When Debt Might be Good for Business!
Published September 10, 2009 | 
There is an old saying that goes, “Out of debt, out of danger,” and while being debt-free is a noble goal, there are times when carrying some debt on the books is not a bad strategy for businesses owners, and in fact, most financial institutions expect it, and having no debt can negatively credit scores.
In today’s market, small businesses with a strong cash flow position, and well-controlled and managed business expenses might not see an immediate need for any financing, but small business owners should always have their future vision in mind and consider long-term changes in their respective businesses, such as possible purchases of buildings and equipment, additions to the staff and other expansions that current revenue capacities are unlikely to support.
An important point to remember is that debt is always cheaper than other forms of financing, such as the owner or investors putting more money into the company.
When comparing the cost of capital, debt risk to the business owner is lower and payments are tax deductible, plus ownership is not shared, while equity-based capital means that investors have to invest long term, and they’re looking for a return, as well as possible ownership.
Remember it is important to structuring the debt appropriately for the company’s size, productivity, and long-term plans.
How much debt is enough?
There are really no hard-and-fast rules about the amount of debt a business owner should take on, because so much depends on the specifics of each individual company, however, if a small business is seeking debt-based capital through banks or other short term lenders, a 2-to-1 ratio of assets to liabilities is regarded as a general rule of thumb
An extremely important point to always remember is that strategic planning is a key element that should never be overlooked or ignored, and although you can preserve wealth and the business value by using debt in many circumstances, debt without a strategic plan is very bad, and especially critical in today’s global economy.
Remember too that lenders want to see a very sound, well thought-out plan backed by business owners with experience and a successful history.
Should short term or long term debt be used?
Debt is taken for short terms to address working capital needs, and long-term arrangements are better suited for fixed assets such as additions to buildings or major equipment purchases, and most business owners are attracted to short-term loans because rates generally are lower than long-term financing.
The risk involved with using short-term debt is that generally, short-term financing is on an on-demand basis, and if a company falls a little short in working capital and cash flow, a lender could call the loans and the company wouldn’t have the funds available to meet the payment obligations.
The loan term should match the length of the life of the asset being purchased with that loan, and for short-term purposes, lines of credit from a bank are a good option, for example, a company might be able to negotiate price 
discounts with prime suppliers/vendors if payments are made early, and those early payments can be made with a line of credit. The advantage of these strategies is that the business saves more money paying a little less to regular suppliers/vendors than the cost of taking out the line of credit from a bank.
Ultimately, the worst strategy Entrepreneurs can make is to start using credit cards the wrong way, and not paying the full balance due each month, creating a slippery slope to financial crisis.
Small businesses should not make the mistake of relying on credit cards as quick fixes, just because they are easily made available, and it should always be remembered that credit card debt can turn out to be the most expensive form of borrowing.
Another financial pit business owners can fall into, is borrowing from his or her retirement accounts during times of trouble, and when the bank has shut them off, they begin to borrow on their 401(k) or against their homes. Remember, 
the 401(k) retirement accounts are creditor-proof, should the business declare bankruptcy, but the money taken from it, is definitely not.
Bank relationships
An old adage says that “running into debt isn’t bad, it’s running into creditors,” but regardless of the financial situation, a business owner should never stop talking to their lenders.
Keep the communication channels open in good times, by voluntarily sending financial records to the banks, and picking up the phone as soon as things look bad, and always keep the strategic plan current, update it if needed, and include with it several years of financial information, and the identification of business needs and associate funds required for equipment, building additions, business growth and expansion, and sufficient operating capital.
Questions a Business Plan Must Answer
Published August 26, 2009 | 
Many Entrepreneurs and businesses have already been able to develop and implement clear, concise business strategies critical to successful, efficient and more profitable operations, but other businesses and Entrepreneurs that have either ignored or refused to consider developing a business plan for many different reasons, far outnumber them.
The Entrepreneurs and businesses that fail to plan (plan to fail) have also failed to consider that developing a business strategy doesn’t have to be restrictive (a common fear), and can be really as flexible and simple as they prefer, especially when first starting the planning process.
Following are questions and issues that need to be addressed as part of a well thought-out, clear and concise business plan, and of course other issues specific to the individual business project will also need to be addressed as they are identified.
What does the business stand for now and what will it be in the future?
- This question addresses the questions of mission and vision for the business.
- It should not only address what the business is but also what the business is not.
What does success look like?
- This is about goal setting, and if you don’t know what success looks like then you might never find it.
- Goals should always be set for specific time frames.
- Ask yourself: What do I have to accomplish by the end of this year to achieve my definition of success?
What do you make?
- Every business must create “value” and ultimately make something.
- This is about the basic “value proposition” of the business.
How do you make it?
- This question is about your craft, systems, and your way of doing business.
- It addresses your inputs, processes, and outputs of the business.
How do you sell it?
- While making something is about the creation of value this question is about marketing or capturing value.
- Many entrepreneurs are great at creating value but many failed to capture it by dropping the ball when it comes to marketing execution.
- As management author Peter Drucker wrote, “There are only two functions of business: Innovation and Marketing.”
Who are the customers?
- This question addresses the people that the business services.
- Most successful Entrepreneurs and small businesses operate in turbulent and uncertain markets catering to small niches of customers that a big business does not want to serve.
- By doing this they are able to stay off the competitive radar screen of the big companies that can’t afford to take huge gambles on such uncertain market segments.
What can you or business contributed to the world that no one else can?
- This is about the understanding of what your “one big idea” is.
- It involves a deep passion, understanding of what you can be the best in the world at, and a sufficient economic engine to drive it.
Who will manage the business and how?
- Who are the people who will operate and grow the business and how will they be organized? This speaks to the organizational structure of the business, as well as, the legal structuring.
- Having a great idea is never enough. Greater ideas are common, but the people who can successfully implement are rare.
How are profits generated and where do they come from?
- At the end of the day, the business must be profitable or it is not a business.
- You should be well versed in the revenue and cost drivers that make business profitable.
- Without profits the company cannot grow and will never be anything more than just a lifestyle business.
What stands in the way of success and how will you overcome it?
- This is about your future story, the enemy and how you overcome it and ultimately win.
- Up until now, you have been addressing questions that concern your business model which is essentially your business in the vacuum.
- But sooner or later, your business will confront internal forces or external competitors that will potentially keep you from achieving your goals.
- Dealing with this reality is, in essence, your strategy.
Understand the Results of Your Business Plan
Published June 30, 2009 | 
I need to make one statement right away and get it out in the open, and that is the fact that no business plan is ever 100% dead on accurate, but of course having no plan is absolutely never the right thing to do either, so as a result it’s important to examine the actual results of the business compared to those projected in the business plan.
Most plans are wrong and yet vital, it’s an unexpected and surprising thing to hear especially if you have never put a business plan together, so after making a statement like that where else do we go, except to the very core of what business and strategic planning is.
Let me start out by saying that those who are deeply involved in plans prepare projections that many times are incorrect, and no one I know even came close in predicting the steep plunge in the global economy last year in the fall of 2008, so it goes without saying that those who are deeply involved in business planning processes around the world have been going through a lot of changes, adjustments and corrections, and multiple reviews and revisions.
So you see why my opening statements about needless ineffective business plans, and yet their importance starts to make sense, and as we look ahead to the rest of the 2009 many upbeat forecasts are still in the review and revision process and starting to reflect the reality of the global economic situation, which always brings up the question why do business and strategic planning in the first place, is everyone just wasting their time developing plans and forecasts? And the answer becomes obvious that although the results are inaccurate at times, how can we determine where we are if a map hasn’t been produced to show us how we got there, and of course where we are going.
If when you look at your plan prepared last year, and of course the results should be greatly different from what actually took place, you would compare the two in detail and look not only where the differences are, but where the greatest differences exist, for example, where expenses were tied to sales, where sales performed as expected, and look for how all the numbers were supposed to tie together, not just why they didn’t.
And if you are like the many thousands of global entrepreneurs that did not have a plan, then this might be a really good time to get the process started in order for you to develop and have a much clearer view of your future business, and you can start by making some simple projections for sales, costs and expenses, and at this time don’t worry about whether they’re wrong or not, just try and make sure that you check each month to determine where and how and in which direction the numbers were incorrect so that you can correct the information, and this whole process should bring you much closer to the action of what is taking place in the global markets and increase your awareness of the actions you need to take to increase your success.
By implementing the review process on a monthly basis, if you are wrong you are only wrong one month at a time, and as you use the plan comparison to actual results and associated analysis to see more closely what is happening exactly, your adjustments will improve, and in the future results will be much more accurate and in tune with market activity, and you should see monthly improvements.
These planning and analysis steps will put you in a better position to forecast more accurately when the markets should start to improve, and they will at some point, and you will be able to use what you learned in the process to see the signs, anticipate what will take place, and plan your actions accordingly.
So although the results of planning may be wrong and inaccurate, it is still a critical key to successful business and an essential tool for successful global entrepreneurs, as they learn that in addition to preparing an initial strategic plan, an important part of the process is making necessary changes and adjustments in determining how to recover in the most effective and efficient manner, and how would you know what steps to take in the recovery process if you didn’t prepare the business and strategic plans in the first place.
Understanding the Two Kinds of Strategic Planning Strategies
Published May 24, 2009 | 
People use to term strategy to describe one thing, but it is actually a bundle of insights and activities and there are fundamentally two kinds of strategy including internal and external, and the concept is so simple and obvious that most managers and entrepreneurs simply overlook it, and yet, few managers or entrepreneurs are taught to craft strategy with these insights in mind.
The reason why internal and external strategy exists is based on the rules of the game of business itself and by definition, in order to fulfill a need or want, there must be an organization and a customer so that an exchange of value can take place, but each of these players in the game is seeking something different and operate under different rule sets. Therefore, creating only an internal or external strategy (but not both) ignores the very definition of a business transaction and only allows you to look on only one side of the equation.
If internal and external strategy are not thought of independently, you cannot appreciate the fact that they are created differently, using a fundamentally different approach, leveraging different resources, focusing on different aspects, and resulting in completely different outcomes.
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Internal |
External |
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Created… |
Inside-out |
Outside-in |
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Fundamental Approach… |
Creative |
Strategic |
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Leverages… |
Assets |
Communications |
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Focus… |
Organization |
Customer |
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Desired Result… |
Innovation |
Positioning |
The most common strategic planning mistake is made when you don’t understand the kind of problem you are working on and in most planning sessions, little regard is given as to whether the organization is currently crafting internal or external strategy and it all gets blended together, but internal and external strategy are different kinds of problems requiring different solutions solved through different means, and once you understand this basic assumption you will begin to see more clearly what to focus on, what approaches are available to you, and what outcomes to expect.
The fact is your organization must think about and craft both types of strategy and you must understand how each kind of strategy is created, what makes it different, and what the desired results should be, as external strategy follows an internal strategy the way the left foot follows the right put in walking, and in effect, both kinds of strategy support the organization as well as each other. Each precedes the other, and follows it, except when the two move together, as the organization jumps to a new position.
If mission and vision are like your eyes that come together in making one insight, then internal and external strategy are like your feet moving you forward, backward, or sideways, and each is again independent of the other, however, they work together in a complex system constantly reinforcing each other and playing off one another in creating movement.
What is Strategic Planning?
Published May 20, 2009 | 
Strategic planning is the continuous process of making present entrepreneurial decisions systematically with the greatest knowledge of their futurity, organizing systematically the efforts needed to carry out the decisions, and measuring the results of these decisions against the expectations through organized systematic feedback.
Strategic planning is not a box of tricks or a bundle of techniques and quantification is not planning. Some of the most important questions in strategic planning can be raised only in terms of such as “larger” or “smaller,” “sooner” or “later,” and strategic planning is not the application of scientific methods to a business decision, but it is the application of thought, analysis, imagination, and judgment.
It is not masterminding the future, as any attempt to do so is foolish since the future is unpredictable, and strategic planning is necessary precisely because we cannot forecast, since the entrepreneur upsets the probabilities on which predictions are based, forecasting does not serve the purposes of planners who seek to direct their organizations to the future, and forecasting is of little use to planners who would innovate and change the way in which people live and work.
Instead, it deals with future aspects of present decisions, best decisions exist only in the present, and the question that faces the strategic decision-maker is not what his/her organization should do tomorrow, but it is, “what do we have to do today to be ready for tomorrow?”
It is not even an attempt to minimize risk, since economic activity, by definition, commit present resources to the future and to take risk is there for the essence of economic activity, and while it is futile to try to eliminate risk, it is essential that the risks taken be the right risks. The end result of successful strategic planning must be the capacity to take greater risks, for this is the only way to improve entrepreneurial performance.
Each device in strategic planning is meant to answer one fundamental question about your plan including:
- Vision: Answers the question of “what.” What will our future look like? What will we accomplish? What is our dream with a deadline?
- Mission: Answers the question of “why.” Why do we exist? Why is our vision important?
- Goals: answers the questions of “who and when.” Who will do what? When will they do it?
- Strategy: answers the question of “how.” How will we achieve our goals? How will our vision bring our mission to life?