Business writer Jennifer Hickey recently spoke with author and educator Mitchell Weiss about his latest book Business Happens: A Practical Guide to Entrepreneurial Finance for Small Businesses & Private Practices. Weiss is an adjunct professor of finance at the University of Hartford and co-founder of the University’s Center for Personal Responsibility. He has also owned and operated commercial finance companies, providing financing to businesses of all sizes for over 30 years.
JH: What was the inspiration for this book and how did you come up with the structure?
MW: It’s written from two perspectives: From my experience of running businesses as well as that of someone who’s provided financing to businesses. I tried to thread my personal experience along with putting out the basics of how to run a business. Part one goes over all you should do/know before founding a business. Part two covers organizing and managing a business. Part three details how a business seeks financing and how to overcome financial adversity. At the end of each section, there’s a list of questions meant for the reader to synthesize that information and apply it to their own businesses. At the end, I include anecdotes of my 30 years running businesses.
JH: Discuss the importance of “chemistry” and “cookies” when choosing legal/financial advisors for your business.
MW: I use the example of when one of my partners and I were looking for a law firm. We compiled a list of possible firms based on recommendations from colleagues after researching them. We then began the interview process, visiting these firms a number of times to meet with partners. The firm we ultimately chose was well established and the only one that offered us food! While feeding us didn’t hurt, we decided to go with this firm because we felt the most comfortable with them. Of course, there are costs to consider. But, after several meetings, we felt they could guide us through complex matters with our best interests in mind. They earned our trust. You need to get a sense of the people you’re working with to determine that level of trust. We ultimately went with our gut, and we weren’t disappointed.
Another point this story brings up is ‘assignment of credibility.’ We’re pre-disposed to trusting someone a family member/friend/colleague trusts. Those referrals carry a lot of weight and can, as a result of expanding your network, help you find other people you’ll need for your business over time.
JH: What are the primary risks and responsibilities every entrepreneur must stay on top of when running a business?
MW: Business owners are responsible to five constituencies: customers, suppliers, lenders, investors, and employees. If you don’t treat your customers properly, they won’t come back and, worse, may go on Yelp or some other social media site to criticize your business. If you don’t pay your suppliers on time, they’re going to shut you down or raise their prices, which will eat into your profits. If you don’t manage your finances properly, your lender may call the loan. If your business doesn’t perform as promised, you won’t get investment capital, including from family/friends. Finally, if you don’t compensate your employees fairly, they’re not going to stick around long, and when you have high turnover this affects all the rest of your constituencies.
All the risks come down to financial risks in the end, as they all affect the bottom line. First, there are ‘market risks’—a market change that you didn’t see coming or worse didn’t respond to it. There are ‘hazard risks,’ which can be mitigated with various insurance products. Finally, the lack of available credit is a serious financial risk when you go into business. Money was easy to get until 2007 and 2008, and then banks reigned in their lending practices. I advocate having more than one way out of the room. Do you have access to other forms of capital? Do you have assets you can sell off? Your business might be harmed without another way out.
JH: Explain the difference between a business plan and strategic plan and why it’s necessary to have both?
MW: A business plan is your foundational document: your idea, the concept, why it’s an opportunity. It maps out how you plan to get your business off the ground, who will be involved and how you plan to accomplish this. The business plan is then modified through the strategic plan, which analyzes your business’ strengths, weaknesses, opportunities, and threats, also known as SWOT analysis. Strengths/weaknesses are internal—company’s strong/weak points—and opportunities/threats are external factors that affect your business. A SWOT analysis should be conducted routinely. You need to stay on top of the market to make sure you’re not missing anything. Talk to your sales people. Are there pricing or quality control issues? You should always be sizing up your businesses against others in your industry.
JH: What is a cash conversion cycle and why is it important to track?
MW: A cash conversion cycle is an end-to-end evaluation—from production to collection. It helps you figure out how much cash you’ll need to float your business until you can collect on your receivables. As you do that, you’re examining three key areas of your business:
- Inventory-to-sale conversion period: how long it’s taking to produce your product.
- Sale-to-cash conversion period: how long it takes to sell the product.
- Purchase-to-payment conversion period: how long it takes to collect on the product once it’s sold.
It gives you a snapshot of so many areas of your business. You can see whether there’s been a slowdown in the product cycle or maybe you’re not collecting from customers as quickly as you should or paying your bills too quickly, which leads to a cash flow shortfall. Maybe too much cash is going toward operating costs or your products are underpriced. It forces you to look at all these different aspects of your business, which are also the same metrics a lender/investor will be evaluating if you seek outside financing.
MW: Whether you’re considering borrowing from a lender or seeking investor equity, all money has to have a way out. Because debt has a higher priority of payback, it comes at a lower cost than investment capital. Equity costs more because investors are taking on more risk. Suppliers, lenders, employees all get paid first. Because there’s a greater risk, investors want a bigger return, which also includes a percentage of your business. From an entrepreneurial standpoint, you want to borrow as much money as you can so you don’t have to dilute ownership in your company.
Lenders will be looking at the overall story arc of your business. That’s where the ‘5c’s of credit’ come into play—capital, capacity, collateral, conditions, and character. Earnings will be assessed to determine your company’s capacity to pay back the loan and collateral available in case you can’t. The condition of your company to weather any shocks or downturns will also be assessed. And because most business loans require a personal guarantee, lenders will not only be looking at your credit scores but also running a Lexis/Nexis search to find out if they can trust you to pay them back.
You should also consider the terms and conditions of the loan to make sure you can live with them. What happens if volume falls off? Will you still be able to make your monthly payments? If a security deposit or additional collateral is required, negotiate for a release once you’ve paid down the loan to a certain value. If there are certain guarantees put in place because of a limited operating history, negotiate to have your business reviewed once you’ve paid down the loan to a certain extent so those provisions can be modified or released.
JH: What are some of the pitfalls a business can encounter if there’s no clear organizational structure in place?
NM: It’s important to have the right people in the right positions and the appropriate responsibilities for the positions they’re in. You need to make sure the workload is properly distributed when you’re building up the business. I prefer more horizontal organizations, with working managers that have more than one or two people reporting to them. That’s how I ran my businesses. If the hierarchy is too steep, then you run the risk of having to reduce your staff if business drops off. Such disruption causes instability and fear among your work force, which in turn impacts productivity and can lead to even more turnover. You want to manage your business tightly. It’s more stressful for workers to have too little work than too much. Hire when you need it. Not in advance.
You also should have good checks and balances to ensure there’s another set of eyes looking over important matters. This is called ‘segregation of responsibilities.’ While you need to have your people running checks on their own areas, you also need them to cross-check others. This prevents bad things from happening, including fraud. For example, when I was CEO/chairman, I couldn’t authorize payment on my expense reports; my CFO had to sign off, but not until after they’d been audited and approved by our accountant. Likewise, I had to sign off on my CFO’s expenses once audited and approved.