The Complete Idiot's Guide to Finance for Small Business Owners

349 Pages·2006·11.721 MB·english

by  Kenneth E. Little

Finance for
Small Business
Owners
by Ken Little
A member of Penguin Group (USA) Inc.

Finance for
Small Business
Owners

Finance for
Small Business
Owners
by Ken Little
A member of Penguin Group (USA) Inc.
ALPHA BOOKS
Published by the Penguin Group
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Copyright © 2006 by Kenneth E. Little
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THE COMPLETE IDIOT’S GUIDE TO and Design are registered trademarks of Penguin Group (USA)
Inc.
ISBN: 1-4406-9098-7
Library of Congress Catalog Card Number: 2005937200
Note:This publication contains the opinions and ideas of its author. It is intended to provide helpful and
informative material on the subject matter covered. It is sold with the understanding that the author and pub-
lisher are not engaged in rendering professional services in the book. If the reader requires personal assistance
or advice, a competent professional should be consulted.
The author and publisher specifically disclaim any responsibility for any liability, loss, or risk, personal or oth-
erwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the con-
tents of this book.
Contents at a Glance
Part 1: Numbers Are Your Friends 1
1 The Payoff 3
What’s in it for me? Here’s why you should spend some of
your valuable time getting comfortable with your financial
statements.
2 The Big Three 15
These three reports have all the financial information you
need to understand your business. Make friends with them
and they will help you run a more profitable business.
3 The Balancing Act 23
Your company’s balance sheet may look like it’s going
nowhere—after all, everything does balance. However, dig a
little deeper and see what wonders this report holds.
4 The Income Statement 35
That’s what I’m talking about. Here’s the bottom line, the
most important number in the world—or is it? If you only
look at the bottom of this report, you’re missing some of the
most important parts.
5 Show Me the Cash 51
Show me the money, or more important, show me the cash,
because without cash your business isn’t going to last long.
This report tracks cash as it comes and goes through your
business.
Part 2: Make the Numbers Work 61
6 How Are Your Assets Working? 63
Your company’s assets don’t serve much purpose if they’re not
working for you as hard as you work for them. Using a few
quick calculations, you can give your company a financial
checkup.
7 Inside the Income Statement 75
Are your expenses and income where they should be? How do
you know? The income statement can tell you much about the
efficiency of your company.
vi The Complete Idiot’s Guide to Finance for Small Business Owners
8 Measuring Cash Flow 85
Cash is your company’s most precious nonhuman asset. Your
most important job is managing cash so that there is some
available when you need it (which is all the time).
9 Operational Analysis 91
Despite its academic tone, operational analysis is about man-
aging your business smarter by understanding the financial
implications of everyday business activities.
Part 3: Strategic Planning/Budgeting 105
10 The Strategic Planning Process 107
Most small business owners don’t enjoy planning—they’d
rather be doing. However, if your company is going to survive
and move to the next level, you must have a plan to get there.
11 Shooting for Profit 121
Don’t settle for what’s left over at the end of the year and call
that your profit. Plan for it, budget for it, and set goals for
achieving the profit you want.
12 Holding Down Expenses 131
You can’t fill a bucket with a hole in it. Plug those expense
holes by making it everyone’s job to keep a lid on costs.
13 Sales Targets 143
For many small businesses, projecting sales is a guess at best
and not even attempted at worse. Don’t let the process over-
whelm you. Projecting sales and identifying sales targets is
important work.
14 Expanding Market Share 155
How do potential customers get to know you? If you don’t
have a plan to expand your market presence and market
share, you’re lucky if any new customers find you.
15 The Strategic Planning Budget 167
Budgets sound like restrictions and constraints to some people,
but if you do it strategically, your budget becomes a planning
and operations tool also.
16 Financing for Growth: Debt vs. Equity 177
Growing businesses need fuel and that fuel is cash. If you
can’t finance your growth out of cash, you need to consider
outside sources. Which is better for you, debt or equity?
Contents at a Glance vii
Part 4: Financing your Business with Debt 187
17 Preparing Your Loan Package 189
You’ll need a loan package before meeting with potential
lenders. That loan package must contain certain elements for
you to have any chance for success.
18 Traditional Debt Financing 201
Traditional debt financing for small businesses takes several
forms and can include short and long-term notes. You have a
variety of lenders to consider as well.
19 SBA Loan Programs 211
The Small Business Administration plays a key role in
financing small businesses, but it may not be the one you
thought.
20 Other Government Programs 221
There are a variety of local, state, and federal loan programs
to help small business owners, but you have to know where to
look.
21 Sources of Alternative Debt Financing 229
You can look beyond traditional lenders and find several other
sources of financing, such as factoring and inventory financing.
Part 5: Financing Your Business with Equity 237
22 Do You Want Partners? 239
Selling shares of your company to investors may mean giving
up some measure of control. On the other hand, if you are
careful, you can also gain access to experienced business people
to tap for advice.
23 Angel Investors 249
Angel investors are often friends, family, or a wealthy local
individual who believes in you and your company. They are
great sources for start-up and early funding.
24 Investment Groups 259
The reality for most small businesses is that the second stage of
investor participation is with a group of local investors.
25 Venture Capitalists 267
Many small businesses are too small to gain the attention of
venture capitalists; however, if your company has big potential
they can be a source of significant investment.
Afterword 275
What’s next for your company? Where do you go from here?
Now that you have the overview, here are some suggested
next steps to understanding your company’s finances.
Appendixes
A Glossary 279
B Resources 285
C Different Legal Structures 287
Index 305