Download - CompTIA - Financing Your Business
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Financing Your Business: When and How to Use Debt and Equity
Presented by: Frank Coker, CMC, MBA
CompTIA Faculty
CEO, CoreConnex, Inc.
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Why does it matter?
• Debt and equity management are essential to growing a business
• It is too late to get cash when you’re desperate
• It’s far less expensive to do it right (plan ahead)
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Why does it matter?
Your money + their money = lift-off
(Then you can play with the big boys)
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Agenda: Financing your Business
• Why does it matter?
• Flavors of debt and equity
• Ratios that matter
• Relationships that matter
• Strategy / timing
• Best practices
• Dashboarding
• CompTIA resources
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How Does it Work?
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How Does it Work?
• Credit cards• LOC (line of
credit)• Vendor credit• Short term loans
• Credit cards• LOC (line of
credit)• Vendor credit• Short term loans
• Mortgage• Leases• Long term loans• Convertible debt
• Mortgage• Leases• Long term loans• Convertible debt
• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants
• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants
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How Does it Work?
• Credit cards• LOC (line of
credit)• Vendor credit• Short term loans
• Credit cards• LOC (line of
credit)• Vendor credit• Short term loans
• Mortgage• Leases• Long term loans• Convertible debt
• Mortgage• Leases• Long term loans• Convertible debt
• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants
• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants
• Paid off in one year• Cover fluctuations• Align cost/ revenue
• Paid off in one year• Cover fluctuations• Align cost/ revenue
• Paid over years• Investment in
future revenues• Align cost/ revenue
• Paid over years• Investment in
future revenues• Align cost/ revenue
• Paid at exit (or drain early)
• Accum earnings• Invest in future
value
• Paid at exit (or drain early)
• Accum earnings• Invest in future
value
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The Cost of Money
Source Interest Principle Cost
Credit Cards Highest Flexible Highest
Line of Credit ModerateFlexible(should pay down often)
Moderate
Short Term Loan
Low-Moderate High Moderate
Long Term Loan Low Low Moderate
(low annual)
Stock n/a n/aDilution - winner takes all!
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What Does the Banker Want?
• Profitable and thriving customers• Long-term relationship• Minimum risk – high certainty• Mutual trust – up-front honesty• Visibility• Opportunity to help solve problems early• Current (not dated) information• Success stories; referrals
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The Biggest Problems
• Surprises – with no opportunity for a fix• Shut down on communications• Personal banker looses borrower to the “troubled
assets” department when surprises occur(no fun for anyone)
• Customer borrows money for the wrong purpose(e.g. LOC increase for a capital investment)
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Special Cases
Solutions:•Personal guarantee from owner•Personal assets as collateral•Higher cost loans•“Alternative Lending” sources•Third party investor (provides investment and guarantee on loans)
High-risk Situations•Service Company – no long-term assets•Extreme peaks and valleys•Revenues on down trend•Industry that is struggling•Company with history of losses•Company that is highly reliant on a single expert
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Key Concepts
• A company with no debt has no leverage• A company with no debt works harder to keep up with
competitors that have appropriate debt levels• A company with excessive debt often cannot grow fast
enough to solve the problem; austerity is often the only way out
• Too much debt will crush a company
OPM - Other People’s Money (pronounced “opium”)
can be addictive
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Ratios that Matter
•
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Financial Strength Metrics
Working Capital = Current Assets – Current LiabilitiesTarget Rate = 1.5 [average across industries, some industries different]
Target Minimum = (1.5 x Current Liabilities) – Current Liabilities
Example:Current Assets = 100Current Liabilities = 60Working Capital = 40Target Minimum = 30
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Healthy Scenarios
• Goal is to get above Target Minimum
• Understanding “health” means tracking trends
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Unhealthy Scenarios
• Falling below or being below Target Minimum is fundamentally unhealthy
• Understanding “health” requires trend lines
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Relationships that Matter
•
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Strategies and Timing
When should you repair your roof?
When is the repair most urgent?
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Thinking Ahead
Planned•Normal fluctuations
•Expansion
•Investment
•Acquisition
•Merger
Unplanned•Economic downturn•Competition•Technology shift•Opportunity•Disaster•Health surprise
It takes time to get ready;All scenarios benefit from a strong financial position
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What are Your Trends
• Growth• Margins• Working Capital• LOB Performance• ROI• Asset Performance• Staff Contribution
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Get an Advisor (Coach)
Recommended role:•Facilitate monthly review process
•Build structure and process
•Keep focus on priority issues and opportunities
•Help solve specific problems
•Support accountability
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Corelytics Dashboard
•Trends•Goals•Comparison •Forecasts•Metrics•Contribution
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Dive Deep – Dive Quickly
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Monthly Process
1. Set GoalsEstablish Plan vs. Actual
2. Track TrendsAdjust to hit goals
3. Align TeamShare to build understanding and commitment
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Tips
• Your accounting or goals don’t have to be perfect, start and adjust
• Get help (advisory board, experts)
• Force accountability (peers, associations)
• Manage/borrow cash as one of your top goals
• Get your team involved! (screen shots of dashboard)
• Dashboarding makes it easier
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CompTIA Benefit:
Free Financial ReportSee your trends, financial strength and working capital
Free Financial ConsultationCompTIA members get consultation with Financial Expert (each with IT expertise).
How?•Email: [email protected]•Subject: Financial Strength•Text: Your contact information & your current accounting system type
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For More Informationhttps://CompTIA.corelytics.com
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Questions?
Thanks!