force companies to collect tax on sales made to their residents even when the company is based elsewhere.  Court challenges on this topic leave the requirement in doubt, but if the trend catches on companies would find it harder to comply with the various sets of rules and tax rates.

What is the entrepreneur to do? In the first place it is recommended that a payroll preparation company that serves small businesses be hired to prepare your payroll and file the required withholding taxes and quarterly reports for your business.They are not expensive and the time and energy they can save you makes this task worry-free.

Hiring a small business accountant who has experience in your type of business is also worthwhile. Make sure you interview them for their abilities and your needs. While the fees they charge are an important consideration, you may want to retain them instead of getting billed for every question you may have. An accounting firm should have a retainer, like $150 a month, to cover payroll, tax returns and other filings. In this way you will be able to develop a relationship with the accountant and someone you can lean on.  Nickel and dime billings for phone conversations would be nonexistent.

An experienced small business accountant who understands your business can help you grow your business.  If he is asking the right questions he would address your goals and where you want to be in the next couple of years. He can help you shape your life.

What makes a Good Business Plan?

At my former job in a major investment firm, I had the responsibility of developing new business for the firm.  In that position I received about 40 business plans a week from entrepreneurs and senior managers of companies seeking financing, and I reviewed about 25 per week.  Why didn’t I read all 40 plans?  Here’s why.

The opening section of a business plan is the business description probably written in two paragraphs.  Here the writer describes his business and product and indicates what his target market is.  If after reading the opening paragraphs I do not know what his business is or what he is talking about, I reject it and move on to the next business plan.  A writer has to write his business plan in a way that is easily understood and is simply written.  If you are an engineer and cannot relate your business in simple terms, then get someone else to write it.  There is no excuse.

I also look at the sentence construction, grammar and spelling.  If there are spelling mistakes or grammatical errors, it indicates to me that the writer has exhibited a level of care which is not conducive to managing and growing a company.  He is neglectful and pays no attention to detail.  If you have a shot at having a professional investor look at your plan, then by all means make sure that you have done your research accurately, use proper grammar and your financial information is added correctly.

When I have a business plan to evaluate I look at its presentation.  Is it neat and attractively done so that it would make you want to open it up and begin reading it?  Does it indicate what the business is and what the product is, how you are going to make money and what your profit will be?  Is what you say in the first section of the plan supported by the financial information in the second section of the plan? Are your profit margins, return on investment, and return on equity comparable with similar companies in your industry?

When you are constructing your business plan, heed the above and you will be sure to generate interest in an investor to read your plan.

Preparing For Taxes

Preparing your expenses and sales receipts for filing your taxes can be a nightmare.  Do you have your company related papers filed in a shoe box?  Or, are you organized and enter your information in bookkeeping software like QuickBooks or Peachtree?

Whatever your preferred method of filing your information is, you have to assemble it for the tax preparer or accountant.  What do you have to give him?  Here is a list of the documentation:

  1. Receipts for the purchase of equipment. These are your assets, and assets are depreciated over time.  Various types of equipment have different rates of depreciation.  Your accountant will know what those rates are, and he will be able to calculate your depreciation expense.  Additionally, certain purchases of capital equipment will give you a tax credit.  So it is worthwhile to have your accountant review this information.
  2. Payroll information is important. Providing a summary of Social Security and Medicare taxes, health benefits, if any, Federal, state and city taxes for each employee and the Treasury payments made are necessary to ascertain your payroll expenses for the year.  Any payments made to independent contractors should be reported on Form 1099.
  3. Any draws that you have taken from the business and any estimated taxes you have paid will assist the accountant in preparing your tax liability.
  4. You will need to give the accountant a list of accounts receivable that have remained outstanding at the end of 2012. He may ask you about the probability of collection of these accounts and may want to indicate whether these are probable or uncollectable leading to a bad debt expense.   He may also want to know whether you have “earned” the revenue you have collected in the year.  This refers to the Matching Principle in accounting – if you haven’t earned the revenues but have collected it, you will have an accrual on moneys collected but not earned.
  5. In this vein, you will also need to give the accountant a list of those accounts payable that you have not paid at the end of the year. The numbers in 4 and 5 will have an impact on your Working Capital.
  6. It will be necessary to also keep an eye on your inventory. How frequently do you replenish your inventory?  Inventory Turnover is critical to learning whether you will need to reduce the selling price or if you will have a write-off of obsolete inventory.
  7. If you have entered into any contracts with vendors or suppliers and independent contractors it would be wise to provide the accountant with a copy of those contracts so that he can see any anticipated revenues or costs associated with them.
  8. Before providing you with the completed tax returns, the accountant will want to review them with you before finalization to make sure that he has included everything. Take this conference seriously.  He should offer you advice on the conduct of your operation and indicate whether you need to do more to mitigate your tax liability or improve the way you are running your business.

By the way, if you are using a software package and your accountant uses the same program, you can provide him with a download of your files so that he can manipulate the information as he needs to.  This will save him a lot of time in preparing your information and reduce your bill.

Keeping Your Eyes on the Books

In teaching Entrepreneurship I often tell my students that they should at least understand the accounting and bookkeeping practices involved in their businesses.  They should be able to speak the language of their accountant or bookkeeper and be able to ask for periodic reports to enable them to review their business’ financial position at any point in time.  The several accounts to be mindful of are the following: 

Cash.  All of the transactions your business has pass through the cash account whether it is for the receipt of collections or the payment of bills.  Some bookkeepers use two journals – cash receipts and cash disbursements – to track activity.

Accounts receivable.  If you are a manufacturer or a service provider and you don’t collect payment immediately, you will generate “receivables”, and you must track them by having your bookkeeper generate an aged receivables report indicating which customers owe you money and how long the bill is outstanding. An effort to collect “old” bills is required to get your money.  Busy businesses generate an accounts receivable report daily.  But it is up to you how often you would want to see this report.  But you should review this report weekly for any potential problem accounts.

Inventory.  Products you have in stock to sell are your “investment” sitting on the shelf and must be carefully accounted for and tracked.  Periodic audits of what you have on the shelves and what you have in your books must be compared and verified.  It is important for you to determine what level of inventory is needed in order to satisfy your customers’ demand to avoid any write-downs of obsolete or damaged inventory.  An analysis of these accounts will help to determine this level.

Accounts payable.  No one likes to pay bills and send money out of the business, but if you have good bookkeeping practices you will have a clear picture of everything if you use your accounts payable feature on your bookkeeping software.  You will have timely payments, and you will not pay anyone twice.  Paying bills early may qualify you for discounts with your vendors.

Purchases.  The purchases account is where you track any raw materials or finished goods you buy for your business.  These work- in- process accounts are part of your inventory account, and they can help you calculate your cost of goods sold, which is subtracted from your sales to find your company’s gross profit. Here you will be able to see if you are paying more for your raw materials and take measures to reduce the costs of them and improve your profit margin.

Payroll expenses.  One of the largest expenses for all companies is the cost of paying employees.  Keep this account up to date for meeting tax and other government reporting requirements.

It is important to note if you cannot hire a bookkeeper that you purchase a good bookkeeping software package, like QuickBooks, to help you organize and track your sales, collections and inventory.

Are you Choosing the Right Suppliers?

Recently, my son told me that he was going to open a store in another state and was scouting the area that he wanted to establish it in to determine if there was enough of a population and traffic to warrant a successful store.  He started to relate a flow of consciousness about this thoughts, and enumerated a few of them including which suppliers to have, who would bring in the olive oil, cheeses and beer at a good price.  I voiced my thoughts and then thought that the following would be good information for other aspiring entrepreneurs to contemplate.

For any business, there is heavy reliance on their suppliers.  Any interruption in the supply chain could seriously impact their long-term viability.  Choosing the right suppliers and using performance measures to re-evaluate existing supplier relationships can help reduce risk and prevent problems down the line.

Customers are also affected by poor supplier relationships.  They can’t find what they were looking for because the supplies weren’t delivered.  They don’t care, as far as they are concerned, it is your fault that they can’t get what they want.

So, how do you determine whether a supplier is viable or not.  There are three factors which you must consider:

  1. The suppliers’ financial and organization stability
  2. How much of a priority you are to them given your size
  3. How willing and proactive they are in communicating with you.  Are you notified of issues before they arise so you can be proactive instead of reactive with your customers?

Investigate the supplier.  Ask for references to determine if they are reliable and treat you with respect. And follow up on them.  Consider four factors with measuring performance:

  • Cost.  Not just the cost to you, but does it cost you money to do business with your suppliers?
  • Quality of their products or customer services
  • Responsiveness to your needs
  • Their use of technology – are they more efficient because they adopted new technologies in their inventories and billings and communication with you?

If any problems arise with your suppliers collect data specifically on that one so that you can have a “fact-based” talk with it about any issues.

Investigate problems. If a problem should arise, find out why the performance is not up to par instead of terminating the relationship.  You should strive for long-term partnerships.  Think of it this way:  your supplier is a stakeholder in your business, if you fail, he loses a customer and his sales go down.  Therefore, it is important to maintain that relationship.

Taking on a supplier.  You may decide to take on a new supplier if he has a new product or brings something different to the table.  In general, it pays to not rely on a single supplier in case problems arise.