If you are looking for help with metrics, accounting and finance, you might want to check out our book let go to GROW: why some businesses thrive and others fail to reach their potential. In this award-winning book, we cover how to create a winning strategy that drives profits and how to measure your success by developing unique metrics for your organization.
Q. A friend asked me to buy 20% of his small business for $100,000. I’m sure that 20% of the company is worth that much today. Still, I’m worried. Are there things I should think about when it comes to making an investment like this one?
A. You are right to be concerned. Making a minority investment in a privately held company is risky, but we’ve done it successfully. We’ll share what we’ve learned about how to mitigate the risk. You’ve said that based on the company’s current value, it’s a sound financial investment. That’s a good first step. Still, the pitfalls are numerous. Before investing, follow these four tips:
o Why should a prospective customer buy my product or service rather than a competitor’s?
Q. I need some money for my small business. I have been approached by a company that will lend me the $50,000 I need. They only want to charge me 3%. I have to pay them back in one month, but as long as I pay my 3% interest on time, there will be no problem extending the loan for additional months. Do you think that accepting this loan is a good idea?
A. Probably not, but let’s explore the situation further. First, you say that they want to charge you only 3%, but that may be a bit deceptive. We suspect it’s actually 3% per month. In other words, if you borrow $50,000 for one month, you must repay $51,500 ($50,000 of principal plus $1,500 of interest). $1,500 divided by $50,000 equals 3%.
You say that it is no problem to get your loan extended for an additional month. If you do that for a year (12 times), you would pay $18,000 in interest (12 times $1,500). However, $18,000 divided by $50,000 is 36%. Therefore, even if you only keep the loan for one month, you are paying an interest rate that is 36% per year. Of course, you’ll never hear one of these lenders say that they are charging you 36%. That rate doesn’t sound good, does it? Nevertheless, that’s what it is. You wouldn’t dream of paying that interest rate for a home loan or a car loan. In fact, most credit cards offer better rates.
Q. There's often an assumption that growth is almost always good for small businesses. If revenue is at $500 thousand, $1 million would be better. Once you're at $1 million, $2 million is better. Does that assumption hold up? Is growth always good?
A. There is an oft-repeated mantra in business, “Grow or die!” Many people subscribe to it. The problem is―it’s wrong. In conducting research for our book, Let Go to Grow; why some businesses thrive and others fail to reach their potential, we encountered numerous business owners who debunk this myth. They have successfully operated very lucrative businesses for decades, but have made conscious decisions not to grow their enterprises.
My small business is doing well and making money. My business is starting to accumulate some cash. I’m thinking of taking some cash out of the business, but how much cash should I keep in my small business?
A. First, congratulations. In general, accumulating cash in your business puts you in a very good position.
In any business, liquidity is important. You need enough cash to pay your obligations. That is, over time the amount of cash that flows into your business must be greater than or equal to the amount of cash that flows out of your business. You can endure negative cash flow in the short term by dipping into reserves, selling assets, or raising capital (either debt or equity). How long you can sustain negative cash flow is a function of the size of the hole you are digging each month, how much reserve you have and your ability to raise cash. Nevertheless, you will eventually have to achieve positive cash flow or the business will go bankrupt.