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Archive for the ‘Where the dollar meets the register’ Category

It’s a common frustration for small business owners that banks seem only willing to finance companies that don’t need it. It’s pretty standard that to get a bank loan a business has to have multiple consecutive quarters of profitability. That seemed pretty conservative to me, but after a couple years of working with bootstrap small businesses I’m beginning to see why that might be necessary protection.
Bootstrapped startup and young businesses are wonderfully creative in their ability to make-do. As a business grows and generates more resources, it doesn’t become profitable right away. Those early years of business growth end up steadily funding capacity building. As a business has more resources, those resources go not only into growth through marketing, or asset building with equipment and facilities, but professionalization where previously there’s been make-do.
Obvious and common sources of “hidden funding” are underpayment or non-payment of founders or early staff. Understaffing and working folks long but unsustainable hours is common. Family members might work in the business for free. When building financial models, staffing is one category where educated guesses can be made about what it should be to support a target level of business, and so this one is less hidden, but still difficult to assess.
Making do with word-of-mouth advertising can work when a business is small, but to grow into a fundable company it will need to move beyond personal social networks and be able to develop a clientele based on its marketing & sales reach. That costs more money and changes margins on sales. Upgrades of equipment and facilities are likely in search of more efficient process, or lower risk.
Professionalization where there is currently make-do is a more subtle version that requires more attention. Bookkeeping needs to be done by a bookkeeper, not Aunt Jane. Software and technology needs to be legally purchased with regular investments for backups, replacements and upgrades. Office furniture and facilities, if cobbled together from craigslist, is a very likely expenditure as a company becomes able to afford it. Rent may be subsidized by a supportive launching business or relative.
How much growing funds are dedicated to upgrades and improvements before they’re ready to be peeled off to fund additional financing is going to vary a little bit from company to company. Does this CEO feel pinched by their 2nd hand desk or do they take pride in their own thriftiness? Is their affordable tech support person a local gem or are they having to wait for more profitability to afford better service? It does seem impossible as an outsider to assess what remains as not-yet-funded internal capacity in any given company. Instead, insisting that a company generate cashflow for a sustained period is a very tangible measure of its ability, and that CEO’s willingness, to operate at a given internal capacity level.

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I’ve been deep in a small local biz (revenues < 500K annually) and it has given me a good view on some specifics of why small business is so difficult. I’ll put high on the list the challenge of not being able to afford full-time people. Instead, small business is a cobbling-together of part-time and volunteer labor. Volunteer labor is particularly important, I have yet to encounter a small business or startup that does not in some way utilize it: the founder working for no or low pay for starters! Usually a family member or good friend will pitch in, and frequently dedicated customers as well. I have yet to see any studies on this, and I was saddened to see KIRO try to make a fuss over the use of volunteer labor in a local NW business.  That business was able to go back and pay everyone minimum wage, but most businesses would not be able to. It’s part of what makes a local business connected to and accountable to the community.

The part-time labor is also a challenge. Coordinating tasks and turning things around get more complicated when the designer only works on Mondays and the Project Manager for a particular project only works on Tuesdays. There’s pretty much a minimum one-week turnaround to get anything done because it takes that long for all the relevant staff members to cycle through! Need to contact a small business? Try to have a little patience when they’re not online 24/7, and realize they probably don’t have all your info and transaction history in a database at their fingertips. We’ve been trained to expect that by larger companies.

Both an upside and a downside is that jobs really are about individuals and not pure roles. In this manufacturing business, labeling is not a bottleneck because of Josh, he’s a champ. However nobody else can label as fast as he can, so should we budget for a labeling machine or should we budget for a food processor? Credit is very personal at this level as well – a startup doesn’t have the history or credit for formal bank lending. Credit is the personal credit of the founder – in a formalized way through personal guarantees or personal assets, and in an informal way by getting favors from other vendors based on personal relationship – being able to delay a payment, or borrowing equipment, or negotiating a lease.

I’m really noticing how growing a business is about steadily reducing risks – growing to hire people full time so they’re more likely to be there for you when you need them; having buffer room in the budget so unexpected expenses hit the balance sheet and not the owner’s pocket; being able to experiment more on product or placement innovation; being able to sign more contracts and get preferred pricing. Those are the efficiencies of scale – it’s about negotiating power more than just about volume, and about focused attention and commitment from stakeholders & partners that reduces frictional costs.

One way to get past many of these things quickly is to raise a bunch of equity and start operating at a higher level, but food businesses tend to be low-margin and can’t promise a return on significant equity. The steady risk-mitigation of organic growth seems to be a necessary path.   Luni of the Fledge Accelerator refers to these as “earners” vs “burners”. Earners being the organic growth path, and burners being the quick equity and try to scale quickly path. A frustrating trend we’re starting to notice is that high-risk money is coming into the food/ag sector where the business models can’t justify it. In the 3-5 years it’s going to take to lose enough money that risk-takers stop flooding it in, those “burners” that get funded will distract partners and resources from the “earners” that could actually sustain and thereby starve them in the short term.   It’s yet another example of how our capital funding system is broken.

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I’m working with a small coffee shop on profitability and I’ve been working on managing inventory.  At MBA school we learn standard inventory management methods and how important it is to track, but it’s not so easy to implement where the dollar meets the register.   For starters, perpetual inventory with food is really challenging – we’d need a super detailed POS system which is expensive.  I’m starting to see why my banking school instructors said they think 50K is a minimum for starting a successful business.  Without technology your business can’t be very efficient, and you’re competing against businesses that do have technology.  It seems the only other option is to be such a small business that one person can track most of it in their own head and have really good intuition.

That leaves me with periodic inventory, which I don’t mind except that Quickbooks seems to handle it poorly.  So I’m currently in a bit of a chasm between what I’m able to do with Excel pivot tables and what we know how to do in Quickbooks.

I do see a purpose for the oft taught “reorder point” setting even in our small-inventory setting.  It would help us generate the weekly shopping list.  I’m also discovering an inventory challenge I didn’t learn about in business school – how to construct a minimum order.  As a very small business we are challenged to meet vendors minimum orders – in some cases to order at all, in other cases to get at least a first level price break.  For example:  as a coffee shop we order all our flavored syrups and some other products from a single vendor.  We’re running out of our most-used syrup so we need to make an order. Just ordering a case or two of that syrup doesn’t meet their minimum order, so what else should we order, and in what relative quantity?  I’d like to analyze the relative consumption of goods that we order from that vendor and construct an order to the minimum amount that matches our needs.  Anyone know of a quickbooks plugin (or other inventory package) that can do that?

Another challenge – like any good business we work to keep our inventory thin. Well, we don’t have to work too hard at it, we have neither the physical space nor budget to get too fat.  However it seems to be a fairly common occurrence (every other week maybe?) that some item we use is not in stock when we go to purchase it.  I’m learning that Cash & Carry seems to be a sort of discount supplier that will always have some variant of a product available, but it will vary: IE sometimes the napkins will be bleached and sometimes they’ll be recycled.  Ditto for the paper bags of the size we like.  That is a problem I’m sure larger businesses deal with as well, perhaps by padding inventory, or by getting big enough to have better relationships with their suppliers.

Another suffering of the very small business – data entry.  To track all this requires hours of typing in numbers from paper receipts.  Where’s the EDI interface for Cash & Carry or Costco?  No wonder so few business owners do it, but without it you’re missing a key advantage.  I’m beginning to think that broad support for data and analysis for small business owners would be a huge support for economic development.  It amazes me what a lock QuickBooks seems to have on the market.  Small suppliers don’t seem to offer much in the way of Electronic Data Interchange,  but I’m just beginning to look.

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