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How to do business succeed? Where is your capital? First understand your investors

How to do business succeed?

3.Where is your capital?

First understand your investors

Now, let’s talk about money.

For those looking to start a business,

there’s nothing more difficult than figuring out how to raise capital.

I always hear people talking about this.

A lot of future entrepreneurs have good business ideas,

they have researched and tested,

but no matter how hard they try,

they still can’t find investors.

They will ask:

“What have I done wrong?”,

“How can I find someone like you?”

But actually,

they don’t need someone like me,

what they need is a better understanding of investors.

Let me tell you a story about Jordan and Seth.

They have a new business

that they think could become a national provider

of Internet development services for SMEs.

They had a private investment of $200,000

to build and operate the business,

generating $42,000 in revenue in the first year

and $246k in the second.

During that time, they learned a lot about the market

and came up with a market entry strategy,

using the connections they had in another of their companies,

a successful printing brokerage in Manhattan.

They realized they needed $2 million

to keep the new business running for the next five years,

and they were ready to approach potential investors.

Jordan asked me

if I’d be willing to go over their business plan

and give them some advice,

and I agreed.

Their business plan was sent to me the day before our meeting.

It’s the most beautiful business plan I’ve ever seen,

35 pages long with a hardcover

with the company’s name and logo printed on it.

The content of the plan is concise and specific,

providing enough background information about the business,

the market,

and the development strategy.

The numbers seem to make a lot of sense,

but there are a few things that caught my attention.

When I met Jordan and Seth,

I asked where they planned to source the funding.

They replied that they have an appointment

with some venture capitalists in the next few days.

I said, “No venture capitalist is going to buy this plan.”

From a venture capitalist perspective,

the plan has at least three problems.

First, the plan barely mentions

how much investors will get back their money,

or how they can cash out.

It would be a big mistake to approach investors

who are only interested in investing in companies

that promise to deliver the expected returns.

Second, their plan requires them to use a certain percentage

of the investment capital

to buy furniture,

equipment and other fixed assets.

A venture capitalist will inevitably ask,

“Why buy those devices?

Why not hire?”

Venture capitalists are always taking advantage of loans

there’s a reason for this, of course.

The more you use loans to finance a new business,

the greater the potential for equity appreciation.

This is similar to buying a house

with the least amount of down payment.

The risk of failure will be greater,

but the reward will be greater if successful.

Jordan and Seth clearly didn’t understand the investment philosophies

of the people they raised.

But the biggest problem with the plan involved a small note on the section

“Expected funding and how the revenue will be used.”

More than $200,000 of the $2 million investment will be used

to “pay back loans to founders and partners.”

I don’t know if anyone will invest a substantial amount

in a new business knowing

that the founder intends to put 10%

of the capital in his own pocket.

Venture capitalists will not accept this.

Surely they will see that as a good reason to reject the deal.

On the other hand,

they would be impressed if Jordan and Seth said,

“Look, for the past two years,

we’ve self-funded this business with our sweat and tears.

Now, we need your money,

but our money will stay there until you get your investment back.”

They consider this to be an important factor

that adds to their advantage.

But what did they do?

They turned a very positive point into a very negative one.

I asked if they had any potential investors other than venture capitalists.

They said they were going to approach a group of doctors.

I don’t know what’s so special about doctors,

but fundraisers always seem to want to reach this audience.

You think doctors are always willing to invest money in any project.

“How much do you expect each doctor to invest?”

I ask.

They say the minimum investment is about 250,000 dollars. I said, ”

You don’t know these people, do you?”

and they admit they’re not used to it.

There are very few doctors willing to invest $250,000 in a new business.

Well-funded professionals also tend

to approach problems in the same way as relatives,

friends,

or amateur investors.

The first question they ask is:

“How much money do I have to invest?”

You need to remember that everyone has an investment limit,

it can be 10 or 20 thousand dollars or 100 thousand dollars.

But no matter what the limit is,

you won’t stand a chance of getting any of their investment

if you ask too much.

Even if investors are kind enough to listen to you,

they won’t get involved in the end.

They won’t seriously consider investing in your deal.

Therefore,

it is important to find out in advance the investment limits of the people

you are approaching,

especially if they are not professional investors.

If you can’t ask them directly,

you can find out through representatives,

or with their accountants and financial advisors.

Usually, they will probably invest around $25,000,

and then you’ll need 40 investors to raise $1 million.

The point is that knowing their investment thresholds well,

you can change the deposit level

so that investors can invest an amount of money

they are most comfortable with.

Therefore, you must conduct research on the investment limits of investors.

For each investor,

you only have one chance to reach them.

If you fail in that meeting,

you have lost your luck.

They will never say,

“Come back when you do better.”

If you go to investors without knowing what to do,

you will never get a second chance.

To capitalize on your opportunities,

you need to plan your investment strategy as carefully

as you would a business plan.

You need to do market research,

learn as much about potential investors as possible,

what they need,

what their standards are,

how they value a project,

before you make an offer

they invest.

There will be some issues that are easy to investigate.

For instance, most bankers will happily tell you their loan standards.

Venture capitalists will also explain their philosophy

if you approach them the right way.

Alternatively, you can ask for advice from entrepreneurs

who have already received support from venture capitalists.

But doing your research is most effective

when you’re out looking for investments.

That’s why I always tell people to be prepared

for a few setbacks in the fundraising process.

You will learn a lot from each rejection.

Therefore, you should plan as carefully as possible.

For example, you could create a questionnaire

and go back to the people who rejected you.

Make it clear this time you’re not here for the money,

that you respect their decision

and don’t ask them to reconsider.

Say that you just want to learn from experience,

and you would be grateful if they could explain

why they turned down your offer.

Ask them to be honest.

Is it because of you?

Or the business plan?

Or the investment you propose?

The information gathered will help strengthen your business plan

and develop your presentation as you reach out to other investors.

You’ll have a better sense of what they’re looking for,

and can make sure you deliver what they want.

This doesn’t mean you have to be fake,

but it’s useless to approach them knowing

that their standards don’t match your needs.

That’s exactly what I told Jordan and Seth,

but they have their own views.

They keep meeting venture capitalists,

and fail.

A few weeks later,

I got a call from Jordan, who told me that he

and Seth had decided to end their partnership.

Seth still wanted to find investors

who would get them $200,000 out of the business,

and Jordan said such efforts were a waste of time.

In the end,

they had to agree on their own path.

I think this is also one of the most expensive business lessons

that entrepreneurs have to go through.

****************

BANK SELECTION

Of course, raising capital for a start-up is important,

but once a company is up and running,

you need to focus on building another financial relationship,

the one with the bank.

At that time, the problem for you will be:

which type of bank to choose?

That question always haunts the CEO of a company listed in Inc. 500,

he came to me asking for advice on securing credit

for company expansion.

He plans to apply for a loan advance.

The CFO wanted to get a loan from a bank,

but the accountant suggested using a mortgage lender.

He said he was not satisfied

with his current bank

and would leave it no matter what.

Is there a reason he shouldn’t borrow from a mortgage lender?

I said I could think of ten reasons

why he shouldn’t get a mortgage.

The question is, how much does he want to hear?

I understand how difficult it is to work with bankers.

I had a lot of disagreements with them.

Sometimes they treat their clients badly,

and at first you have to work very hard

to get them to agree to fund you.

As a group,

they are the most unreasonable salesmen

I have ever met.

But every business needs a bank,

and you should take every opportunity

to build a relationship with a bank.

Forget about whether you need a loan right now.

Actually, it’s better not to.

It’s important to build relationships.

Why? Because the day will come

when you will need to take out a loan,

and when that happens,

you don’t want your only option to be a mortgage lender.

Please don’t misunderstand me.

I do not mean to disparage the nature of mortgage lenders.

They play an important role in our economy,

they lend money to struggling companies.

And unlike bankers,

they are great salespeople.

And, as they admit,

the percentage of borrowing

from them will be higher than from the bank,

but they give you more (or as they claim):

managing loans,

making credit checks for customers,

help you update information about debts.

In addition, they were able to quickly

and smoothly conclude a loan agreement,

in as little as two weeks,

without requiring audited financial statements.

All of this seems very attractive to a growing company

with limited cash flows and a lot of debt,

especially when those companies have had traumatic experiences with banks.

However,

keep in mind that borrowing

from property lenders is always risky.

A loan from a mortgage lender is not the same as a loan from a bank.

(I use the word bank to refer

to traditional commercial lenders.

For the sake of discussion,

I refer to mortgage lenders as mortgage lending institutions.)

Difference can mainly be summed up in two words: control.

When you take out a loan from a mortgage lender,

it means you’ve given up control of your debt.

The customer payment will no longer come

to you but will go to the lender’s safe.

You only get a copy of the payment check

and a complete accounting statement

of what’s going on with that source of money.

If a conflict arises,

or if your business goes wrong,

the lender will keep all the cash.

While they obviously prefer your company to be successful,

they don’t get the benefit of helping you through the tough times.

After all,

they don’t rely on you to pay off their debt.

They rely on your customers.

That’s why mortgage lenders rarely require you

to provide audited financial statements.

It’s your customer’s credit rating,

not yours,

that matters.

When you get a loan from a bank,

you are in a completely different position

because banks do not do business the way mortgage lenders do.

They don’t make money by managing debt.

Their profits come from good loans.

Banks will give you credit based loans

only if they see that you can afford to pay the interest.

They don’t want your debt.

They were not born to solve them.

So the debt is still in your hands.

You are responsible for their management,

control and withdrawal.

However, you still have to report regularly on your debt situation,

and if things go badly the bank will know too.

But even then,

you still have more management space

and a higher chance of survival,

because the bank will be more profitable

when you are successful.

They are always interested in whether you can keep the business

or not because they want to be paid interest.

I’m not suggesting that the main reason to get a loan from a bank

is to protect yourself during tough times.

I mean, when you take out a loan,

you have entered a relationship,

and that relationship is only

as good as you know what your partner needs.

Banks look for good companies

and good entrepreneurs for investment,

in contrast mortgage lenders look for good debt to acquire.

The reason why it’s harder to get a loan from a bank is this:

you have to prove yourself trustworthy

and that’s also why it takes a lot of effort to get a loan.

However, mortgage lenders will certainly provide services

that banks cannot,

but which every business should do on its own.

Therefore, if given a choice,

it is better to choose a bank loan.

Those loans give you the opportunity to demonstrate

hat you understand your responsibilities as a borrower

and are capable of taking them on as an entrepreneur.

In fact, it gives you the opportunity to build trust with people.

****************

Ask Norm

Dear Norm:

I need your advice on finding investors.

If I don’t have the money to invest in my business,

what should I do to contribute as a form of personal equity to attract investors?

The only idea I have right now is to sign a promissory note.

Dave

Dear Dave:

If for investors, the sweat and tears

of business owners are not convincing enough,

then I do not believe that a commitment

to repay the debt can make them satisfied.

Surely you will have a list of people you know to call for investment.

I mean you will have to start calling the people in your phone book,

including friends and relatives.

Any money you raise from them will be seen

by outside investors as your money.

By asking for money from family and friends,

you risk your relationship with them in the future.

This will be appreciated by investors,

who want to know what else you are investing

in that matters other than your time.

– Norm

****************

Mistakes that cause you to lose your loan

Ultimately, trust is always essential

for you to strengthen your relationship with the bank,

but trust is not something many entrepreneurs find in banks.

They are always anxiously afraid that they will be debt collection,

which can happen at any time for any reason.

I know a company that made a mistake with its dividend payment

and was dumped by the bank

they had worked with for 50 years.

Another company was forced to stop collaborating

when their bank changed its policy

and decided to no longer finance debt-based financing.

Another company was terminated

because it wanted to invest in a risky project.

I’ve also been in debt collection twice in my career,

and because of that,

I hope this doesn’t happen to anyone.

It was one of my bloody experiences,

and it helped me understand what I needed to do to protect myself.

The first time was in 1985,

when my mail company was growing like crazy.

The business consists of 17 different branches,

each of which is related to the same bank.

I thought everything was going to be fine until one day,

I received 17 letters telling me I had 30 days

to pay off my debt without warning.

I felt really dizzy and angry.

I called the debt manager and said,

“What the hell are you doing?

Shouldn’t you at least call me before sending these letters?”

He apologized and then basically said I lost my loan.

He said the bank would give up debt-based financing

and didn’t want to work with me anymore.

I have a month to find another lender.

The next experience,

in 1995,

was much more pleasant than the first.

This time,

I also borrow money based on debt

and that bank will also change its policy to move

to a new business direction.

This time,

however,

the banker came to me

and explained what was going to happen.

“We divide our clients into three groups,” he says.

“The first group consists of customers we really want to keep.

They are good companies,

and they fit our new business plan.

The second group is the customers

we shouldn’t have worked with in the first place,

they have 30 days to pay all debts and terminate the contract.

The third group consists of good customers like you,

but not suitable for our new direction.

We will help you find a new bank,

and you have time to do this.

There is no rush,

but we expect the work to be completed in the next six months,

if possible.”

What he said made me realize that in the last mistake,

I was in group two.

Looking back,

I realize that I could have been in the third group

if I had acted more calmly then.

Instead of getting angry,

I can ask the banker,

“What’s the problem?

Can we find a solution?”

And my response clearly reinforced the bank’s decision

to give up on me as soon as possible.

A lot of businesses make the same mistake as me.

Really, I think there are seven mistakes business owners

often make when dealing with banks.

Avoiding these stumbling blocks can save you from many failures.

However, the bank may still decide to give you up someday,

for a reason beyond your control,

but you will have a much better chance of being placed in the third group.

****************

Mistake 1:

Submitting financial statements late.

Banks are also in business,

and they have more rules to follow than you do.

To ensure the bank’s principles,

supervisors will check their records

and documents at least once a year,

the auditors will review the records quarterly,

or even monthly.

If you don’t file your financial statements on time,

your records are incomplete,

and you cause problems for the bank,

because they are graded based on the accounts they manage.

And that’s a disadvantage for you.

****************

Mistake 2:

Operating on uncollected budgets.

To avoid extra credit,

and to pay interest,

some companies will deposit the checks they receive

and immediately use the uncollected funds,

which will impact keeping the balance in the bank at low level.

A company can save a few bucks this way,

but it costs the bank the cost,

which deprives the bank of the income it would otherwise receive.

Yet another disadvantage that you create for yourself.

****************

Mistake 3:

Not cooperating.

Banks often ask questions about your financial statements,

and you probably won’t know the answer.

Some people will feel uncomfortable

or defensive when asked to explain their financial situation.

Instead of letting their accountants provide the bank

with the necessary information,

they try to find ways to evade,

giving feedback that is worthless.

When the inspectors came to check,

the bank was asked the same question,

they could not give a satisfactory answer,

and as a result,

they were criticized.

One more disadvantage.

****************

Mistake 4: Distracting the relationship.

When you don’t need much help from the bank,

it’s easy to ignore them.

You have a lot of other pressing issues to focus on,

and you think,

“Why bother about the banks?

Let’s just leave it as it is.”

But by the time you need their help,

it’s often too late.

If you haven’t built a good relationship yet,

chances are you’ll leave empty-handed.

That’s why it’s important to meet regularly

and build a solid relationship with your bank.

My partner and I make it a rule to meet

with the bank at least every three months.

****************

Mistake 5: Not regularly updating information for the bank.

Bankers don’t like unexpected big business troubles,

and usually all problems can be predicted,

and bankers want as much warning of such troubles

as possible as soon as possible.

The banker also needs reassurances

that you are in control of your business.

That’s why they ask you to submit annual projections.

If your project doesn’t go well year after year,

the bank will conclude that you don’t know

where your business is headed or worse,

you’re dangerously optimistic.

****************

Mistake 6: Ignoring the rules.

Whenever a bank lends you money,

they always set certain constraints,

namely the terms of the loan agreement.

Many people don’t understand those terms,

or forget,

or simply ignore them.

I know a man,

let’s call him Marvin

and his associates who decided

to let the company pay them $500,000 in bonuses

to avoid double taxation.

(If they received that money as a dividend,

the company would have to declare $500,000

in profits and pay corporate taxes plus personal income tax.)

Unfortunately, they missed the impact

of this payment on the debt-to-equity ratio.

By reducing the share capital in the company,

they caused the bonus amount to skyrocket

above the limit allowed by the bank.

When the bank told them the company was overcharged,

and they had to deal with the problem,

they got angry.

The company was a loyal customer of the bank

and they assumed

that the bank had no right to dictate to them.

***************

Ask Norm

Dear Norm:

I’m only 20 years old, but I’ve been wanting

to start a business for a long time.

My passion is computers,

and I came up with a great theoretical idea.

I only need about $100k to get started.

My father-in-law can provide that money.

The problem is, I don’t know how to reach him.

Brandon

Dear Brandon:

Entrepreneurs are all optimistic by nature,

but you need to look at the potential risks

as well as the surface potential,

and the truth is:

there is always an inherent risk in borrowing money

from a spouse’s family.

So, first, you need to ask yourself:

What if you lost all that money?

If the failure will cause the family to be severely divided,

I will look elsewhere for capital.

Failure in business is inherently difficult enough

without the added family troubles.

But if the loss of money doesn’t affect your family’s life,

then reaching out to your father-in-law should be simple.

Just put your business card on the table

and tell him that you think the plan will work,

but if it fails,

there is a chance that he will lose his investment.

Ask him if he’s interested in the investment,

and assure him that,

if he doesn’t, you don’t mind.

And remember,

there are other sources of investment capital

if your wife’s family isn’t your only option.

– Norm

And that’s an example for…

****************

Mistake 7: Arguing when you’re wrong.

Many entrepreneurs think they have complete control over

how much money they borrow

from the bank, especially when they’re a good,

ong-time customer.

They begin to think of the bank’s money as their own,

and they become angry

when the bank reclaims the loan.

But the bank has the right to take back the loan

if the borrower violates the terms.

After all,

terms have their reasons.

Banks are also subject to certain laws.

If the loans don’t meet federal standards,

the bank could run into serious regulatory trouble.

It’s also not helpful to protest

when the bank changes its lending policy, as in my case.

Arguing won’t restore the old policy,

just as anger won’t help the bank forgive your breach

of loan terms.

On the contrary,

annoying the bank will only give them more reason to kick you out.

That’s exactly what happened

with Marvin et al.

You must understand that none of the mistakes

I mentioned above are inevitable.

Even Marvin could salvage the relationship

with the bank if he stayed calm,

acted rationally,

and devised a plan to get the company back on track.

Building a lasting relationship takes time,

and breaking it takes time.

One mistake can lead to other mistakes,

disadvantages pile up

and often people do not easily recognize them.

You won’t know exactly where you’re at until it’s all over.

One day, you’ll get a letter informing you,

or a banker will call,

and you’ll find out if you’re in group two or group three.

You’ll probably never have to get a letter

or phone call from your bank to cancel your contract,

but if you do,

hopefully you’ll be in the top three.

In business,

and in any other field,

it is always better to be gently guided out than

to be rudely kicked out.

****************

FRIENDLY BANK

There are bound to be times when getting a loan is so difficult

that you can’t get a loan no matter what you do.

Luckily, you may have other options

if you happen to have a business

that allows customers to pay after delivery.

Unless you have mortgaged your debt to someone else,

you need to have a good banker,

and start thinking like a banker.

Debt is actually the loan you give to your client,

and it’s always a good idea

to monitor the quality of your loan portfolio.

This is especially important

when other sources of cash are exhausted.

You need to ask:

Are loans taking longer to recover than usual?

Will your recovery time increase, and if so,

why? Do customers need more frequent reminder calls?

Are some customers struggling with their own problems?

In this case,

you need to create new terms for them.

Or are they taking advantage of you,

in which case you may want to add more pressure

or perhaps abandon the customer?

I think when you get a loan from a bank

or a debt-based mortgage lender,

you understand quite well the nature of these lenders.

Surely your lender wants to be assured that

you keep a close eye on your debts

because they correspond to your loan.

If you don’t collect your debt,

you won’t have the cash you need to survive.

This gives you a strong incentive to find out

who pays on time and who doesn’t,

and keep a close eye on those who don’t.

But even without that incentive,

we still need to keep a close eye on debt.

Unfortunately,

it’s easy to neglect this as your company grows,

especially if you have ample cash and bank deposits.

I discovered that danger during my appraisal of a project

to sell three companies in 2006.

After reviewing the debt,

the buyer wanted to increase our bad debt recovery

by $200,000 and $400,000,

which brings the selling price down from $2 million to $4 million.

“What are you saying?”

I say. “Our debt is all good.

We keep records of our clients,

they can’t get their documents back if they don’t pay.”

“Yes, your records show that 40% of liabilities last more than 120 days,”

said the auditor.

“That’s a big number.

Among these there may be many uncollectible debts.”

I was completely shocked.

We have worked with many hospitals and government organizations,

who are very reliable only late payments,

but that number was much larger than we anticipated.

We had a good debt collection system,

but I didn’t care about it.

After all,

we don’t seem to have any cash flow problems.

We pay our bills on time,

and still have plenty of money in reserve.

The idea that we’re in trouble with

The debt problem never crossed my mind.

Therefore, the management of receivables

is not my priority and concern.

But the loss of 2 out of 4 million dollars in selling price quickly caught my attention.

I believe the majority of our customers with 120 days of debt are able to pay,

and we will prove it.

We spent four just to do it.

We started looking at a breakdown of liabilities

by month over the past three years,

that is, the current monthly percentage of liabilities,

for 30, 60, 120 days or more.

It turns out that the amount of 120-day debt has “silently”

increased during that time.

Each month, the 120-day public payment period is probably only about 0.5% increase,

but after a year it is 6%.

At that rate,

assuming you initially only have about 10%

of your debt in your 120-day pool an acceptable amount

depending on the type of business

and the type of customers you have

then at the end of the third year,

that number would be 28%.

That is exactly what happened to us.

We realized that part of the problem was

due to the overcrowding

and understaffing of the collection department.

So we’re hiring an extra person,

not to push our customers to pay too late,

but to limit future growth.

That’s the first step in solving the problem:

making sure in the future

you don’t repeat the mistakes of the past.

Then you can go back to dealing

with what happened in the past.

So as a next step,

we turned our attention to the collection of debts

from customers who had not been paying

for more than four months.

Because we are not short of money,

we are able to prevent some of the common mistakes made

by people who are short of money.

When you’re forced to have instant cash,

you’re naturally going to find customers who can pay quickly,

your best customers,

to be exact,

who always pay on time.

You push them to pay early

or beg for their help,

but neither of these ways help build good relationships

with the people most important to the company’s success.

The second mistake is to let the accountant collect the debt.

They don’t know their customers as well as other employees,

and they don’t have a personal relationship

that can avoid unintentionally offending loyal customers.

A salesperson,

a customer service representative,

or a manager who is in constant contact

with customers may know a better way

to ask customers to pay.

With that in mind,

we divided the 120-day liabilities among sales

and service staff and started communicating with customers.

What happened was truly amazing.

Some people put the blame in their payment on us.

One customer said:

“Of course we will pay you,

but why are you calling us so late?

You shouldn’t let things go too far.

You should have told us sooner.”

It turned out that the customer had a problem

with his accounting department,

which was only discovered when we called

and informed about the debt payment.

People blamed us for not informing them of the problem sooner.

Right or wrong,

in all cases,

we apologize and then go on with our work.

With other customers,

we discovered we had to adjust our invoicing process.

For example,

a hospital corporation has an ordering system that doesn’t work for us.

Without knowing this,

we forced their accountants to accept our system,

instead of us adapting our invoicing system

to their billing process.

When we asked how we could pay our debt faster,

they showed us the information and forms they needed.

And then we adapted their system.

Followed by cases where our invoice was not sent to the right audience.

There are also a number of cases in which

we discovered we were not up

to date with enough contact information.

Initially, we take information from the customer,

then check them again when need to renew the contract after 5 years.

During that time,

on the client side

there may have been personnel changes in departments,

in processes,

even company names and locations,

and we are not aware of it.

Or maybe our debt collectors know the change,

but the billers don’t,

because we don’t allow people

to change the information on the system for security reasons.

As a result, we were forced to develop a new process

to coordinate information exchange

and ensure invoices were sent to the right people.

We also consider customers who we feel should be terminated.

They are usually small customers

who have been urged on many times

by the debt collector.

It takes six months to a year to collect their debt,

and then they only pay

because they need to find a certain box of their files.

That type of customer literally “picks your pocket”.

First, you can’t use the money that customer owes you

and promises to pay you when signing the contract.

Assume his debt is $1,000.

If he doesn’t pay on time,

that means you will have to borrow another $1,000 from the bank.

Let’s say you pay 9% interest per year,

which equates to $90 per year.

So, $1,000 in debt if you get it from them is actually $910.

Meanwhile, your accountant has to spend half an hour a month calling

that company and listening to them make excuses and promise to pay.

A total of six hours each year

that accountant had to spend for that company.

If you pay the accountant $25 an hour,

including benefits,

the late paying client costs you $150 more per year,

so that $1,000 is now $760.

Look at how this has impacted your gross profit margin.

Typically, I would accept a small client

with a gross margin as low as 40%.

It’s not worth closing a deal with a lower profit margin,

even if the customer pays on time.

So for $1,000, you should be able to make a profit of $400.

But because it took him a year to pay you back,

and that cost you $260 in bank interest

and an accountant’s salary,

something you wouldn’t have to pay if he paid early,

so your gross profit is only $140.

That means the gross profit margin is then exactly 14%.

I don’t know how you would act in this case,

but if we had that many customers, we would default!

I don’t want and need those kind of customers,

so we force them to pay off or leave.

In the end,

we reduced the number of uncollectible accounts

by more than 50% over 120 days or more.

The person planning to buy our company can’t believe this.

They insisted on sending their auditor to check again,

but this person confirmed the fact what we informed.

Not only did we identify the problem immediately,

but we also implemented a new process

to help prevent this from happening in the future.

Although we did not end up selling the company to these people,

we are grateful to them for pointing out the debt problem

and forcing us to calculate our debt better.

********************

KEY POINTS

First: Before raising money from other people,

make sure you know how much

they want to invest and what they are looking for.

I suggest you answer 5 questions then you can do?

Why they should choose your project?

Why they invest for you not others? 

What they are looking for?

They look for getting highest return on investment.

Who will pay for their profits?

When do they receive return on investment?

Where do they receive return on investment?

Second: Start building a relationship with a commercial bank early on

and only use a mortgage lender

when you can’t get the money you need from the bank.

There are bound to be times

when getting a loan is so difficult

that you can’t get a loan no matter what you do.

Luckily, you may have other options

if you happen to have a business that allows customers to pay after delivery.

Unless you have mortgaged your debt to someone else,

you need to have a good banker,

and start thinking like a banker.

Third: Bankers are also business people.

Treat them the way you want them to treat you.

Fourth: Your debt is the loan you give to your customers.

Make sure your portfolio is always in good shape.

Typically, I would accept a small client with a gross margin as low as 40%.

 It’s not worth closing a deal with a lower profit margin,

even if the customer pays on time. 

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Angel Cherry

Creative Blogger

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