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.

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Metrics, Accounting & Finance

entrepreneur with open signQ. 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:

  • Ensure the business has a sound strategy – If you read this column, you’re familiar with the three questions that every successful business must answer:

o Why should a prospective customer buy my product or service rather than a competitor’s?

shutterstock 105421988 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.

shutterstock 206225593 1Q. 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.

shutterstock 110509937 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.

shutterstock 1714391Q. I’m planning to start a business. I have some investors who are interested in providing the capital I will need. They are willing to take either equity or debt. Even if I give the investors all equity, I’ll own more than 50% of the business. My questions is, how much debt should I issue?

People refer to debt as leverage because with a given amount of earnings, debt will increase the Return on Equity (ROE). Here’s why. There are only two ways to capitalize a business, debt and equity.

 
shutterstock 180748832Q. I run a small business. I pay an accountant to produce financial statements each month, but I have not found them to be very useful. Could I save this expense and just do without financial statements? If I do need them, what can I do to make them useful?
 
A. If your business has any size or complexity, you absolutely need financial statements. Trying to run a business without good financial statements is like trying to call football plays without knowing the information on the scoreboard (e.g., score, quarter, down, distance needed for a first down, time remaining, etc.). Regardless of your coaching skills, it’s impossible to call plays effectively under such circumstances. Yet, in our experience, far too many small business owners attempt exactly this.

“I HIGHLY recommend Polly and Doug. They have wonderful insight to help small business owners prioritize and identify strategies for growth and improvement. Wish I had met them 20 years ago!”

Sharon MaderePresident / Premier Pet Products

My team and I have had the privilege of working with Polly on our business. Polly's keen business insight and savvy is something special. She was honest, direct, and tactful about her observations and recommendations for our team and how to grow our business. It was a pleasure having her help us and I would tell anyone that’s serious about growing their business to call Polly. She’s great!

John O’Reilly, Broker/OwnerBase Camp Realty

“Doug and Polly, I want to thank both of you! The past few months have been enlightening and overwhelming all at the same time. Your guidance, direction, wealth of knowledge, and wisdom have exceeded all my expectations. No words could ever completely describe just how amazing of a “dynamic duo” you two really are!”

Dawn Beninghove, RN, CCM, CRP, PNChief Executive Officer / Companion Extraordinaire Nursing Network, Inc.

“Doug White took on an unfocused operation (in the financial services sector) and created an efficient, centralized system dedicated to excellence. He did this not by driving change from the top down, but by helping the entire team see how their part of the process could be improved. Doug then mentored us toward effecting the changes ourselves. He taught us all how to bring our “A game,” and how to take ownership and pride in what we do.”

Donna LevinVice President of Operations / care.com

"I have had the privilege of working with Polly White for several years on a variety of projects. She consistently provides clear direction on how to resolve a wide range of employment-related issues. I look forward to my continued relationship with Polly."

Elizabeth WilkinsBusiness Manager / Manorhouse Management, Inc.

I have known Polly for more than ten years. As an HR Manager, I have utilized Polly’s training expertise at my former company and with my current company. Polly exceled at assessing the needs of our management teams and tailoring training programs that resulted in visible positive change. I also know I can count on Polly as a resource on any HR topic or bounce ideas off of her when I need a second opinion. Polly has been a mentor to me and I have always appreciated her willingness to listen and offer valuable advice and expertise.

Leigh McCullar, HR Business PartnerUniversity of Richmond

I am truly impressed with the abilities of Doug and Polly White, thank you! What a difference your expertise have made in helping Associates grow in their careers. Your dedication to excellence through empowering the individual and strengthening the Company is enlightening. I do and will continue to recommend Whitestone Partners to the Executive Market.

Suzanne Pittman, MEd VAMAC, Inc.
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