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The 9 Biggest Financial Warning Signs

The key, like any illness, is to catch the symptoms early, so that you can begin to identify the causes.

Brian Hamilton

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Money

When you’re running a business, the ultimate sign of financial distress is usually running out of cash – you just don’t have any money left.  However, even though it seems obvious, running out of cash is almost always a symptom and not a cause of business failure.

In this article, I outline a few warning signs that financial trouble is nearby (or that’s it has already started).  I’ll start by identifying a few telling symptoms, and eventually go down to the typical root causes of financial distress.

The Symptoms:

1. You’re struggling to be profitable.

I realise in advance that this is very obvious.  Yet, in a market where it is easy to raise capital, this is not always an incredibly clear one– it is sometimes lost on even talented business people.  No matter what anyone claims, an unprofitable business is, by definition, a business at risk.  When there isn’t a clear path to profitability, the business is forced to raise money outside of itself, which opens up an entirely different world of risk.  The business relies, not on itself, but on others.

2. Your margins are slipping (gross or net).

A margin is taking a profit number and dividing it by sales. Gross profit margin (gross profit divided by sales), usually measures a company’s ability to manage its most important costs. Margins are always expressed as cents on every sales dollar.  Net profit margin is a company’s net profit divided by its sales.  Often, the net profit margin of a company is far more important than the amount of dollars in profit that a company is earning.  This is because net profit margin is typically an indicator of how profitable a company will be as it grows.  In my experience, even financial professionals do not put in enough time into understanding margin performance.

Related: Become Your Best For R500 (Or Less)

3. Your sales are stagnant or decreasing.

Again, this is an obvious one, but healthy businesses grow.  Like the biology of plants, something is either growing or dying.  Sales dollars are used to pay for expenses, so there is a clear financial impact of not having as much sales money available to pay for expenses; however, the very dangerous part of sales stagnation or decline is that it usually indicates a lack of customer acceptance, which is key to any business.   There is no better barometer of market/customer acceptance than revenue

4. Your rate of sales growth is declining.

This is something to watch out for, and it’s a fairly subtle point.  Even if your sales are increasing, you have to keep an eye on the rate of growth.  Is your sales percent change higher, year over year, for this year, than it was last year?

If not, it may be a symptom of financial issues.  One very important note: it’s natural for companies, as they grow bigger, to start seeing their rate of sales growth go down.  It’s much easier to “double” your sales when you had $1000 in revenue last year than it is when you had $100,000,000 last year.  Still, it’s important to keep your eyes on the rate of growth.

5. You are profitable, but do not have positive cash flow from operations.

It would take too many words to explain this in full, but it is very possible to be profitable and still not be generating positive cash flow.  At some point, all businesses need a good accountant—one who is experienced in financial analysis and who can help you navigate through this issue of liquidity.

Not all accountants are good at financial analysis, so this may take some digging on your end.

Related: No Funding? Build From The Ground Up

The Causes:

6. Renewal sales, inbound leads, or other metrics related to market acceptance are flat-lining.

Most companies live and die on the stickiness of their product— i.e., repeat business and word of mouth.  The market tends to be efficient, and customers tend to make good purchasing decisions.  A company should have metrics by which it can evaluate how solid its customer relationships are.

Most businesses have unique ways to measure the stickiness of customer base – renewals, repeat business, Yelp ratings.

When these metrics start sliding, it will eventually have serious financial consequences and will likely manifest itself in some of the symptoms listed above.

7. Your employee turnover is getting higher.

While it’s true that each industry will have specific challenges and rates of employee retention, significant changes in employee turnover tend to be an early warning sign that a business is in trouble.   Sometimes this is measured, erroneously, by changes in key personnel.  I’m more interested in overall employee retention changes.

8.  The product or service you offer is decreasing in quality.

You need objective metrics to measure the quality of your product.  This is very closely related to point number 6.  Ultimately, marketing, public relations, and “buzz” can only help you to a certain extent.  The product’s quality should speak for itself.

You want to be offering a product whose quality is so high that, in order to lose, you have to virtually everything else wrong.  This must be tracked internally by the company, not just by customers.

9. Your office/workspace/headquarters looks messy.

In my previous consulting career, I got to the point where I could walk into a business, and pretty much know immediately if it was doing well or not.  Are the bathrooms clean, are the floors clean, what’s the condition of the paint?  Do people care about the company? You’ll be able to tell by how they treat their workspace.

This article was originally posted here on Entrepreneur.com.

 

Brian Hamilton is the chairman and co-founder of Sageworks. He is the original architect of Sageworks’ artificial intelligence platform, FIND, which is the leading financial analysis technology for analyzing private companies and is used by thousands of accounting firms and financial institutions across North America. He has dedicated his life to bringing greater clarity to financial statements and to increasing financial literacy among businesses. Hamilton regularly leads discussions on private company performance, the financial strength of companies preparing for an IPO and entrepreneurship in major business and financial news outlets such as CNBC and The Wall Street Journal.

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How to Guides

6 Hacks For Getting Clients To Pay You Faster

Almost everybody pays eventually but almost nobody pays sooner than they have to. That’s a problem.

John Rampton

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client-management

Getting your clients to pay you on time is a real hassle. After a sale, it is easy to think you did your job and just relax. Nothing is set in stone until the payment is final.

Not getting your payment on time can be detrimental to your company. This is especially so if you need or were expecting that money to come within a certain timeframe. It is frustrating, and there is a fine line because often you are working with people who could be recurring, valuable customers.

Therefore, it is critical to you find ways to get paid on time. Here are seven hacks to avoid the hassle and get paid faster:

1. Set payment expectations early and give gentle reminders

From the onset, ensure that your clients know what their cost and payment schedule look like. You do not want to give them any reason for confusion or an excuse not to pay on time. Make it crystal clear when they need to pay by and how much they will need to pay. It will properly set their expectations to avoid surprises.

Related: 4 Types Of Clients Your Growing Business Can’t Afford To Work With

Offering gentle reminders about an upcoming payment can continue to keep their expectations in check. They might not be prepared to pay if they signed their contract three months ago and forgot that their payment date was tomorrow. Instead, put the pieces in place to ensure, with total certainty, that they know how much they will owe and when they will owe it.

Poor communication also sets a poor standard with your clients. It will give them the message that they can receive your services without having to pay on time. It is hard to change this precedent. Therefore, being consistent and straightforward from the very beginning will help you keep these payments coming.

2. Follow up

Do not hesitate to follow up after sending the invoice. Your clients are busy. They likely overlooked a payment if they did not make it. You can send friendly reminders to pay after a few days have gone by. No one minds a gentle follow-up as it demonstrates your ability to act professionally. I built my calendar app for this very reason. Follow up frequently till they pay.

Streamline the payment process as much as possible. There are some awesome tools to help collect payments today. The less time it takes your customers to make the payment, the faster you will get paid and the less hassle you will deal with. It is worth the upfront investment to set up the right systems in order to get faster results.

When possible, take the payment upfront, too. This way there will not even be an issue of getting them to pay. Today, people are more comfortable paying for a service before they see its full value in. Take advantage of that.

3. Offer small incentives for quick payment

Offering incentives for quick payments will speed up the process and build customer loyalty. Customers know they are going to have to pay at some point. If they know that making the payment immediately will give them an additional benefit, then they will often do so.

You can even form these incentives around your product or services. It could be sending company stickers, access to an additional feature, or a free week of service. This will reward them for paying on time and give them further reason to continue coming back.

4. Send the invoice to the right person

At larger companies, it is crucial that you send the invoice to the right person. When your clients are originally agreeing to pay, make sure they know how that payment will take place. It takes two minutes to discuss who will be making the payment, and it will save you significant stress on the back end.

Related: Great Places To Take Your Clients When Networking

5. Establish personal connections with clients

You might not always have the bandwidth to do this, but getting to know your clients will give you a much easier route to payment collection. In the case that someone has not paid, you will feel more comfortable asking them. It is easier to send a quick reminder to someone that you know than it is when you feel like you have to be more formal. Personal connections with your clients will ensure you get your money faster.

6. Think about the little things

There are a variety of small factors that add up to improve the speed in which you receive payments. Think about the time of day that you are sending the invoices out, the styling of the invoices and the actual content within them.

Related: How to Get Clients When You Hate Asking for Business

You can streamline the process with a clean and concise invoice. Make it visually appealing and include descriptions of what they are paying for. The process will slow down if you make mistakes. Instead, take the extra time to make sure that everything looks as it should.

This article was originally posted here on Entrepreneur.com.

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How to Guides

Why Bartering Can Be Your Untapped Revenue Source

More organisations are experimenting with cash-free solutions. Here’s how bartering may drive the future of B2B commerce.

Andrew Medal

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business-barter

Many small- to medium-size business owners have begun to barter, trade and swap goods and services without any cash involved.

Take the city of Portland for example. Unsurprisingly, the culturally tight-knit and self-proclaimed weird city has given rise to a thriving underground bartering network. A recent Rolling Stone article showcased the colorful personalities and supportive business community that is Portland’s bartering economy. Some of them call themselves “swappers,” others simply identify as community-oriented business owners. All of them share a common bond of exchanging goods and services to help each other grow.

The trouble with traditional bartering like this is that it’s incredibly difficult to scale. The idea of a coffee shop exchanging beans for fresh food from a local grower is nice, but any business looking to expand can’t possibly expect that kind of barter to lead to scalable growth.

That’s what gave Bob Bagga, CEO and founder of BizX, the idea to create a community that enables businesses to turn their excess capacity into potential capital. Bagga explains:

“By using the BizX dollar, businesses are able to turn extra business capacity and assets into cash flow, which can, in turn, be spent at member businesses without any cash involved. The goal for us is to reduce waste, maximise member potential and help companies earn new customers.”

Related: 5 Research-Backed Strategies To Increase Your Sales Revenues

By creating a complementary currency to power commerce through the sharing of excess goods and services, Bagga and his team have given business owners a chance to create cash-free lines of capital for little more than their incremental cost of goods sold.

Cash-free capital

Most business owners have plenty of great ideas to grow, but lack the capital and cash resources needed for those growth initiatives. Take a restauranteur, for example. Expanding or upgrading the restaurant may be their desired path for generating increased revenue, but the cash required for such an undertaking might not be readily available.

What if that same restaurateur was able to exchange empty seats and excess food for a shared currency that they could then spend at other businesses in the network? While trading one meal with a contractor might not result in enough capital to exchange in return for a major overhaul, many units over time will eventually add up.

That’s precisely why business owners are looking for alternatives to traditional financing and venture capital raising. Those models, though effective, often edge out small- to medium-size businesses in favour of rapid growth SaaS companies or user-heavy business models.

As a result, businesses looking at growing should explore growth opportunities that require little to no upfront investment.

The future of B2B commerce

B2B companies often operate at less than their full potential. Bagga pointed out that small businesses in the United States, on average, only run at 80 percent capacity. In many cases, this is simply because connecting with new customers presents a real challenge.

Also, most B2B companies have excess business potential because they offer products or services that could field more customers at a small marginal cost of goods sold. As such, many can afford to accept an alternative form of payment, as long as they can use it for other practical applications.

Related: 5 Strategic Steps to Help You Double Your Revenue Next Year

While traditional bartering usually doesn’t result in additional cash flow, companies that are able to exchange services based on a shared or complementary currency can determine when and how to spend their newfound capital. Many will use that for marketing, advertising and public relations services that would otherwise have been too costly.

Cash flow isn’t always confined to exchanged services either. In many cases, these unique partnerships result in cash business resulting from direct referrals from services rendered in exchange for other goods.

This article was originally posted here on Entrepreneur.com.

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How to Guides

The Steps Involved In Joining An Investment Holding Company For High Growth

There are many growth capital avenues available for established entrepreneurs. One of those is joining an investment holding company. Is this the right move for your business?

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Let’s say you’re a high-growth, high-impact business that’s reached a ceiling; a point at which you need to seek investment partners as a growth tool. Many mature businesses approach an intersection at which it becomes clear that they need to unlock capital, identify mentors, or collaborate beneficially with other subsidiaries.

If your goal is to join an investment holding company, what are the steps involved and what can you expect from the process?

Sustainability and scalability are the key

To begin with, it’s important to clarify the difference between a private equity (PE) investor and an investment holding company. PE investors need to go into an investment knowing what their exit strategy will be, while groups choose to invest in businesses that have shown themselves to be sustainable and scalable. As long as they continue along that road, the group is more likely to hold onto them. You are also a member of that group, and subject to its board.

In the case of MICROmega, we seek first to understand the business. If we are able to do that, we look for sustainability and scalability, and if these characteristics are clearly evident, we go on to pursue an investment opportunity. This is typical of investment holding companies.

Related: Dragon’s Den Polo Leteka Gives Her Top Tips To Attract Growth Capital

Once we become the investment holding company, we try to remove as many of the subsidiary’s distractions as we can: Alleviating administrative and financing burdens so that business owners are free to focus on growing the business. In our experience, growing businesses become more and more administratively intensive, which can bog entrepreneurs down.

This is ultimately a partnership, so everyone should benefit from the association. At the same time, you need to be sure that the investment holding company shares your values — this is a long-term relationship, and you need to know that you’ll be happy down the line.

What would-be subsidiaries need to do

business-subsidiary

1Define exactly what you want

While there are some basic strategic values that any partner should be able to bring to the table — namely, access to capital, industry-specific networks, and economies of scale — it’s wise for an investor-seeking business to have a predetermined idea of the specifics that they require from a potential strategic partner.

2Research, and research again

Any long-term investment relationship should begin with extensive research on the investment partner universe. There are many potential investment partners out there, but each has specific investment mandates, sector or industry preferences, and value preferences. Ensure that you can identify and understand these.

3Be clear on your own risk profile

The quantum of funding required will impact the choice of funding partner. When you understand your risk profile relative to the type of returns on offer, you’ll be able to determine, and strive to seek out the most appropriate funding source.

Related: Common Mistakes SMEs Make When Looking At Growth Opportunities

4Unpack your plan for the capital

Businesses seeking to be acquired should be clear on what they will do with the capital to be contributed by the investment partner, and how growth will be achieved.

5Ask the investor the right questions

I’m a firm believer in would-be subsidiaries ensuring that they adequately evaluate potential investors. The starting point is to ensure that the interests of both parties are aligned.

Thereafter, further questions should cover:

  • Investors’ detailed track records
  • Their investment mandates
  • The returns that they target
  • Their typical risk profiles
  • The origins or sources of their funding.

6Ensure a sense of shared spirit

It is essential that the investor and the organisation’s priorities and approaches are aligned at the outset; that they are on the same page. Many things can go wrong between entrepreneurs and financial partners, and the worst outcome is that the investor crushes the entrepreneur’s pioneering spirit.

Related: What Type Of Growth Funding Do You Really Need?

In such a scenario, no one wins. This is why I believe that both parties should be happy, with a sincere sense that they have entered into a partnership that will create value on both sides.

Regardless of who your investment holding company is, you should expect it to provide access to capital and support throughout the business; provide mentorship and ideas around innovation; and help you to create an environment in which you are able to focus on innovating, and not on administration management.


Checklist

  • Do you know what you’d like from an investment partner?
  • Have you thoroughly researched potential partners in your sector?
  • Have you determined your risk profile versus potential returns?
  • Do you have a plan on what you intend to do with any capital raised?
  • Do you have a clear list of questions to ask any potential investors?
  • Have you evaluated whether there is value-alignment?

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