A CFO's Advice to Entrepreneurs

By Mitch York 1

I was introduced to B2Bcfo.com’s Keith Simmons (pictured) by my CPA. I don’t often get together for a cup of coffee with a stranger, but because my accountant is someone I really trust, I decided to do it. We had no particular agenda except to see if there might be some common interests, and indeed there were. Keith is a partner in a fascinating business that helps small firms have access to expert chief financial officers on a temporary basis. His focus is Long Island and the New York metro area, but his company has partners nationwide.

He answers some of my entrepreneur-focused questions here.

What are the biggest mistakes new business owners make when it comes to managing the financial side of their business?

I find fewer than 10% of all businesses–new and established–take the time to create a plan. Lack of planning is the most common error of new business owners. Planning encompasses a lot of territory, including the financial responsibility of supporting your business until the business is able to support you. Eighty percent of new businesses fail in the first year. The primary reason is lack of cash, another is holding a vision that did not meet the reality of the business. As a new business owner your first task is to translate your vision into a business plan and have it critiqued by qualified persons. Include financial and cash flow forecasts. Then on to Plan B showing sales at 50% of the original forecast. Assuming your venture will be self-funded, does the reduced sales forecast still show cash flow in your favor? If not, do you have the financial resources and confidence to contribute additional cash to your business. Companies most often fail because they have no plan are unable to measure progress against a plan and don’t see the end coming.

A lot of experts talk about having lines of credit available at all times. What if a bank won’t extend credit to your small business? Are credit cards a good option? What about shifting balances between credit cards?

Credit can be hard to come by for start-ups. Establish a relationship with your banker, even if they cannot loan. Contact your local Small Business Development Center (SBDC), Community Development Center of Long Island (CDCLI), Long Island Development Center (LIDC) and others to determine if funding is available and the steps necessary to obtain funding. I’d consider credit cards as a good option only when an owner faces a brief shortfall of cash and is confident that the business is able pay off all balances in the short term. Move credit balances to the card with the lowest interest rate and pay on time. Late payments can result in highly unfavorable interest rates.

Do small businesses need to subscribe to Dun & Bradstreet or similar services to know their business credit score?

This is always a good idea. You should review your credit rating quarterly and correct any errors. If you have good credit that is not shown on the report, speak with a credit representative and provide additional credit sources to be added to your report. Go to annualcreditreport.com for a free report of your personal credit rating. The rating agencies are Equifax, TransUnion and Experian. Each allows one free report per year.

I have many small business clients who have problems with collections. Not that their customers aren’t going to pay–they just take 60 or 90 days. How can a small business with little leverage over clients speed the cycle?

Being successful as a small business owner requires a high level of confidence. This inner confidence is critical when discussing price and payment terms. Those that lack confidence will sell below market price and fail to discuss terms. Price and terms are both components of the sales discussion. It may be to your advantage to run a D&B report on the client’s payment history and be able to discuss any concerns. When you receive an order obtain the name, phone number and email address of the Controller or Head Bookkeeper and the Accounts Payable individual. Send a confirmation to the customer thanking them for the order, a brief description of the product ordered and the agreed terms. Send a copy to the Accounts Payable department. Speak with the accounting department in advance and identify any special information required in order to pay in a timely manner. Do they need a signed PO or Proof of Delivery? Make it your job to make their job easier. Review the terms on their Purchase Order and resolve any discrepancies. During collection calls I look to inject light humor and a knowledge of the difficulties a customer’s staff faces, particularly in times of tight cash. They are under great pressure and receive many demanding and offensive calls. I appeal to their human side and they remember me. It keeps me higher on their payment list. If you feel that you will not be paid in full, ask for a good faith payment. Despite your best efforts the customer may pay late, particularly in the current economy. At least know that you have improved your chances for more timely payments. Another option is to obtain Accounts Receivable insurance. There will be a percentage fee and a deductible, but you now have a bit more leverage. You will be able to say, “The agreement with my lender requires that I carry A/R Insurance. When your company’s account goes to 60 days I am required to turn it over to my insurer, which will impact your credit rating.” Revise the Cash Flow Forecast to incorporate these slower payments.

Does it make sense for most small businesses to accept credit cards for payment?

Accepting credit card payments carries fees of 2% to 5% percent. Are you able to absorb these costs or include then in the price, or worried about their ability to pay at a later date? If this is the case, accept a customer’s offer to pay by credit card. This slightly lower cash inflow will be offset by the time you gain to build your business rather than spending time to chase down a customer for payment.

What advice would you give someone who is looking to start a second career after a successful career in corporate life, and wants to be their own boss?

We assume that success in corporate life will transfer into success for our small business. First, make a list of your skills. Then list all the skills and knowledge needed to run your new business. For a sole proprietor this list will include skills in: sales and marketing, presentations, accounting, computer, scheduling. Expect to see many gaps. What skills need development? Attend Core4 and other business training seminars given by the CDCLI, SBDC, organizations and libraries. SBDC at Stony Brook and Farmingdale, Hauppauge Industrial Association and others hold Business Owner roundtables where you can brainstorm your issues. As children we learned by asking questions.

As adults we are afraid that asking questions might make us look foolish. Better to look foolish and eventually find the answer than not ask questions and suffer a business failure. No question is a bad question. Start with “What question do I ask when I don’t know what question to ask?” Ask your accountant, attorney, other business owners, consultants. Each stage of business development faces different issues. Keep asking. Budget funds to hire professional advisors. This decision is often the difference between success or failure. Seasoned experts are available on an as needed basis, whether it be CEO, CFO, CTO, HR or Sales coaches. Each costs significantly less than a full-time executive whose cost is beyond your reach.

I find that a lot of solopreneurs skimp on their image even when they have a great service. Do you agree?

Leave a professional impression. I recommend not using AOL, Gmail, Yahoo, Optonline or similar addresses. Those who want to know more expect to view a website and correspond to an email address that reflects the your website name. Don’t scrimp on materials. I receive many comments on the high quality of my business card, brochure and website. Correspondence is printed on 28# or 32# paper. Learn to network. Understand what networking means and how you can assist others. Then network, network, network. DON’T SELL – LISTEN! Identify the needs of the client. Determine if you are the best solution. For example, I’ve been asked if I’m qualified to perform bookkeeping functions. Yes I am, but I am not the most cost effective solution. I would not feel proper to perform bookkeeping work at CFO rates. With the client in mind, I refer them to a part-time bookkeeper. My client’s level of trust grows exponentially. Each of us enjoy landing a new client, be sure you are the best solution. Your integrity will shine through. And don’t forget that Plan!

Keith A. Simmons is a partner in B2BCFO® and former Chief Financial Officer of Long Island companies. He works with owners of emerging, small and mid-market businesses to create financial and goal clarity. Goals are transformed into action plans that increase cash, profitability, sales and company value. He can be reached at [email protected]. 631.379.6742.

MSPmentor contributing blogger Mitch York coaches executives who are evolving into entrepreneurs. He is a veteran of high-tech media and an entrepreneur himself. Find York — and his personal blog — at www.e2ecoaching.com. MSPmentor is updated multiple times daily. Don’t miss a single post. Subscribe to our Enewsletter, RSS and Twitter feeds.