Are You Managing Your Business Like Your Household Budget?

It might be time to expand your thinking.

At the end of one of my Growth Dilemma workshops last week, I asked the participants for feedback about what they had learned. One woman commented that she learned to “manage her business more like a business, and less like a household budget.”

What did she mean?

If you think about managing a household budget, you have to match your expenses with your income. And hopefully, there is something extra at the end of every month to save and splurge on something special. While the budget can create pressure and tension, the math and process is relatively simple.

Many entrepreneurs’ choose to manage their businesses like their household budgets. They spend as they can afford to, and are reluctant to consider or make any investments that don’t meet their monthly cash flow.

“If I can’t afford it, I can’t do it – or I have to wait until I can.”

This is one approach to managing and building a business. There is nothing wrong with it, and you can be successful. It is conservative and valid.

However, for many entrepreneurs’ there is a different approach. If there are specific investments that you want to make which you think will help you achieve your objectives faster, you can choose to raise equity or borrow money to make these investments faster.

Let’s take an example. Let’s say you have a business with a $1,000,000 of sales and $100,000 of profit that you take home as a salary.

If you think with an investment of $100,000 you grow your sales to $1,500,000 and your profit to $200,000.

If you follow the “If I can’t afford it, I can’t do it” approach, you will never make this investment.

If you choose to borrow the money through the SBA, you would have a monthly payment of approximately $1,100 a month for ten years.

If the investment fails miserably, you will lose approximately 13 percent of your income to debt service.

If the investment works, you will double your profits, and likely pay off your debt in about two years.

This is using leverage to grow your business.

Leverage doesn’t work in managing the household budget, but it does when building a business.

So how are you managing your growth plans?

What Prompts Change for You?

Sometimes a shock to your system brings clarity.

It’s not easy to sit down and write a column about entrepreneurship the night of an unspeakable national tragedy in Las Vegas. What could I possibly say that would be relevant or useful tonight?

All I can suggest and hope is that some entrepreneurs might be able to take the shock of the Las Vegas massacre and try to use the event to bring some positive changes to your life.

Entrepreneurship is an all-engrossing lifestyle. Despite all the books and philosophies that teach us work/life balance – the reality is that there is not much of it. We push forward at an incredible and intense pace, and the focus and discipline that is required to reach our goals can often bring us tumbling down.

Sometimes our systems need a shock, to make positive changes.

I wrote about this in 2013, when I found myself in the Emergency Room one day. I talked about some steps I took back then, to try to bring some balance to my life.

And sometimes despite all of our efforts, we can find ourselves out of rhythm again. Just two weeks ago when I sat down in synagogue to celebrate the Jewish New Year, I was shocked and saddened at myself to realize that I had not been there for one whole year. I was too busy traveling, building, and running the marathon of building my company. And as I sat and absorbed the “shock” of the moment I decided to make some changes the following week.

The truth of the matter is that there are things we can all do to “de-stress” our lives. Think carefully about what you spend most of your time on, and how you can either delegate it or make it more efficient. Invariably, there is almost a way to make changes; you just have to be willing to “shock yourself” out of your routine.

My trip to the Emergency Room a few years ago and my experience in synagogue this Jewish New Year were my shocks. That being said, events like Las Vegas this morning can have a similar impact if you think about it and want to make changes.

So how will you use this shock to improve your life?

That’s a Stretch

Let’s talk about your business stretch goals.

As you grow older, you’ll recognize the increasing value of stretching your body. And as you plan to grow your business, you also should be thinking about stretching – as in your goals.

While entrepreneurs are thought of as a freewheeling lot, that isn’t necessarily the case. Sure, there are some big-time risk takers out there, but there are just as many (if not more) business owners who are unsure of their future or are overly cautious.

Let’s start by defining a stretch goal.

Simply put, a stretch goal is a target that might be a bit beyond what’s considered a reasonable expectation. For example, if your business has grown by 5 percent annually and you expect steady growth, 8 percent might be a reasonable stretch.

Experience shows that often those stretch goals become achievable. Sometimes market conditions change. Other times, the value of a product or service that is slow to catch on is suddenly recognized. And often, entrepreneurs are unaware of the many funding options open to them; securing additional funding to bolster inventory, add a sales team, increase product development or multiple other needs may be the missing key to increased success.

Let’s try a brief exercise on stretch goals that looks two years ahead to 2019.

First, what are your stretch goals in terms of revenue and earnings before interest, tax, depreciation and amortization (EBITDA), as well as the numbers for the most recently completed financial year and projections for the current year?

As a reminder, remember that EBITDA measures a company’s operating performance without factoring in tax numbers, accounting issues and financial questions.

From there, describe three things that are hindering your business.

That might entail anything from a weak distribution system to the departure of key management members to a competitor introducing a better product or service to limited inventory. Theoretically, the number of hindrances is unlimited – these are just a handful of examples.

Now, what’s a ballpark figure for the amount of capital infusion you would need to accomplish your goals?

All this information, combined with questions used to judge risk tolerance, will enable a lending expert to pinpoint lending options that are best-suited for you.

Remember, the idea isn’t to push you out of your comfort zone. It’s more to show you that, from an outsider’s perspective, you have a chance to make real gains. And it’s about adding clarity to your business goals while removing doubts you may have harbored about your operations going forward.

To further assuage any doubts, “stretchers” can be classified into a few different categories.

Conservative stretchers may be happy with 5 percent annual growth, while moderate stretchers fall in the 5 to 15 percent range. So-called aggressive stretchers push for 15 to 25 percent annual growth, a rate that will have those entrepreneurs, by necessity, planning and investing ahead of the curve.

And for those striving to top 25 percent – let’s call them “rocket ship” stretchers — prepare for an exhilarating but potentially bumpy ride.

Has this given you the tools you need to clarify your realistic expectations?

Golf and entrepreneurs seem to go together, so think about this: If you’re on the green, you’ll never sink a putt if your shot doesn’t reach the hole. As long as you hit the ball hard enough, it may go past the hole, but at least there’s a chance it goes in.

Similarly, if you never stretch a bit, you may never reach that potential that may not be so far out of grasp.

How Should You Invest Your Next $1,000,000?

Take some chips and focus on testing.

In workshops that I do across the country, I ask participants what they would do with their next $1,000,000 – and how they would split investing it between their business and a mutual fund of their choice.

It’s an important question – because while it’s tempting as entrepreneurs to go “all in” in our businesses, it’s always wise and prudent if you can to take some chips and move them to the side. Trees don’t grow to the sky forever, and despite our businesses being our babies, it is smart to diversify some of the risks.

It’s also important to take the question one level deeper. Let’s say you were to decide to invest $800,000 into your business, and $200,000 into your mutual fund – what should you do with your $800,000?

If you are lucky to have a formula in your business that you know you can make money with, it’s tempting to pour your money into the model, with the hope and intent to “do more of that.”

Putting all your money into “what is working” is also short-term thinking. It’s wise to take some of the chips that you will put into your business, and experiment with speculative and new ideas that will hopefully diversify the model.

Do you have one sales channel that works the best? Do you have one customer that makes up the majority of your sales? Is there one product that is your home run.

We work hard as entrepreneur’s to get to these points. And then when we’re finally there and are making money, we want to keep doing it, and at the same time should be worried about concentration risk. So we need to take some time and money to try new things.

So what would you do with your next $1,000,000? My first suggestion is to take some money and put it on the side and put a good chunk of it in your business. But then go one step further – use the bulk of your money that you are going to put into your business and put it into what is working, and use some of it to try new and experimental ideas.

Is a Family Business or Partnership Right for You?

Here are some tools to help think it through.

What does Harper Lee’s classic novel “To Kill a Mockingbird,” which was turned into an equally stellar film, have to do with business?

It gave us this quote: “You can choose your friends, but you sho’ can’t choose your family.”

And while relatives are the banes of existence for some people, that doesn’t stop many entrepreneurs from starting family-owned businesses–or entering into partnerships with close friends, who can be just as frustrating as relatives.

In my loan advisory firm, we frequently get phone calls about partnerships that have gone awry.

Let’s look at the pros and cons of a business with principals having close ties.

On the plus side, loyalty should be strong and the goals are likely to be similar.

As noted, “Having a certain level of intimacy among the owners of a business can help bring about familiarity with the company and having family members around provides a built-in support system that should ensure teamwork and solidarity. Other benefits of a family business include long-term stability, trust, loyalty and shared values.”

Don’t forget stability: Family members are far more likely to be there in the long run than outsiders who might bolt the first time a better opportunity presents itself.

In addition, family members are more likely to be flexible. Need to take your child to the doctor or soccer practice? Want to take a long weekend on your anniversary?

Family members are probably going to be more understanding than strangers.

It should be noted that family-owned businesses seem to enjoy extra cachet among customers; the personal touch appeals to customers, suppliers, and circles of influence.

And a family-run business tends to have lower starting costs because participants may well work for free or for little compensation until things get up and running.

Moving to the negative side, just because someone is a relative doesn’t mean they are right for the company. And because they’re family, it will be that much harder to remove them from the job if they prove to be inadequate. Balancing business needs with personal relationships can be tricky.

Meantime, sibling rivalries may rear their ugly heads. And differences regarding succession–what happens when the next generation has radically different ideas or simply isn’t interested in the business –may also wreak havoc both in the business and in your personal life.

Because everyone’s related (or at least the key members are), the corporate structure may well be lacking, which can lead to regulatory issues and poor professionalism. Employees who aren’t part of the family may feel resentful and neglected, especially when nepotism is obvious.

Also consider that a family business may lack proper perspective and alternative viewpoints. If everyone has similar life experiences, they’re also likely to have the same blind spots. Group thinking in this case won’t be helpful.

That leads to this question: What can be done to prevent problems and reduce the risk–there’s no way to completely eliminate it–family businesses and close partnerships pose?

Consider the previously discussed risk tolerance post.

Have each potential partner take the test, then compare answers. This will give you a compatibility gauge in terms of business philosophy.

If you score as “risk flexible,” but brother Tom is “risk neutral” and cousin Joe is “risk averse,” you’re going to clash. Conversely, if your scores are similar, you might expect reasonable good compatibility, which bodes well for your working relationships.

In addition, all partners might want to sit down and write out their stretch goals for the business three years from now, and then compare notes. Granted, it’s a bit premature if your business isn’t underway, but your answers provide another information point for comparing business philosophy.

Plenty of family-owned businesses exist in the world today, and there’s no inherent reason to dismiss the idea out of hand. That said, compatibility may well be the ultimate deciding factor in success, so be sure to consider working relationships before moving forward.

There are pros and cons to staying in a family-run or partner business. Pros: loyalty, trust, stability, familiarity. Cons: incompatibility, old sibling rivalries, divergent goals, dissimilar risk-tolerance levels.

How do you and your partners calibrate?

A Tale of Four Fishpreneurs

Which one do you most relate to and why?

Four friends grew up in a small coastal fishing town.  As they embarked upon their careers, they didn’t forget their roots but tackled the world differently.

One Fisherman stayed in town.  His life didn’t change much.  He took his fishing pole to the waterfront every day and caught a few fish.  He sold them to a store and made a modest living.  He made enough to live a safe and peaceful life.

The second Fisherman started his career in the same manner but grew restless.  So he saved enough money to buy a small boat.   The vessel allowed him to go out into the deeper waters every day, and he caught more fish than if he stayed on shore.  He also lived a relatively simple life, but he was able to live in a slightly bigger home than his first friend.

The third Fisherman wanted more.  And while he started on the same path, he attended a business class and wrote a business plan to secure a loan to buy a fleet of five boats.  He hired employees and had to keep them motivated and paid to keep his boats on the water so that he could make his debt payments.

As the business grew, he needed an office manager to keep track of all of the paperwork.  He had to rent a small yard to store his boats, and manage his fleet.  He liked his life but didn’t enjoy that he spent more time administering, and less time on the water.

The fourth Fisherman couldn’t wait to leave town.  It stifled him.  He came up with an invention for a new type of fishing equipment and ventured north to try and find investors who would back his idea.  It took a long time and was a struggle, but eventually, he found an investor, and then another one.

Slowly they got the product right and started to sell it in stores.  He had a board of directors to worry about and a lot of pressure to keep them happy and make the returns they wanted.  If he can get his invention to take off, even though he now only owns a small part of his company, he will be infinitely richer than his few friends who he left behind.

Once every year, the Fishermen get together and share stories and reminisce.   What do you imagine their conversation is about?  Do you think one is happier than the other?  Which one do you identify with and why?

How Quickly Do You Want to Grow Your Business?

And why it matters.

Close your eyes for a minute, and ask yourself what is your top-line revenue and bottom-line EBITDA goal for your business three years from now. Then jot your numbers on a piece of paper, and compare them to your results over the past twelve months. What are your growth targets by percentage?

The most important thing about this question is that there is genuinely no “right” answer. How much risk you want to take, and how quickly you want to grow and expand is a deeply personal one. But if you can find your “comfort zone” and be content with it, you can plan accordingly and make the financing decisions that are right for you.

If your goal is exponential growth, (let’s say 100 percent or more per year) you should probably seriously consider equity or venture financing. In most instances, these are the financing mechanisms that work the best for hyper growth.

If you are very conservative, and are content with less than 5 percent growth per year, you may well be able to growth through cash flow and don’t have to worry about lenders or investors. Your conservative choices will avoid a myriad of headaches that you don’t need to concern yourself with.

Most entrepreneur’s I know fit somewhere in the middle. They want to move their business up the ladder steadily and with a good rhythm, without risking falling off along the way.

If you’re one of these entrepreneur’s you can likely use debt to grow your business, and you will need it along the way to preserve cash and keep moving forward.

For these companies, a debt plan is very important. You need to pick your capital investments you are going to make each year, and look at long term options to finance them. And you should make sure you have a line of credit in place or possibly an asset based line if you have accounts receivable and or inventory to give your business the fuel it needs to grow. You can also likely avoid investors and retain control of your company.

How quickly do you want to grow your business? If you decide now, you can make the right choices to push you forward. If you don’t decide, or keep changing your mind you might risk falling off the ladder as you go.

Five Dilemmas Entrepreneurs Struggle With

What is your growth dilemma ?

The classic stereotype of an entrepreneur is one who is always running, pushing the envelope and taking risks. This is the “sex appeal” of entrepreneurship that many dream about and aspire to. Yet it’s important to know that at every stage of their journey, entrepreneurs have quiet fears or dilemmas that are holding them back.

Some common dilemmas include:

· You’re just not sure what to do next. You would like to keep moving forward but you’re stuck because you’re not sure what the next best move is.

· You’re so busy in your daily grind and routine that you don’t have time to think about your next move. You’re working in your business instead of on your business.

· Growing requires an investment. You’re not sure if you have the stomach to take on more debt or put in the cash that is required to grow to the next level.

· There is tension between you and your partners about how to grow. You might be the “grower” and they are more conservative.

· You’re “happy with your lot”. Things are going well, and you simply want to enjoy them.

What is your dilemma? Being aware of it might help you overcome it.