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Finance Basics: Beancounting for Beginners

Cash Flow Matters Most: Above All Else, Now

Small Business Financing: What Sources Are Appropriate

Financial Bootstrapping: Thrifty is Nifty

Finance Foresights for Small Business Startup: Ideas for the Back-Burner

Small Business Financing Resources: Books, Software, Links

Finance Basics: Beancounting for Beginners

Before going to far, it is vital to have a few financial concepts anchored in one's brain. Small business financing is really no different to big business financing; it's just a question of smaller scale and less complexity.

The main tools that you are going to be dealing with are the income statement (or profit & loss in British-oriented countries), the balance sheet and the cash flow forecast. Of course finance and accounting are not just about these three, but they are all critical and any finance dialog with banks and other sources of small business finance need to be concerned with them.

The income statement is the means by which it can be determined how good the company is at making money. It considers income and expenditure (you can download a free Excel income statement template from Bizfilings). Whereas the balance sheet describes what the business owns and what it owes (you can download a free Excel balance sheet template from Bizfilings). The cash flow forecast reveals how the company will pay for operations and future growth.

The income statement, the balance sheet and the cash flow forecast need to be viewed dynamically, not statically. That is why the preparation of a business plan requires all three to be stated over a period, not just at the end of year one. A well run (even small) business will compare the actual against the forecast income statement monthly and the cash flow forecast will also be monitored monthly. The balance sheet is less critical over shorter periods, but does need regular monitoring.

The comparison of the variances between reality and the forecast enables good short-term (and sometimes long-term) decision making. Nothing is going to run smoothly and knowing where you are is important to the success of the business. It is also vital to be able to keep financial 'partners' like banks and investors informed of what's going on.

When you and outsiders (especially banks) look at the data supplied by income statements and balance sheets, financial ratios will be used to make checks on performance. Of course you'll be checking on (gross or net) profitability, but tests of solvency are important too. The current ratio is current assets divided by current liabilities and tells you to what extent cash on hand and disposable assets suffice to pay near-term liabilities. Banks will prefer the quick ratio (cash + accounts receivable divided by current liabilities) because this harsher test concerns money that is quickly available, which is why it's sometimes called the acid test. For other ratios, take a look at Biz Miner, where incidentally, you can do some interesting comparisons of your business (in the US) against other like businesses. Then there's BizStats that has another mine of US business statistics.

At WorkSavvy, there is a lot of emphasis on cash flow. That's because it's the startup's blood-supply. It may be as much as the first two years where cash remains of paramount importance. In the second phase, it is likely that growth will become important (provided that the cash is there to support it)—to secure your market, and in the third phase profitability will take over as the key to success and long-term survival.

Startup money raised by Inc. Magazine 500 companies (the fastest growing in the US) in 2007 came from the sources shown in the table below:

CEOs capital sources 

(percent by each means)

Bear in mind that even among the Inc. 500 group (the top echelon) as many as 14% raised $0! Pre-launch, the median for funds raised by the fast-growing companies was $50K. You can compare the sources in the table below (from the Entrepreneur magazine & PricewaterhouseCoopers' 2006 'Hot 100' listing of fastest-growing new entrepreneurial companies).

How Hot 100 companies financed startups

(percent by each means)

The question of capital raising is not easy, even if you can get your hands on the money. Capital intensive businesses will require it, of course. However it is worth asking yourself the question, "How little capital do I need?," rather than, "How much capital do I need?" If you have not been ruthless with yourself in your own personal goal-setting, you may find yourself setting out on a road that leads you to a place far distant to the one you thought you were aiming at. If you want to reflect on this a bit, a good (short) book to read is Bo Burlingham's Small Giants: Companies That Choose to Be Great Instead of Big. In contrast and for good balance, take a look at the story of Croc shoes, a company not 5 years old that, after a February 2006 IPO of $239m, suddenly had a market value of $1.09bn. See the Croc website, too.

Cash Flow Matters Most: Above All Else, Now

Cash matters above all else at business startup and for quite a while after. In most businesses, the early stage is dependent upon there being the cash available to keep the business going. Of course you will measure your income (profit or loss) and you'll calculate your balance sheets, but if you can't pay your bills, they don't matter at all.

I put the cash flow issue right up front, where in my opinion it belongs for any small business startup. Not only is strong positive cash flow vital for staying in business, but also it will give your business a higher valuation. This will enable you to hang on to more equity if you ever do go for external capital investment or other business financing and will also help in any loan negotiations.

What gets you strong positive cash flow? Why sales, of course. That's why I say if you have a choice of activity right now, spend your energy on sales! AND—here's an idea: if you are selling physical products, think about how you might start by selling related services. Services are generally quicker to market and will generate cash faster. You can keep planning/producing your physical products, while the services keep you afloat. You may want to give some thought to generating passive income—money that just comes in, e.g., from subscriptions, downloads, renewals and the like.

Forecasting your cash flow is vital also. So vital that I have set out below a format for a six-month cash flow forecast or projection. You'll need to modify it for your own circumstance and, of course you would do it for 12 months, rolling.

Cash flow forecast or projection

This is schematic and yours will be realistic—and there are some important things to remember:

• The amounts are countable cash, so for example in the income statement that you will prepare, you'll even out pre-payments (items such as insurance) that you pay up-front on a pro-rata basis for each month. Here in the cash flow forecast, you put the amounts in the month when you'll pay the whole year's amount (a premium, in the insurance example). Likewise for accruals (items such as telecom bills) that you pay after you have had the service; in the income statement you'll put an amount for telecom in each month, but in the cash flow forecast you put it in the month when you expect to pay it.
• You carry the cash on hand figure at the bottom of each column to the top of the next for the start of the following month.
• You compare actual out-turn with the forecast, so as to be able to take corrective actions, e.g. going after late payments, delaying purchases, seeking better terms from suppliers (such as discounts for cash, longer settlement periods). One of the worst sins of new businesses is to let cash get out of hand by not keeping the focus on sales, chasing late settlements, going for discounts—in other words keep inflows high and outflows low!
• As well as determining how much money will be in the business today and tomorrow, it will remind you to ask what's coming in, from whom and when?
• Beware: a cash flow statement is not the same as a cash flow forecast. The statement takes a single snapshot—for instance at the year end for the annual report and accounts. very useful for seeing whether a business has strong cash flow or not, so investors can see over-loaded finished goods inventories, for example. But they are not the tool for the startup to see if the business is going to run out of cash at a particular time.
• You can download a free cash flow sensitivity analysis (in an Excel spreadsheet format) which will enable you to compare optimistic, pessimistic and best-guess forecasts from Bizfilings.

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Small Business Financing: What Sources Are Appropriate

Capital Finance

Where do you get your finance to seed your business? Two main sources: equity (capital) and cash. Equity can be a source of assets, either through contributed capital (i.e., assets from the owners) or retained earnings (when the business increases assets through earning activities). These retained earnings can then be distributed to the owners (through dividends) or kept in the business. Cash is the liquid funds in the business that may come from your own pocket, operations (sales) or loans. Both forms of finance need to be watched over very carefully, especially when the business is a tender young shoot. The kind of seed money that you apply to your startup has implications that will have effects on the business that you may not have thought about.

Do not confuse equity and loan finance (though certain kinds of loan may be convertible into equity). Weigh very carefully where you want your finance to come from. Equity is going to be cheap for you, but it will dilute your ownership and provide you with other masters to satisfy. Loans are going to be expensive and you need to know that you will generate sufficient cash to repay them (and the interest). Rolling up interest is a dangerous practice, even if offered, because the interest compounds at an alarming rate.

Whatever your business on whatever scale, you are going to need finance, but equity will only be created if you incorporate a company (at the beginning or later). The people who put in equity own the business—and the risk! At the outset, most small business startups are owned and financed by the entrepreneurs themselves, but as the business develops, so do the potential sources of investment.

The best form of small business financing is sales, rather than external funding. Below you will see some external sources described, but financing the business from operations will give you the least risky start.  There are a few exceptions, such as highly capital intense businesses or where infrastructure needs to be in place before revenue can flow. Otherwise try to go the financial bootstrapping route.

Risk Capital Sources other than the entrepreneur

Family & Friends (F&F): Of course you are going to start with your own money, but if you simply cannot do with some extra funds, then it's obvious to start with family and friends. In the US there are 6.1 million family-and-friends loans a year, worth $89 billion. Beware though, for you may complicate business issues through relationship ones (and the opposite!). It is best to tap this source for loans rather than equity, but in either case draft an agreement (normally called a promissory note) to cover terms. You will need to decide what you are offering as well as what you want and in either case a version of the business plan will be appropriate. Beware of the difference between loans and capital. Do your F&F think they'll make a bit of interest or they'll get a little of the 'action' (shares) in your business? Will the lenders want a say in how the business is run? Do you want that? Make sure that both parties expectations co-incide. Whatever route you take, make sure that you prepare a promissary note to document the transaction.

Associates (such as suppliers or customers): These are people who have their own business reason to want to back you. They may see your business as complementary or likely to lead to increased sales or lower costs for their own. They need to be treated with the same care as Family & Friends and maybe more, for they may not only be risking their money, but also their own enterprises.

Business Angels (individuals or small groups): These are appropriate for fast-growth businesses that are likely to go for more money later (venture capital, IPO or sale). The sums vary by angel type but are likely to involve investments between $50K-$1m. In the US they should be accredited investors who have to have high net worth or incomes. Angels are likely to want to become personally involved with the business. Finance may come in tranches as milestones are hit. There are directories of Angel Investors (individuals and groups)— see Links, below, but you'll find that a personal recommendation will work better than a cold approach. See if you can't find a link. In 2005, it's estimated that $2.3bn Angel investments went to 49,500 US firms (Center for Venture Research, University of New Hampshire). The figure was up 3.1% over the previous year. The number of active investors was 227 000 individuals, with an average of four to five investors joining forces to fund an entrepreneurial startup. The sectors with the highest angel investment were healthcare services/medical devices (20%), software (18%) and biotech (12). In the, US Angels are the largest source of seed and start-up capital. Interesting to note is the fact that though women-owned ventures accounted for only 8.7% of the entrepreneurs seeking angel capital, but a third of them were successful.

 "Nice stuff!" - a Silicon Valley venture capitalist

Venture Capitalists: These firms or funds generally do investments from $1m upwards. As a rule of thumb, I'd say ask yourself if you are going to be needing a minimum of $5 million and have a business that is likely to be worth $25 million in about 5 years. If this is beyond you, forget VC money. Each VC has specific aims by sector, company type or geography. Almost invariably such investors are looking for a very high capital gain, since not all their investments are going to succeed. Bear in mind that they finance a tiny minority of startups and often, in any event, will only come in on a second round of financing, once the business has begun to have a proven track record of fast growth. Think very carefully about the consequences of growth and the demands of external investors. You may not want the necessary concomitant pressure. If you're having trouble raising the capital you think you need for start up, learn the low cash startup secrets of America's fastest growing companies in the AVC Smart Startup Guide from Anti Venture Capital (Here's a quote from their newsletter:"Remember, only about one in every 500 entrepreneurs chasing capital attracts any. The other 499 entrepreneurs simply end up wasting six to eighteen months of their lives in a futile quest. Memorise this distinction: Savvy entrepreneurs know how to create cash. Wannabes wait for someone to give them cash."). Learn how the best entrepreneurs start companies with creative financing. If you want to research what the VCs offer, go to The Infon Venture Capital Database. Bear in mind, that if you approach a firm cold, you'll be at a disadvantage (vs. an intro from someone they know and trust); go for a local firm which invests in your sector and one that will consider investing in a firm at your stage of development.

Equity Markets as a source of capital are not really of concern to startups, except in very rare cases. Those cases are not likely to include readers of the WorkSavvy website! However, there is one option that startups with a good/wide reputation and/or customer base can consider: the Direct Public Offering (DPO). DPOs are not as popular as the full market IPO, but they let ambitious entrepreneurs sell shares direct to investors at much less cost and fewer regulations. Regulation D (with the state securities administration) allows you to raise up to $1 million in a 12 month period; Regulation A (with the Small Business Office of the SEC) lets you raise up to $5 million each 12 months. You can get more information from your accountant, but take a look at the Small Business and the SEC first.

Caveat 1: Many business startups imagine that venture capital is the way to go for small business financing (I did), but take care! You may spend months side-tracked from the essentials, imagining a crock of gold. A tiny proportion of seekers actually get to present to VCs and a tiny minority of that tiny minority actually get funded. You can help yourself ascertain whether you're ready for the venture capital route, especially if you are an innovation-based business by running The Gauntlet which tests your readiness for this route. This UK product costs £299, but you can use it repeatedly.

Caveat 2: VC funding is very limited in numbers of deals. To give you an idea, the PwC/NVCA Money Tree Report™ says that in the US, the $21.7bn VC investments in 2005 went into only 3,000 firms (an average of about $7m each). They also report that $2.9bn went into first round finance for 608 startups and early stage companies (av. $4.8m).

Loan Finance

Loan finance for small business financing is available from many sources. Overdraft facilities or a line of credit at your bank may be the most straightforward, but high rates will apply and may in any event be refused unless you have had a lengthy banking relationship (and a good credit rating). Security will be requested and the facility or line of credit (if taken up) may be required to repaid on very short notice (causing a delicate small business to go belly up). Loans for the longer term are likely to be related to and secured on items of equipment, vehicles and the like. Lease finance may be more appropriate—from the bank or other finance company. The latter, by the way, may be less demanding than banks, though rates may be higher.

In any event the lender is going to look at your character and personal history, your credit record and your capacity to repay. So be prepared to discuss them, rather than seeing questions as an intrusion. There are two ways to get the loans: in your own name (personal loan) or through the business (a bank loan).

Several countries have government supported micro-loans for business startup, often through loan guarantee programs (such as the SBA 7a). Whereas less security (or in some cases, no security) may be required for such finance, the paperwork can be considerable and the time frame to get it quite extended. A few countries are trying to do something about the latter—the US, for example, has a "LowDoc" (low documentation) program for loans under $150K and microloans for sums of $100-35,000 that take a week or so to process.

If you have obtained an equity investment from somewhere, the same source may be prepared to advance working capital in the form of a loan (possibly convertible into equity), which will of course depend upon the state of your business progress. The investor is likely to be no less demanding, but the loan may be easier to negotiate, given the investor's wider interest in seeing the business succeed.

Don't forget the importance of establishing a line of credit or overdraft limit/facility in Brit-speak (the maximum credit and bank or financial institution will give you), before you start to run up bills in your business. This is in addition to any loans (advances) that you may have established.

There is of course, the credit card(s). There are many people who use this route, but the rates are high and the risk is great—demand for (quicker-than-you-want) early settlement. they can of course be used prudently. They could perhaps be considered for a computer purchase, for example, but not if you have already run up big debits on other (especially personal) things. They may be better kept for personal costs that you can't cover with cash, especially if you are not taking much cash out of the business.

Customer and Supplier Finance: you can always try your customers and suppliers for help as you are starting up. Some customers will be willing to pay early or on a down payment basis. Some suppliers will offer extended credit. However with no track record negotiating terms is sometimes difficult.  Among bigger companies, there are now some who see benefit to working with business partners in a more creative way. For example, Whole Foods Market has a Local Producer Loan Program that provides up to $10 million annually in low-interest loans to help small, local producers of agricultural and value-added products grow their businesses. To qualify, producers must: meet the company’s quality and animal welfare standards, have a specific project plan for the use of funds, and have adequate cash flow to service debt. The maximum loan is $100,000.

One of the more interesting examples of supplier finance is from UPS, through UPS Capital that has developed small business loans for increasing working capital and reducing risk. They offer SBA 7(A) and 504 programs; SBA loans for professionals; franchise financing; business acquisitions; commercial construction loans; commercial real estate loans; financing for women business owners.

Savings: as a startup, you may not often think about stashing money away, but here is the only way I know how a business in the US can have a business savings account that offers a reasonable interest rate. My bank offers less than one per cent on business savings. Atrocious! It is often the case that a startup finds itself with (temporarily) idle cash in its checking account. What a waste. So why not use the business account at ING. If you click the banner here, it will take you to ING Direct. You will need to open a personal savings account and from there you will be able to open a business savings account. You can earn rates of interest at or above money market rates. I recommend ING and use them myself extensively, both for private and business savings.

Person to Person (P2P) Banking & Finance: there is a new source of direct Internet-based loans. In the US there is Prosper where you can list the loan you seek and private lenders can choose to make one or not. Rates depend on how the borrower is rated. Lower rates can be achieved by going through affiliation groups. In the UK (and soon the in US) there is Zopa, but here (for the moment) lenders cannot see details of the loan being sought. There are many individuals seeking to pay off credit-card debt or make car purchases, but there are business loans being requested too. Of course you would have to check out rates in your own case, but there are examples of P2P rates being less than half those asked by traditional finance companies.

To help facilitate this process is Virgin Money, a Massachusetts-based specialty loan administration company that manages person to person business loans and mortgages, as well as personal loans. They provide everything customers need to formalize and repay private loans. Given that the majority of private financing for startups comes from family and friends, this is management service probably has a big future. Default rates seem to be lower than average (Zopa says theirs are 0.05% and Virgin Money says theirs is <5% vs. an average of 14% for all interpersonal loans). VisitVirgin Money's website for lots of helpful material or start by investing in the book, Investors in Your Backyard, written by founder, Asheesh Advani (see more below).

Now there are several other offers such as Vator that allows you to do a 3-minute video pitch of your business or idea. Raise Capital is an online community where entrepreneurs can showcase their business and seek investment.

This kind of Web-based lending is becoming prevalent also in the voluntary sector. One is Kiva, the P2P lending organization between the developed and developing worlds. Another is Chipin that enables you to collect money for a project or charity. Yet another is Fundable through which you can raise funds for a benevolent purpose or even sell a product you have yet to produce. Until the target is reached, the funds are not released (or charged to donors/buyers).

Corporate Venture Capital: this may be a route for you, especially if you're in techno-business. In the US, Corporate Venture Capital (CVC) is a growing field and represents more than 10% of overall VC investment. Any good VC will be offering their own useful network, but CVCs offer in many cases, offer in addition their savoir faire and other bonuses like their customer base, tech knowledge and association with their brand. They will most likely syndicate investment and each will have their own policy about early or later stage investments. Here are some CVCs you might want to look at in the US: Chevron Technology Ventures,  Dow Venture Capital, Hitachi Corporate Ventures Catalyst, Intel Capital, Siemens Venture Capital, UPS Strategic Enterprise Fund. In Canada, an example is Telus Ventures. In Germany, an example is Schott Corporate Venture Capital. Corporate Venturing has its own association in the US: the Strategic Venture Association.

Caveat 1: only offer anyone (especially banks and other financial institutions) a personal guarantee as a very last resort. Offering your home or other assets as security is a near second 'no-no' to a personal guarantee. If you are worried about a roof over your head or the food on the table, you risk making poor business decisions. Of course lenders will ask for it, since it gives them security, they think. Experience shows that such collateral makes for a one-sided relationship strongly in favor of the lender. If you are going to be forthcoming when you need them less—i.e., when the lender is convinced that you offering collateral, use business assets, not personal ones. Unsecured loans are probably only have the capacity to repay on time under any circumstances. Happily, there are other ways to go (see Bootstrapping below).

Caveat 2: do not take a loan without a 'promissory note' or written agreement. Such a document is not difficult to prepare, but you will be inviting problems down line if you do not have your agreement in writing.

Welcome to WorkSavvy / Entrepreneurship & You / First Steps to a Business Start / Savvy Business Planning / Savvy Business Finance / Savvy Marketing / Savvy Business Organization / Savvy Web-biz / Sustainable Business Startup / Savvy Business Resources / About WorkSavvy! / Lift Off newsletter / Contact WorkSavvy : will @ worksavvy.ws 

Financial Bootstrapping: Thrifty is Nifty

"Bootstrap Finance" is a pair of words you should become familiar with. The savvy entrepreneur uses 'financial bootstrapping'—building a business out of little or nothing with no or minimal outside capital. It's when the entrepreneur uses imagination, know-how and hard work instead of spending money for small business financing.

At the beginning, you may ask yourself 'how much money do I need?'. But a better question is 'how little money can I start the business with?'. There are those who say too much money is worse than too little. You can burn dollar bills very fast at the start and you are going to need every penny as sales begin to take off.

The benefits include a potentially higher value for your business (no equity relinquished), saves on interest, with less debt you'll be able to borrow more when you must, opportunity for higher profits when you get there.

"Going Bedouin" is another expression you may have heard in connection with the lean enterprise. Wired magazine's Jargonwatch section describes it: "Verb. Downsizing a business by eliminating all but the core assets: employees and the communications links between them. A company that has gone completely Bedouin lacks a physical location, operating simply as a network of engineering, sales and support staff connected 24/7 by Internet and cell phone."

If you would like more on financial bootstrapping, then write my articles Virtual Seed Money: Use the Bootstrapper's Cashbox, Think Big, Start Small: SPQR—10 ways to small profits, quick returns, or Staffing a Startup Without Hiring: Getting the work done with minimal payroll. Here though, is a summary list of bootstrap finance ideas that you can use right away:

• while having long-term goals, make next week your time horizon to make sure you examine short-term cash sources;
• make sales the Number One Job and over-deliver not over-sell;
• do a little marketing every day and ask me (will @ worksavvy.ws) for a copy of my article, Millipede Marketing: Relentless Forward Movement;
• get editorial press coverage in your marketplace (loads of free help is available, e.g., from the Publicity Insider;
• ensure your customers pay within 30 days (even consider a discount for prompt settlement)—sales of 100 000 a month, for example, with an average settlement of 45 days need cash of 150K in the business (60 days need 200K)!
• you can even think of what my friend, Sven Atterhed of the Foresight Group, the intrapreneurship specialists, calls 'customer financing', that is to say talking with early customers to help with your cash flow (provided of course that they love your products). I remember asking a client during the first three months of my company if he could settle his invoice two weeks early. He did and it saved us from folding the baby business.
• invoice on-time (for customer payment schedules) or early if acceptable;
• to keep payments timely, follow up all invoices before the payment is due (check, for instance, that the paperwork is correct and that the invoice has reached the accounts payable person, in other words you don't need to appear to be chasing payment);
• make sure your prices include a good gross margin (revenue less cost of goods sold), i.e., not including fixed overhead costs like rent or utilities;
• ensure economical customer acquisition—the process of: promotion→inquiries→prospects→customers (can even include using public transport or budget hotels...) and give super customer service to ensure new sales from existing customers;
• get all or part payment up-front from customers or get them to write you a letter of credit, or at least see if you can get stage payments;
• negotiate electronic payment of your invoices (the cash arrives quicker);
• offer a discount (say 5%) for automated payments for regularly invoiced sales or subscriptions;
• request extended trade credit from suppliers (this may only be obtainable once you prove to be a good payer), but don't hesitate to speak to the owner or the accounts payable department and don't forget to compare credit terms with cash discounts;
• see if you can get a conditional sales contract from equipment suppliers (you only get title to the goods when you've paid in full);
• examine leasing rather than purchase of equipment;
• is the equipment you want available re-conditioned or second-hand;
• see how much non-essential work you can sub-contract;
• consider barter (also known as reciprocal trade) for materials or services—Lingualcare bartered equity for workspace with the landlord and got cubicles from a company that went bust; there are several barter systems available on the Web—you can seek services and offer your own (e.g., www.barteryourservices.com) or you can trade in 'universal currency';
• are joint-ventures viable (they can involve activities with one or more partners)?;
• use your networks—you'll be surprised how much help there is and how many ambassadors for your business there are out there;
• collaborate, for example on purchasing expensive capital items, especially those that you don't use full-time;
• build a virtual team rather than hire— ask me (will @ worksavvy.ws) for my article Virtual Teams and How to Build Them Without Payroll and see where you can get low-cost or no-cost bodies (e.g., students);
• are there good people prepared to sell on a commission-only basis, especially at the early stage of the business;
• find things you can get for free, especially via the Web, e.g., Open Source software and other useful tools (see Savvy Web-biz); there is a lot shown on WorkSavvy!;
• search the Web for discounts, e.g. at Coupon Mountain (US)—do a search for 'special offers and rebates';
• use JAJAH Web-activated telephony—global VoIP telephony between normal landline and mobile phones, without software download, installation process or headsets;
• do-it-yourself, e.g., print your own office stationery; you can use inexpensive software to help (I use Visual Business Cards—$19.95 and it's super);
• do legal and accountancy preparation yourself; many legal forms can be had for free on the Web and basic accounting tools also (e.g., free legal forms or lectlaw both for the US) and Web-based services exist for basic legal services. For example there is legalzoom.com that provides online work on corporations, LLCs, DBA (Doing Business As), copyrights, trademarks as well as personal legal services;
• Look at the costs of Outsourcing (anything!); this can be an option for accounting and tax preparation for example; a visit to outsourcing.org may be revealing.
• find group healthcare schemes through employer or other groups (e.g. chamber of commerce) and find out if group insurance or indemnity policies are available through trade association memberships;
• look at invoice factoring, but it is often expensive and a long term contract is often required so you can't do it as-and-when, plus the customers are paying them, not you
• credit cards are often used, but they are dangerous way to go, given high interest rates and compound interest (see above);
• here is a novel means of financing if you are already in business and accepts credit cards: Express Funding Group has formulated a business unsecured cash advance program that is based on a hidden asset "Credit card processing receivables".
• carry no excess inventory;
• share workspace or find others with under-utilized space, especially where they are in a complementary business;
• have no fixed workspace until you absolutely have to. Try a free wi-fi serviced café. Delicious Monster, a software firm, is headquartered literally inside one, the Zoka coffeehouse near University Village in Seattle. Under a special arrangement with the manager, programmer Wil Shipley and his two-man crew work there each day.
• negotiate bank loans before you need them, not in desperation;
• take advantage of any public grants or incentives that may be available, but don't build your business plan on the basis of this kind of finance;
• seek soft loans or loan guarantees that government institutions offer for small business or minorities;
• pitch your business on line at no or lo-cost: you can find examples of how to do this at my post on the Entrepreneurship Blog; among those I mention, vator.tv is great value—upload a video pitch free. So is Businessplanposting—regioster for free and get all kind of resources, an post a plan 'snapshot' for free, but look at the others, too;
• you will find your own bootstraps, they are your boots, after all—I did (a bank at the time was offering royalty-based interest linked to turnover and my former company that was prepared to give me 12 months to pay for assets of the division I used to run);
• and last—do cash flow forecasting as prescribed above.

There is a lot of current air-time given to the concept of "extended enterprises" or those that outsource many functions, especially those under the heading of Business Process Outsourcing (customer relationship management, invoicing and accounting, IT and other staff functions that were always carried out in house and considered 'costs'). However there is a hue and cry in developed markets against outsourcing because it's alleged to be exporting jobs and devastating economies. However the concept of an extended enterprise is much more inclusive and allowing jobs to be done where they are best done and freeing up energy for core and creative activities. Another form of bootstrapping likewise has an unseen benefit: "innovation networks" involve collaborative R&D pulling in strengths that may not be available within the business. Such partnering is more than simple subcontracting (a flow of money in one direction and brainpower in the other), since they mutualize the benefits. In WorkSavvy there is emphasis given to the importance of listening to customers and using feedback to enhance or change the product/service offer. "Co-creation" goes further. It involves getting the customers directly involved with product development. Get creativity and loyalty in one go!

Want to read more? Then download Seth Godin's Bootstrapper's Bible. It's free.

A great resource is the blog: bootstrapme.com, "How to bootstrap your business to fame and fortune" where you will get all kinds of ideas as well as links to videos, other botsrapping blogs, and many other resources, thoughts on entrepreneurship and tools as well as how-to guides for you to use .

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Finance Foresights for Small Business Startup: Ideas for the Back-Burner

Here are a few finance ideas that you may want to keep up your sleeve or write on your cuff:

1. Think about valuation of your business from the start. Why? Not because you are necessarily going to try to sell it one day, but it will help you get a sense of worth. Not simply financial worth, but also the worth of your efforts in a much wider sense. Valuing a private company is a hazardous activity and depends on who is doing the valuation and why. You will almost certainly consider it to be worth more than others do. The approaches to valuation are broadly: the market approach (what are other comparable companies worth—using multiples of earnings, earnings per share, sales multiple, cash flow, book values?); the income approach (recognizing future earnings by discounting present predicted earnings); the asset-based or 'cost of entry' approach (based on the cost of replacing the assets). This is a big subject and not appropriate to examine in detail here, but give it thought! Don't forget to think not only about hard numbers and soft figures like projections, but also the intangibles (like those in #5 below). And a valuation scheme or process will be needed for the next foresight (#2).
2. Whatever the scale of your startup, it is a good idea to consider whether you envisage employee stock ownership (ESOP), either from the start or later. You may like the idea of an ESOP for all your people, or you may want to offer stock or options to key members of your team. Giving some consideration to this early and depending upon your objectives, may lead you to different kinds of corporate or capital structures. This also concerns the next foresight (#3). For example, in the US up to 25% of covered compensation can be contributed in all ESOPs, whether C or S corporations, so there are tax advantages both for the company and the employee.
3. Tax planning is not something to spend over-much time on at startup, but it is worth considering ahead of time (i.e. before the end of the tax year). How much cash should be accrued to settling your eventual tax bill? Don't let it creep up and surprise you later. Some tax-saving advantages have to be taken during the tax year or they may be lost. If tax is paid on a pay-as-you-go basis then you don't want to be having to claw back money if you have overpaid. The timing of income and expenditure needs considering in advance and provision for bad debts (you won't have any!) will have to be made before the year end. Bonuses or stock-options, likewise. Treatment of losses across tax years need consideration. Amortisation (depreciation) of fixed assets is an issue not only to consider from the tax point of view, but also for your own management accounting (you don't want your balance sheet to give you a false reading). In family companies, you'll want to seek the best tax treatment for salary vs. dividends and pension contributions. A savvy accountant will be able to guide you on all these matters.
4. While you are busy starting your enterprise, development costs may not be on your mind. However, market, product, geographic and other kinds of development must be part of your thinking from the outset. If you do not set a budget for development, you will get caught out by the natural life-cycle of your business and what it offers and suddenly find you sales are drooping. In 2004, a mere 17% of Inc. 500 companies stuck with their original product and client list and: 71% pursued new markets and distribution channels; 54% pursued partnerships & joint-ventures to extend products and markets; 52% developed new products and distribution channels (Inc. 500 companies had an average of $165K sales per employee in 2004).
5. Protecting business name, brand and trade mark values (and domain names) when you have only just come up with them, may seem a bit far fetched. But just imagine down the track having to change all your printed and other materials, let alone recouping all the energy invested in the name or brand. There has been a lot of publicity around Apple Computer vs. Apple Records (the Beatles) where there are vast sums involved, but one month after starting a company, we received a malicious 'passing off' suit. A company with a similar, but not the same, name tried to make some money by (unsuccessfully) demanding damages. Beware! At startup your name(s) may not have a value, but bear in mind that the Coca Cola name was estimated to be worth $67, 525 million in 2005 (Business Week)—talk about brand equity! I have an alliance with a business, product & brand naming and strategic positioning firm. So, if you'd like help in this field, email me (will @ worksavvy.ws) and I'll put you in touch with Phil Davis. If you want more on registration, take a look at Digital Trademarks or, if you're US-based, you can use the Government's Trademark Electronic Application System.

Small Business Financing Resources

Books:

Investors in Your Backyard: How to Raise Business Capital From the People You Know, by Asheesh Advani. This book may be the best $24.99 you ever invest. I would regard it as essential reading for any startup however large or small. Asheesh is the founder of Circle Lending, now Virgin Money, sets up and manages business loans by family and friends. It's packed with useful information and guidance on loans and equity as well as being written in a lively style, has case studies and comes with a CD with many of the documents needed for formalizing a loan. The bulk of the book is devoted to loans rather than equity, for the very good reason that at the earliest stage of the life of a business, searching for equity will rarely make sense. The effort and time required will be justified in very few and special cases. Equity capital is hard enough to find and is virtually never forthcoming for the launch stage of your business.

Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money by Greg Gianforte, an bootstrapping entrepreneur; the book is stuffed with good ideas. Greg considers that bootstrapping is the quickest and surest way of building a solid business and having lots of cash only delays the onset of the learning process. If you happen to live in Montana, then you will want to know that Greg has set up Bootstrap Montana that has a Loan Program to create jobs in rural Montana by providing Montana entrepreneurs with 0% loans for projects which will provide fast return on investment. Bootstrap Montana seeks to loan funds to Montana entrepreneurs who embrace the business development philosophy of growing a company without the aid of outside equity investment capital.

Teaming Up: the Small Business Guide to Collaborating with Others to Boost Your Earnings and Expand Your Horizons by Paul and Sarah Edwards & Rick Benzel. This is a 1997 book that should be on your shelf today. It is filled with inspiring and very practical ways to collaborate.

Keeping the Books: Basic Recordkeeping and Accounting for the Successful Small Business by Linda Pinson is exactly what it says. it is a very useful book, regularly updated, with lots of usable forms and worksheets, as well as copies of many IRS forms necessary for the small business. I use it myself.

Software: The obvious choice for very basic small business accounting software, without the sophistication of balance sheets and the like, is Quicken Premier Home & Business.  If you are a home-based business , then this may well suit you. There is also a Quicken Mac.

However, if you are seriously in business, you should consider QuickBooks, Quicken's bigger brother, which is specifically designed for small business If you feel you want hands-on experience first, you can download a free version (cut down and with up to 20 customers and vendors). Click one of these links and download QuickBooks Simple Start.

I suggest that you Compare QuickBooks 2008 Editions where you can consider all your options from the online version at $19.96 a month and all the various desktop editions, even the Simple Start Plus Pack at $79.96, that will give you more capacity and some extra facilities over the free version. With this you can migrate to higher level additions. Also it is worth knowing that if you and your colleagues or bookkeeper do not use the same operating system, you can transfer files between Mac and PC.

The QuickBook Pro 2008 edition is good for fast and easy financial management. and the QuickBooks Premier Editions 2008 give you comprehensive financialmanagement and planning tools to help take your business to the next level. They also have QuickBooks Solutions For Your Industry. QuickBooks has support in Australia, Canada, China, Germany, Hong Kong, New Zealand, Phillipines, Singapore, South Africa, Thailand & United Kingdom.

If you are not an accountant or there is not one in the business, you'll be well advised to seek out a QuickBooks Pro Adviser to help set up your accounting system, even if you do want to do your own bookkeeping. You can find one of these at the QuickBooks site or by asking in your neghborhood or looking in the Yellow Pages. I have also found that many bookkeepers who are not official Pro Advisors, still nonethless know QuickBooks backwards and can give you all the help you need.

You may think I am going on about QuickBooks... I am, because it is my view that it is not far off a must for the startup. Plus, it has a whole range of nice features that make the product almost into a customer relationship manager and a stationery design package. You can record a lot of customer and vendor  information in one place and import to and export files from your office and image software.

I am happy to say that I am a QuickBooks Affiliate, but not I hasten to add a ProAdviser. Though if you do decide to go the QuickBooks route, I thoroughly recommend that you take a short training course. You are very likely to be able to find one locally. I did mine with our local Community Action Program during 8 hours over a couple of days. I am no bookkeeper, but I found that it was $90 well spent.

Links:

Online Accounting Resource. Harold Averkamp's free accounting resource. Learn (US) accounting principles, debits and credits, financial ratios, breakeven point, improving profits, and more. Accountingcoach.com's online accounting resource will help you become financially literate.

Virgin Money provides a full range of services for reducing financial risks, administrative hassles, and emotional pitfalls of interpersonal loans between relatives, friends and other private parties. It is well worth visiting the site and downloading their Business Builder. It is full of good advice and details of what the company's founder calls the Kitchen Table Pitch for a loan to your family or friends.

BusinessFinance.com. Search the funding criteria of over 4,000 sources for business loans, venture capital, equipment leasing and commercial real estate financing. Corey Price's (US) site that can match finance to your needs—free.

Ideas Café's First Year Budget Worksheet. This is nice and simple and you can use it before you get cracking with your spreadsheet or business plan software.

iBank uses the Finance Center solution to provide an online commercial lending marketplace for small business loans, commercial mortgages loans and equipment lease financing. The FinanceSuite offers the small business a way to create a professional Digital Loan Package (DLP) on the Web then connects this Digital Loan Package to over 229 lenders. Through a single application the Finance Center stores the business plan, management overview, financials, pictures and other documents which pre-populate numerous lender loan applications for financing from $500 up to $50 million.

The Infon Venture Capital Database is fully searchable and free. There are advantages for subscribers. This is an amazing compendium of information about VCs all over the globe. You can search by criteria (including by stage: seed, early, later, IPO, public, buyout or other), by website, contacts (including email addresses).

The University of New Hampshire Center for Venture Research publishes a has created a nationwide list of US venture capital resources (not including angel investors) to help entrepreneurs in their networking process of finding early stage capital. You can order a copy for $40.

If you want data on VC funding in the US, a great source is the Money Tree Report™ that comes out quarterly; it's from PricewaterhouseCoopers & the National Venture Capital Association (US).

VC Fodder looks at the world of entrepreneurship, venture capital and technology.

Entrepreneur magazine publishes a list of the top venture capital firms for entrepreneurs each year—the VC 100.

Angel Capital Association Directory for North America have a directory of members—a good place to start if you are looking for business angel funding in the US.

Investors' Circle is a US network that seeks early, expansion-stage companies or small venture funds whose businesses address significant social or environmental issues. Applications are taken only from companies in Energy & Environment - Food & Organics - Community & International Development - Education & Media - Health & Wellness. Companies that are most likely to find interest within Investors' Circle membership will have a combination of the following characteristics: strong management team; clear understanding of their market(s); legally defensible technology; third party product or business model verification; clear commitment to a social and/or environmental mission.

Village Ventures is an early stage venture capital firm investing in exceptional entrepreneurs building technology and life science companies in emerging U.S. technology centers.

Charles River Ventures has come up with an ingenious new (late 2006) product: The CRV QuickStart Seed Funding Program. It offers up to $250,000 in the form of a convertible loan. It starts off as a standard interest bearing loan (without personal guarantee) and converts into equity if your company closes on a new round of (equity) funding. Of course, you would need to be in one of their four sector areas and they look for is outstanding people, with a vision of how their company can play a role in the evolving technology and business landscape—more than a slick business plan presentation, even though that might help. What they says is, "After meeting with a company, we ask ourselves, "How can this become a significant company?" We also assess the capabilities and charisma of the founding team. Can they attract the best employees? Do they have the capability to shift the direction of an industry? If we can visualize greatness, and are convinced that the founders share the same vision to create an industry giant, we're excited."

Inc. magazine's Directory of Angel Groups; very good summaries and advice on appropriate means of making contact to ensure your do not waste your time—or theirs.

Angel Investor News is a monthly publication and has many helpful features including a list of profiles of many business angels. Also if you do aim to pitch, first read guidelines on presentations; it covers not only the content, but for each section gives advice on what questions to expect from investors.

Another list of Business Angels can be found at Startup Junkies.

Deal Flow where you can submit a summary of your venture for a listing that may (hopefully) be spotted by an angel investor.

Accounting Glossary at Venture Line that you can consult or download. The glossary at earlycapital.com is especially good for terms used by angels and VCs (the site is owned by the Venture Alliance that provides greater access to private equity capital to emerging companies).

Try the Dinky Town financial ratios calculator for a quick look at your books; it's a handy tool that you can use on line; it does profitability, current and quick ratio calculations for you.

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Welcome to WorkSavvy / Entrepreneurship & You / First Steps to a Business Start / Savvy Business Planning / Savvy Business Finance / Savvy Marketing / Savvy Business Organization / Savvy Web-biz / Sustainable Business Startup / Savvy Business Resources / About WorkSavvy! / Lift Off newsletter / Contact WorkSavvy : will @ worksavvy.ws 

William Keyser • WorkSavvy LLC • will @ worksavvy.ws