Profit Growth Strategies By Brian Tracy

Transcription

1 Profit Growth Strategies By Brian Tracy Getting the Money You Need Introduction Thought is the original source of all wealth, all success, all material gain, all great discoveries and inventions, and of all achievement. (Claude Bristol) Getting the money that you require to start and build your business is perhaps the most important skill of the entrepreneur. Cash flow is the most important single measure and determinant of business success or failure. Your ability to assure the necessary cash flow is indispensable to your success. Successful entrepreneurs think about revenue and cash flow most of the time. They evaluate every activity of their business to be sure that it has the most positive effect on cash coming in to the company. The number one reason for business failure is lack of cash. Because of low sales or poor management, the company runs out of money and can often collapse overnight. In this lesson you will learn how to: Determine the amount of money you will require Start your business with a small investment Raise money sixteen different ways Continually find the money you need to survive and thrive 1

2 Financing Your Business Money is as important to your business as blood is to your brain. It is the source of life and energy. With sufficient cash, you can deal with any temporary difficulty or setback. Without sufficient cash, your company can fail very quickly. 1. The starting point of financing your business is for you to determine how much money you need. a) Prepare a complete business plan before starting your business. b) Update your business plan every year, based on your experience. c) Calculate how much of your product or service you will be able to sell. d) Determine exactly how much it will cost you to produce and sell that quantity of product or service. e) Determine how much net profit you will earn each month, each quarter, each year. f) Determine your cash requirements based on your answers to the above questions. 2. Entrepreneurial business activities contain a high level of uncertainty and unpredictability. a) Every cost you project will end up costing twice as much. b) Every activity you plan will end up taking three times as long. c) Very few businesses make a profit in the first four years. d) It takes two years in business for you to break even. 2

3 e) It takes two more years for you to generate enough profit to repay your losses from the first two years. f) It is only after four years in business that you will begin to generate substantial profits. 3. The Sigmoid Curve has three phases that apply to business life cycles, product and service life cycles and industry life cycles. a) Phase one is the learning phase, when the entrepreneur focuses single mindedly on sales and cash generation. b) Phase Two is the growth phase, when the entrepreneur makes more and more sales, and generates greater profitability. c) Phase Three is the decline phase, when profits and sales of a product or business begin to fall off. d) You must practice continuous innovation to remain in the growth phase of your business. e) You must constantly introduce new products and services during the growth phase. f) You must constantly improve your existing products and services during the growth phase. 4. Most entrepreneurial businesses fail and lose all the money invested in them within the first two years. a) Most new businesses are financed with what is called love money, which comes from four sources: b) Your own money you invest your own money to start the business. 3

4 c) Your family s money they believe in you and invest their money in you hoping for your success. d) Your friend s money can be excellent sources of early finance because they like you. e) Angel Investors people who know you, like you and trust you, and are willing to risk their money in your new business venture. 5. There are several sources of money that you can tap to start and build your own business. In my entrepreneurial career, starting and building businesses over the years, I have used every one of them. Here they are: 1) Your Own Savings First, and usually the most important, is your own personal savings account. If you cannot discipline yourself to save and accumulate money to get started, you probably do not have the character and discipline to succeed once your business gets going. 2) Sale of assets You can raise money by the sale of assets. You can sell your house, your car, your motor home or some of your furniture. You can sell everything or anything else that you own. You can cash in your life insurance for its cash value. Sometimes you can sell stocks, bonds, securities or liquidate your retirement account to get the cash you need to start your own business. Most people who start a business for the first time end up selling everything they have to get enough money for their own business. 3) use Your CredIT Cards The third source of money that you can tap into to start or build your business is credit cards. Many of the most successful businesses in America were started by people who took out as many credit cards as possible while they were working and possessed a solid credit rating, and then borrowed against and lived off those credit cards for two or three years until their businesses became profitable. 4

5 This is not a great strategy, nor is it a recommendation. Credit card cash is very expensive, sometimes 18% interest per year. But if it makes the difference between going broke and staying in business long enough to turn the corner, it is an increasingly common way for entrepreneurs to launch their businesses. 4) Take Out Personal Loans You can get personal loans. These are loans that are made to you on the basis of your job, your past credit rating and your character. Sometimes you can get a personal line of credit from the bank, based on your assets. You can then use this line of credit to underwrite your business until you achieve sufficient sales and profitability. It is essential that you build up a good credit rating, and that you maintain that rating. If you are thinking of starting a business in the future, it is a wise idea for you to begin borrowing and repaying loans from your bank so that they become familiar with your trustworthiness. 5) Borrow against CollaTEral You can borrow money by taking out what is called a collateral loan. You can borrow against something you own. You can borrow against your car, your furniture, your boat or your motor home. You can even borrow against your house. Many businesses have been started by the business owner mortgaging, financing or borrowing against every single thing he or she owns. 6) love MonEY The basic source of most new business financing, as mentioned above, probably 99%, is what is called love money. Love money is money that people give you because they love you. This is money from friends, relatives, business associates, your parents, and so on. The fact is that new business start-ups are extremely risky, and banks are not in the business of taking risks. They are in the business of avoiding risks. For this reason, very few banks will ever lend to a person starting a business, unless they are convinced that that person has sufficient funds and collateral to repay the loan even if the business is a failure. 5

6 The only people who will take a risk with a new business are the people who love you. They will advance you the money because they believe in you and are hoping for the best. 7) get a BuSInESS Loan Take out a business loan. Business loans require liquid asset coverage of at least $2 for every $1 that you wish to borrow. Business loans also require a minimum of one to two years of successful business history. To borrow money for your business, you will need up-to-date financial statements, plus personal guarantees that cover everything that you own, or ever will own. Many people will tell you not to give personal guarantees when you take out a loan for your business. This is silly. Before a bank will lend you money for your business, they will not only want personal guarantees from you, but also from your spouse, and often from your parents. Banks are not in the business of taking risks. 8) lease or rent The seventh way that you can finance your business is through leasing. Instead of paying cash for cars, furniture, buildings or office equipment, you can make monthly payments by renting or leasing them month-by-month and year-by-year. This is a prudent way to get started, especially since your sales and cash flow are often unpredictable in the early stages of your business. 9) BooTSTrap Your Way to SuCCESS An excellent way to finance and build your business, and one of the most popular and effective strategies in business, is called bootstrapping. Bootstrapping requires that you start small, generate sales and profits, re-invest your profits back into your business and then make more sales and repeat the process. Thousands of men and women who are today millionaires and multi-millionaires began with little or no money and built their fortunes one dollar at a time through bootstrapping. Even though you start slower with bootstrapping, there are certain distinct advantages of this process that make it superior, in many cases, to starting off with a lot of money. 6

7 10) CuSToMEr FinanCIng You can finance your business by using what is called customer financing. With this method, your customers give you the money that you need to produce the goods and services that you sell to them for the money that they ve already paid you in advance. a) ReqUEST a DEPoSIT Many businesses will request a 50% deposit on an order when they make the sale. With this money, they will then buy the raw materials and pay for the labor to produce the product that they have sold. Their profit is contained in the other 50% that they collect upon successful delivery of the product or service. b) SELL a SUBSCRIPTIon Another way of customer financing is the sale of newsletters, seminars and subscriptions of any kind. The customers pay for the product or service in advance, prior to delivery. With a subscription, customers pay for the entire year of the product prior to receiving the first issue. c) DIRECT MAIL SELLIng Direct mail marketing is another form of customer financing. Your up-front investment is in the advertising, but then you take the orders before you fill them and deliver the product. You actually receive the money by cash or credit card before you have to purchase and deliver the product or service. Your customers are actually paying for the business as you go along. d) GET a RETAInER You can use customer financing in consulting or the sale of personal services. Many small businesses start with a person who has expert knowledge in a particular area. He or she goes out and offers his or her services as a consultant on what is called a retainer basis. On this basis, the client pays you a monthly retainer to work with them for a certain number of days or hours each month. In exchange, they give you progress payments, usually on the first of the month. 7

8 If you are working on a consulting basis for several days or weeks, you can bill the customer as you go along, on a weekly or monthly basis. In this way, the customer finances your operations. e) MULTI-LEVEL MARkETIng Multi-level marketing is another way of customer financing. In multi-level marketing, all you require is a sample kit to get started. By demonstrating the samples, you can take orders and collect payment. You can then buy the products from the manufacturer, deliver the orders and keep the profits. f) GET PAID FIRST Many companies use customer financing to get started. They make the sale and ask the customer to pay for all or part of the order when the order is placed. If this is not possible they get the customer to agree to pay upon delivery of the order, rather than waiting 30, 60 or 90 days. They then take this money and pay their suppliers. This is called kiting and is very common in small businesses. You arrange 30 or 60-day credit terms from your suppliers. You sell the product, get paid for it and then turn around and pay your supplier before the bill becomes due. In this way, you have no capital of your own tied up. By selling a product, receiving payment and then paying your supplier, you can actually be in business with little or no cash investment or exposure. 11) venture CaPITal Some companies are financed by venture capital. This is sophisticated money managed by experienced people that is pooled as high risk capital to invest in potentially fast-growth companies. This type of money is well-known but very hard to get hold of. Many young entrepreneurs try to raise venture capital to start their businesses. They are absolutely amazed at how difficult this is. Less than 1% of business proposals received by venture capitalists are ever funded because new businesses are so risky. Fully 99% of all business plans and proposals submitted to venture capitalists are eventually thrown in the wastebasket. Venture capitalists are not in the business of losing money for their clients. 8

9 12) Small BuSInESS AdMInISTraTIon You can often tap into the Small Business Administration, or the SBA. The SBA will look at business plans as what is called a Lender of Last Resort. This means that they will only consider your business plan and your loan application when you have been turned down or rejected by at least two other banks or financial institutions. The good news is that, because the SBA is a government organization, even if they will not approve your loan, they will help you to operate your business more successfully. They will provide you with consulting services at low costs, and sometimes for free. They also have publications, books, pamphlets and so on that can help you in your marketing, financing, selling and other aspects of your business. Many small and medium-sized companies have been saved or turned around by the Small Business Administration. 13) Small BuSInESS InvESTMEnt CoMPanIES You can sometimes raise money through small business investment companies, called SBI s. These are Risk Groups that put together pools of money to invest in small, up and coming companies. They are similar to venture capital groups in that they require some kind of a track record before they will invest with you. Both venture capital suppliers and small business investment companies will require equity in your company. Very often they will require controlling equity, 51% or more of the stock in your business, before they will invest. If you do not perform and generate the profits that you promised, they want to be in a position to take over your company, replace you with competent management, and recover their investment. 14) PublIC Stock offering You can raise money for your business with a public stock offering. During the dot.com boom, many companies were going to market, selling stock and raising large amounts of money even before they had built or sold a single product or service. They were called pre-revenue companies. As it happens, this type of investing, going public in advance of starting the business, had never happened before, and will probably never happen again. 9

10 normally, a public stock offering requires a record of proven profitability, usually for several years. It requires two to three years of audited financial statements. A public offering is done through a stock brokerage firm, which will handle most of the details and then offer the stock to the public and to their clients. 15) SuPPlIEr FinanCIng You can raise cash for your business with what is called supplier financing. Many companies that supply you with goods and services to sell to your customers will offer you delayed billing, if you ask for it. If you have a good track record and credit rating with your suppliers, they will often be willing to wait 60 or 90 days for payment. This gives you an opportunity to purchase products and services, even raw materials, from your suppliers, to produce the goods and services that you have sold to your customers, and then to get paid for them, all before payment is due to your suppliers. With good credit, a person can start a business, make sales, fulfill the sales and make profits long before he has to pay for the products or services that he has already sold. The ability to do this depends very much on your character, your reputation, your credit rating and the confidence that your supplier has in you and your ability to pay. Better Sources of Credit Here is an important note. Smaller or newer customer companies are more likely to offer you credit terms than larger companies. Smaller or newer companies are often easier to deal with because they are hungry and are eager for the business. The key to getting generous credit terms from your suppliers is for you to go and visit them personally. Meet the sales or the credit manager and sell them on you, and your reason for requiring credit. Take along your financial statement. Show them your business plan. Explain to them what you are doing, and very often they will extend you credit and help you to build your business. 10

11 6. One of the most important qualities for business success is the willingness to pay any price to make your business successful. a) You must be willing to risk 100% of your own capital and savings in your new business. b) You must be willing to take on the complete risk of the enterprise, including the risk of failure. c) You must be prepared to work long and hard, 10 to 12 hours per day, six or seven days per week for the first four to seven years. d) You must resolve in advance to persist in the face of every difficulty and disappointment. 7. Your ability to generate the cash flow necessary for the survival of your business is the key skill of the entrepreneur. a) The key to business success is to sell something and earn a profit. b) Businesses succeed because of high sales and revenue generation. c) Businesses fail because of low sales and excessive costs. d) You must focus all your efforts on the generation of sales, revenues and cash flow. 8. The most important quality for successful business operations is frugality in all areas, at all times. a) Carefully think through every expense before you make it. b) Defer and delay expenditures as long as possible. 11

12 c) Always rent or borrow rather than buy. d) Question every expense ruthlessly before you make it. e) Conserve cash in every way possible. 9. One of the most successful ways of starting a business is through bootstrapping. a) You start your business small and grow out of your sales and profits. b) You start by buying a product for one price, and then selling it at a higher price. c) You reinvest your profits to expand your business. d) You can start small, working out of your home, or sharing offices with someone else. e) The act of bootstrapping makes you more creative and cost conscious from the very beginning. 10.Your major goal should be to build up sufficient cash reserves to provide a cushion against unexpected declines in sales. a) You should build up a cash reserve of two to six months of fixed operating costs. b) Resist the temptation to spend your profits on lifestyle, such as cars, homes, boats, jewelry and vacations; c) Make whatever sacrifices are necessary to assure your business survival. 12

13 11.When your business becomes successful, people will be more interested in lending you their money. a) Investors will want to own a percentage or share of your business. b) Investors will ask for guarantees of performance and repayment. c) ownership and control are the keys to business success. d) Always maintain 51% ownership, or more of your business. Many entrepreneurs begin thinking about starting their own businesses years in advance. During this time, they develop experience by working for other companies. Most of all, they save their money each month so that they have enough to finance their businesses when they begin. When you have no money of your own, you will find it very hard to borrow money from other people for your business idea. But when you have money of your own to invest, based on your experience and savings, you will find it much easier to gain the financial support of family, friends and other people. Once your business begins to succeed, you can then approach banks to borrow money for growth and expansion. At every phase of your business you must think about cash flow all the time. 13

14 Action Exercises 1. Make a list of three sources of capital or financing that you can draw upon in the future List three ways that you can conserve cash in your daily business operations Make a list of three steps that you can take to make yourself deserving of loans from friends and family

15 4. What three steps can you take to make yourself and your business creditworthy to a bank or sophisticated lender? What cash expenditures can you delay or defer when you run short of cash? What three steps would you be prepared to take in a cash emergency, which you will have on a regular basis?

16 7. What three ways can you get your customers to finance your business in the form of advance payments, retainers, or immediate payment upon delivery? What one action are you going to take immediately to improve your financial situation? 16