A Brighter Future – Maybe

This was the title of an Article in today’s Wall Street Journal in the Small Business section (page B5 of the print edition).

A Brighter future for small business






Some interesting tidbits:

They estimate the number of American small businesses at nearly 30 million.  There are a lot of us out there!

Companies loosen their purse strings – a little:

Many of the outlays will be geared toward improving sales without hurting cash flow.  That means investing in technology to reduce overhead, and increasing productivity through work-force training and development..

Sounds to me like there needs to be some serious cash flow planning going on.  Time to jump on the SurvivalWare bandwagon!

The bad news:

Continued weakness in the housing market is still a challenge for many business owners, who are prevented from tapping home equity or from using their homes as collateral for secured bank loans.

The good news:

Small business loan approvals by small banks and credit unions have climbed steadily since the start of the year and are now roughly half of all applications…

This in contrast to an approval rate of 10% from banks with assets of more than $10 billion.  I know where to target my next loan application!

Here is the full article: http://online.wsj.com/article/SB10001424052970204720204577126672345172312.html

What is Cash Flow?

According to Wikipedia,

Cash flow is the movement of cash into or out of a business, project, or financial product.

Cash Flow

The trouble is that you run into all sorts of qualifiers and distractions.  There is Net Cash Flow, Free Cash Flow, Discounted Cash Flow, Pre-tax Cash Flow, After-tax Cash Flow, Cash In-Flows, Cash Out-Flows, etc., etc.

I’ll focus today’s article on Net Cash Flow as it applies to a business, and specifically, a small business.  I’ll use the terms Cash Flow and Net Cash Flow interchangeably.  Also, cash is defined to be bank deposits in addition to currency.  Stuff you can spend right away if you need to.

Small Business Cash Flow

Is it the same as profits?  No!  But profits certainly are one component of cash flow.

Is it the same as cash?  No!  It is the movement of cash during a defined time period, not the same as the cash balance at the end of a time period.

Is it a term everyone agrees on?  No!  Otherwise you wouldn’t be asking the question!  I’ll give you the common sense definition:

“Net Cash Flow” = “Cash Inflows” – “Cash Outflows”

But you really have to dig down deeper  if you want to understand it, and control it.  It’s just like your cholesterol levels.  There is good cash flow, and bad cash flow.  You want more of the good, and less of the bad.  So it helps to know which is which.

Why is Cash Flow important?  It is the lifeblood of a small company, and the central focus of value for a profit making entity of any size.  If you run out of cash, you go out of business.  The stakes are huge.  And it is not easy to manage, especially as you grow.  There is a tendency to try to get by on the bare minimum of capital as a way of preserving equity and control for the founder or owner.

Back to the central question: what is cash flow?

I’d have to agree with Wikipedia: Cash flow is the movement of cash into or out of a business. 

If during a month you collect $100 from customers and pay $80 to vendors, you can be said to have “Net Cash Flow” of $20 for the month.  Your “Cash Inflows” were $100 and your “Cash Outflows” were $80.

When people use the term “Cash Flow” they often mean “Net Cash Flow” but sometimes they mean “Cash Inflows”  – so you have to be aware of the context and the person using the term.

Since “Net Cash Flow” is the net amount of cash coming in (or going out) for a time period, you can use it to determine what your cash balance should be:

“Ending Cash Balance” = “Beginning Cash Balance” + “Net Cash Flow”

Remembering your algebra, you can re-arrange the formula and calculate “Net Cash Flow” based on knowing the beginning and ending cash balance:

“Net Cash Flow” = “Ending Cash Balance” – “Beginning Cash Balance”

So another way of defining Cash Flow  is to say that it is the change in cash from one time period to the next.

Components of Cash Flow

The accounting profession and the Securities and Exchange Commisssion (SEC) have rules about how to calculate and present cash flow.  (As you can imagine, “Net Cash Flow” alone does not give you a lot of insight into how a business is doing).

You can look at a 66 page PDF file with the guidelines to follow: Statement of Financial Accounting Standards No. 95 – Satements of Cash Flow.

If I may be so bold as to summarize, you are supposed to classify cash receipts and payments according to whether they stem from operating, financing, or investing activities.  Rather than making detailed lists of receipts and payments, you can calculate many of the sub-components of cash flow by looking at the balance sheet for two consecutive time periods, and subtracting one from the other.  This is how a financial model generates a complete cash flow statement using the Income Statement and Balance Sheet for several time periods as input.

Operating Cash Flow

Cash Flow from Operating Activities is primarily Operating Profit and changes in Working Capital.  In general, cash flow from operating activities is a GOOD THING, especially from Operating Profits.  Profits are GOOD.  Losses are BAD.

Changes in working capital can go either way.  Less cash tied up in Inventory might be a good thing (and a positive Cash Flow).  Or it could be a company desperate for cash, and unable to pay vendors on time, who are less willing to ship without cash up front.  An increase in Payables, while recorded as a positive cash flow is not necessarily a good thing.  It could be a sign that you are getting behind in your bills.  Or it could be part of a deliberate strategy to free up cash – it which case in increase would be a Good Thing.  How about changes in Accounts Receivable?  A reduction in your Accounts Receivable balance comes in as positive cash flow.  It could be because you are collecting your receviables more aggressively.  Or it could be you just had a lousy Sales month.

How to increase Operating Cash Flow:

Increase Operating Profits (get better gross margins, control expenses better, make more sales)

Decrease your Inventory Balance

Decrease your Accounts Receivable Balance (because customers send you money)

Increase your Accounts Payable Balance (take longer to pay vendors)

Not all of these are necessarily feasible or desirable to do.  As with any financial decision, I recommend you look at a financial model of the enterprise as a whole – to make sure you’re not just playing “whack-a-mole” with cash.

HINT:  Explore the use of Deferred Revenue to finance your business.  An Increase in Deferred Revenue is a Positive Cash Flow.  Deferred Revenue occurs when customers pay you in advance of receiving a product or service.  Annual Software Maintenance falls into this category, as do Subscriptions paid up front, or other similar payment arrangements.

Cash Flow from Financing Activities

Financing Activities refer to debt and equity.  Borrowing money, repaying debt, and paying the interest on the debt are all Financing Activities.  So is selling stock in the company, or paying dividends.

Positive Cash Flow from Financing can be a Good Thing if it is the result of new Long Term Debt, the sale of a minority stake,  or a deliberate increase in short term debt.  If it is credit cards kicking in to absorb lack of cash elsewhere, it might be a Bad Thing.  Conversely, negative Cash Flow from Financing due to a decrease in credit card debt might be a Good Thing – a sign that you are generating cash from other things, and can afford to repay debt.

How to increase Cash Flow from Financing Activities:

Arrange a long term bank loan

Borrow against a credit line

Sell stock in the company

Avoid paying dividends

Cash Flow from Investing Activities

Investing is primarily the act of putting money into long term assets such as Vehicles, Equipment, or Leasehold improvements.  Buying a Fixed Asset generates negative cash flow – but often is a Good Thing.  It is a Bad Thing if you make a large cash outlay and there is not sufficient cash flow from other sources (e.g. a loan) to offset the cash outflow.

How to increase Cash Flow from Investing Activities:

Use operating leases instead of purchasing equipment

Don’t invest in your business (may not be a good long term strategy)

Net Cash Flow

Is the sum of the three components:

Cash Flow from Operating Activities + Cash Flow from Financing Activities + Cash Flow from Investing Activities

If you have done the math correctly, this will be equal to the change in your Cash Balance for the same time period.

More Information on Cash Flow

Check out Philip Campbell’s book, Never Run Out of Cash.  He proposes his own easy to follow Cash Flow Statement that he calls the Peace of Mind Schedule.  He does a great job of explaining cash flow in simple terms, and preaches about the importance of monitoring cash flow and doing cash flow projections.

Check out my SurvivalWare Website for Cash Flow Projection Software.   Anyone can try SurvivalWare Free for 30 days.  Just give us your name and email address, and we’ll send you a link.  No credit cards required.

The SurvivalWare Jobs Act of 2011 – “100K, Here to Stay”

My Proposal to Help Small Business

By Rusty Luhring

Small Business Advocate

Founder, CEO of Luhring SurvivalWare, Inc.

Cash Flow Analysis and Projection Software

 The post mortems on Solyndra have been fascinating, to say the least.  I think what we are seeing is a growing mountain of evidence that Solyndra was doomed to happen when the loan guarantee program was created in the first place.  That perhaps expecting government workers to act like venture capitalists is no way to run a railroad.  I have an alternative to the American Jobs Program that I’ve started a crusade for.  It is called the “SurvivalWare 100K, Here to Stay” program.

But first, let’s talk about Solyndra.  It helps make my program all the more compelling. 

Here’s what we know, nearly 30 days after the bankruptcy filing August 31, 2011: 

  • The company may have had a better chance of surviving WITHOUT the loan than with it.  Wait, what?!  That was the gist of a Wall Street Journal Article on page B1, 9/16/2011, “Loan Was Solyndra’s Undoing.”
  • Solyndra Executives spent lavishly.  (“Solyndra’s ex-employees tell of high spending, factory woes” Washington Post 9/22/2011).  Let me do the math.  $500 million+  in federal loan guarantees.  Effective interest rate a little over 1% APR.  Did they sign personal guarantees?  Hard to tell.  And why are they pleading the 5th at the Congressional Hearing?  So who exactly is surprised they spent lavishly?
  • The encircling Republican partisans smell blood in the water, but they are not exactly blameless.  According to Dana Milbank’s column in today’s Washington Post (9/27/2011 pg A8) 

“What McConnell neglected to mention is that Solyndra was cleared to participate in this loan guarantee program by President George W. Bush’s Administration.  He also did not mention that the legislation creating the loan-guarantee program, approved by the Republican-controlled Congress in 2005, received yes votes from – wait for it – DeMint, Hatch, and McConnell.” 

  • Wait, it gets better. 

“Bush’s Energy Department apparently adjusted the regulations to make sure that Solyndra would be eligible for the guarantees.  It hadn’t originally contemplated using the photovoltaic-panel manufacturing that Solyndra did but changed the regulation before it was finalized.”

 You may call that highly suspect.  I call it good pro-active government relations strategy executed by a top notch lobbying firm.  They deserve kudos for early detection of the problem, and successful resolution.  They surely deserve a handsome payday.  And surely the dollar amounts will become published as the investigations continue. 

  • In no way am I absolving the Obama administration.  They are taking this tendency to enact grand plans and appear to “do something” for every ill – to unprecedented heights.  Rushing the Solyndra approval so the Vice President could speak at a photo op (via video feed at that!) was just plain wrong and revealing at the same time.
  •  Who in their right mind would put up with the uncertainty and the restrictions in order to snag one of these loan guarantees?  A year long period of time to negotiate the loan.  Tough luck if business conditions change.  I think it biases the applicant pool away from solid business people and more toward porcine operators used to feeding at the federal trough.
  • No scandal is complete without a mention of Goldman Sachs.  So guess who was Solyndra’s financial advisor?  I hope they were compensated handsomely, for I feel sure their advice on dealing with the Administration and Treasury department was priceless.
  • Final editing before publication: today’s Washington Post (9/28/2011) had a page 2 article about the “Foundation” connected to George Kaiser that was the principal investor in Solyndra.  It was not really a private foundation, and hence has no requirement to pay out 5% of its net assets per year.  Yet apparently gifts of cash and stock to this entity are tax deductible.  And it can use the word “Foundation” in its name.  This is getting off on a tangent – but I do hope we find out who voted for such a ridiculous law.  Thank you Solyndra for bringing this issue to the forefront, under the bright glare of publicity now associated with anything remotely related to your business or government dealings.

The SurvivalWare Jobs Act of 2011

Instead of doling out $500,000,000 at a time to the companies with the best lobbyists, how about chunks of $100k credit lines to any small business owner willing to sign personally.  Give a contract to Capital One to administer the program.  These would be credit cards.  Pre-approved.  Subject to the same penalties and collection efforts upon default as any credit card debt.  Healthy interest rates to cover a higher default rate. 

All you have to do is apply.  Swear under oath this is for a small business.  Agree that you will be a responsible steward and do cash flow projections on a regular basis so that you can avoid trouble and ultimately pay it back. 

As a business owner you would tap this debt only when you had opportunities that would return something higher than the interest rate.  The thing about small business owners in today’s economy is that they have to routinely pass up opportunities due to lack of capital.  If something has a 12 month payback, it doesn’t matter if there is insufficient cash to cover the wait. 

How much would The SurvivalWare Jobs Act of 2011 cost? 

Let’s say we want to help 4 million small businesses. 

At $100,000 each that would be $400 Billion.  Hmmm. That’s less than the President’s Jobs Act Proposal.  And that’s only if all 4 million borrowed the full amount right away.  And 100% defaulted. 

What would the impact of this?  Torrid investment, confidence, and growth.  That’s right, torrid. 

I don’t have an economic model to crunch the numbers and predict the exact number of jobs created, additional tax revenues collected, growth in the money supply, or impact on inflation.  I can tell you though what it would do for the vibrant, diverse, striving community of American small business owners and entrepreneurs.  It would build confidence.  It would show appreciation.  It would spur profitable investment and deliberate risk taking – what this economy needs to pull out of the doldrums.  It would unleash the animal spirits of American Capitalism like nothing else you can possibly do. 

Who am I? 

I’m just a small businessman, trying to make my dreams happen.  I’m trying to change the world, one small business at a time.  I’m trying to improve financial literacy and acumen among entrepreneurs and small business people.   So that their financial management skills become a competitive edge, not a cause for failure in a hostile business climate, stacked to favor heft and connections.  Being nimble financially is critical to our success. 

I want to help other entrepreneurs and small business owners succeed. 

We have a great country, a great economic system, a great democracy.  There are things we can do to unleash the American Competitive Spirit – our can-do attitude, our perserverance.  We want to make it easy for people to start new businesses.  To stay in business once they’ve started.  To add jobs, when appropriate.  To encourage innovation.  Not by prescription.  By reducing friction, and getting out of the way. 

And those things we can do to help do NOT include showering loan guarantees on politically connected companies with incredibly competent lobbyists. 

Frequently Asked Questions 

Q. What kind of paperwork to fill out? 

A. None.  Online applications only. Name, DOB, SSN# all that required.  Nothing about Income, Assets,  or  Debt. 

Q. How long to get approved? 

A. 3 minutes max.  This should be written into the Service Level Agreement with Capital One (or whoever). 

Q. How long before we get access to the cash? 

A. A week to 10 days.  Standard fraud protections and investigation apply.  So do standard upselling pitches by the issuer. 

Q. What are the costs?

A. I’d recommend a standard interest rate of 15.99% the first year of the program. (Re-negotiated annually by Treasury and the credit card company).  Capital One and the government should share in the profits.  The government at minimum earns interest at the rate it is paying on 10 year bonds for any capital tied up in the enterprise. 

Q. Can I start a new business tomorrow? 

A. We’d probably pick a start date to define when you had to be in business to qualify for the full 100K limit.  Start-ups would be treated like student loans – and maybe have a smaller limit initially. ($25,000 to $50,000) 

Q.  What can I do with the money? 

A.  Pay it back eventually.  Other than that, it is up to you.

Conservative vs. Liberal Approach to Weight Loss

The recent budget plans and debt ceiling battle have helped sharpen the debate between conservatives and liberals who each have their own world view.  I couldn’t help but think how radically different their approach to weight loss might be.  And shouldn’t there be a better way? 

Top 10 Conservative guiding principles for weight loss 

Conservatives’ approach to weight loss 

  1. You can’t eat cake. Or ice cream. Or doughnuts.  Or anything that gives you pleasure.
  2. Abstain from alcohol and drugs.
  3. Pray before every meal
  4. No more than 1800 calories a day.  Unless, of course, you have contributed money to the Republican National Committee.
  5. Avoid fast food, or restaurants without white tablecloths.
  6. Raising exercise levels is off the table – you have to focus on cutting calories.
  7. Accept random urine tests to detect excessive carb consumption
  8. Weigh yourself once an hour and report the results to your minister or block captain
  9. If you don’t lose weight, you get put on probation.  3 strikes and you are out: you get put behind bars where your caloric intake will be strictly limited.  Unless ,of course, you have contributed money to the Republican National Committee.
  10. Other than that, do as you please, you fat slob.

 Top 10  Liberal guiding principles for weight loss

 Liberals’ approach to weight loss 

  1. Government funded yoga classes
  2. Eat 3.7 servings of fruit each day, and 9.2 servings of vegetables.  Here are the specific fruits and vegetables you are permitted to eat. (See attached table pending final tabulation of campaign contributions)
  3. Buy only organic food transported in green electric vehicles to solar powered grocery stores or wind powered farmers markets.
  4. Abstain from most alcohol and fat, red wine and brie cheese excepted.
  5. Compost your fast spoiling organic fruits and vegetables.
  6. Recycle empty food and beverage containers regardless of how far you have to drive to drop them off in the proper bin.
  7. Drink 2 gallons of filtered water a day.  Perrier, Pelegrino, and other expensive and status conferring spring waters are also permitted.
  8. Weigh yourself at most once a month.  We’re not keeping score.  It’s the effort that counts.
  9. File a class action suit to remove vending machines that sell sodas from school campuses.  Replace with fruit juices of equal or greater caloric content.
  10. Exercise your collective bargaining rights to demand arugula and alfalfa sprouts in the company cafeteria.  Stipulate organic ketchup only for the burgers and fries station.

 SurvivalWare Common Sense Approach to weight loss 

  1. Burn more calories than you consume each day
  2. Keep track so you can monitor daily progress
  3. Post your weight and performance each day on Facebook or your Blog to provide focus and motivation.
  4. Buy the SurvivalWare Diet Book (It’s only $3.99 and includes a link to a spreadsheet to help you keep track)
  5. Throw the bums out of office.  We need some common sense in our government.

SurvivalWare Common Sense Approach to Business Survival and Growth

  1. Take in more cash each (day, week, month) than you ship out
  2. Be consistently profitable.
  3. Keep close track of cash and profits so you can monitor daily / weekly / monthly progress and Never Run Out of Cash.
  4. Join a peer group or franchise system that allows you to compare your performance to industry norms, and learn about best practices.
  5. Take the time to do cash flow projections, even when it is painful to do.
  6. Buy our Software!  Take our courses!  Engage our growing army of Skilled Developers!

Cash Flow Projection Software

The Solyndra affair makes me want to vomit!

A peek into the real world of small business survival 

It’s time to give small business owners a voice

Why do I get physically ill when I read about Solyndra, the company that announced last week that it was declaring bankruptcy DESPITE $535 million in federal loan guarantees.  Maybe because I’ve just been through an 18 month long cash crisis where I’ve had to go to the mats to survive.  Federal policies didn’t cause my problems, but they sure didn’t help matters.  Take the small business credit crunch, which is ongoing and brutal for millions of small business owners who could use a little cushion. I believe its continuation to be an unintended consequence of stepped up bank regulation.  And I don’t think anyone in Congress or the Administration has a clue about small business.  Or truly gives a damn, except when the cameras are rolling.

What do I mean going to the mats?  Well, it starts with a commitment to never give up, no matter what the odds, or the amount of humble pie you have to eat.  (If humble pie were fattening, I’d weigh about 400 pounds!)  But a little of it is good now and again, it helps keep one grounded.  Too much gets tiresome, especially when you read about $535 million pissed away on a company that apparently doesn’t know how to do financial projections.

And then I learn that “a major fundraising bundler for Obama” – or rather George Kaiser’s family foundation – was a major investor in Solyndra.  In Saturday’s Washington Post (9/3/2011), there was an inside article about the George Kaiser Family Foundation issuing a statement that “George Kaiser is not personally invested in Solyndra and did not participate in any discussions with the U.S. Government regarding the loan.”  Translation: that’s what underlings are for.

Why the rancor?

I feel like I don’t have a voice.  There is a serious small business credit crunch going on, and the federal government just seems to make it worse.  Yet they find $535 million for a “green” company funded by a campaign contributor.  That’s just not fair.

Meanwhile, I have to fight American Express tooth and nail to get more time to pay a huge bill I ran up in anticipation of new sales that did not materialize.  It was a week after the 15 day grace period that I got the call.  I was dreading it, like you can’t believe.  This was mid to late December, 2010, just before Christmas of course.  I find that Murphy’s law is strongest when applied to matters of small business cash flow.  Two weeks earlier, my daughter Kelly, who had moved back temporarily with us because she lost her job (with guess who!) – totaled our only car and broke her pelvis.  She had no health insurance of course. 

She had driven my wife, Laurie, to work that day so she could have the car.  It was raining, and I assume she was late (operating on “Kelly time” as we family members affectionately call it).  She didn’t see the speeding (at least that is our contention) vehicle barreling down the George Washington parkway as she pulled out to turn left, and took the full impact in the driver-side door.  It was about 7:30 a.m., 2 or 3 hours into my workday, when I got a call on my office phone from a number I did not recognize.

I ascertained that she was alive and conscious, and then much discussion ensued about how to get me to the scene.  One of the good samaratans who stopped to help offered to pick me up (Kelly was driving our only car).  But traffic had been stopped in both directions on the parkway.  It was only two miles away.  I grabbed a backpack, my iPhone, and lots of reading material (ever been to an emergency room?!),  hopped on my bike, and pedaled furiously in the rain..

I’m happy to say that 8 months later, Kelly is fine and dandy, and living on her own.

Two weeks to the day after Kelly had her accident, my wife slipped and fell while leaving for work and broke her foot.  When she called and told me what happened, my second thought was “your poor thing, I hope you’re OK.”  My first thought was, ”Damn, who’s going to help take care of Kelly?!  What impact will this have on our family income?  Does my life insurance policy have a suicide clause?”
Within a few days of that, son #2 flew in from California, separated from his wife.  You guessed it – he was unemployed because his father had eliminated his work hours.

Then shortly after the new year, son #1 moves back home – also unemployed.  There are advantages and disadvantages to employing family members.

I finally worked out a repayment schedule with Amex.  One thing nice about doing detailed cash planning, is that it strengthens your resolve, and helps you avoid commitments that come back to bite later.  At first they let me get by with paying $100 every couple of weeks as a sign of good faith.  Of course, what really hurt was losing all the points I had accumulated.  I was tempted to use them up prior to becoming delinquent, but figured that would not look so good.

The Amex collection rep was professional and firm, but relentless.  She even suggested I skip a mortgage payment in order to pay them instead.  (I declined) Some time in January,  we reached a standoff, and finally she called in her manager who quickly offered me a work out plan to pay them over two years.  A ray of light at the end of the tunnel.  I tried not to sound too eager when I said yes.

I’m afraid I had to swear off employees for a spell, and hunker down.  This when my work day was constrained by driving my wife to work, my daughter to X-ray’s and doctor’s appointments, and cooking and (occasionally) cleaning for our suddenly un-empty nest.

And in my business, software and consulting, time is money.  So , yeah, I felt the strain.  Good thing I didn’t hear about Solyndra back then.

I won’t bore you with all the gory details.  A few highlights include getting turned down for a re-financing because I couldn’t document my income for the previous year.  I had a lousy year.  I had hardly any income.  My house value in relation to my two mortgages was such that in normal times, I would have been able to take another $50,000 or so out.  That was not to be.

I even called a micro-lender in late December.  They wanted several years of tax returns, a formal marketing plan, a long application filled out, and collateral.  They’d even accept cash as collateral.  Wait, what?  I wasn’t born yesterday.  I’m not going to give cash to someone so that they can turn around and lend it to me at a significant rate of interest.

I decided at the time that it was not worth the time it would take to apply.  The maximum loan amount was $35,000, and the guy I talked to seemed to have “writing grant applications” as a core competency vs. understanding the needs of a small business.

Then there was the email vendor I had stopped using in January.  Long story short: I let them know that I was not going to be able to pay them for the duration of the 12 month contract I had signed the previous May (one of several infrastructure building mistakes I made in 2010).  I suggested we work out a compromise.  They declined.  So I ignored their calls and emails until I received an overnight letter in May from their in-house counsel.  I waited a few days before calling them back – wanting to preserve at least a shred of dignity.  I dragged it out until June, and started making payments the end of July.  Just 10 more to go.  Again, the detailed cash planning strengthened my resolve, and gave me confidence.

But listen – I am not the only one.  These stories are repeated a million times over out there in small-business land.  I know – I talk to customers every day.  I see their financials.  I am not the only one who has war stories about business survival.

So you can see why we small business owners would be a little upset when we learn that a company received $535 million in federal loan guarantees, and then declares bankruptcy.  They found that selling solar panels for less money than it took to manufacture them was not a good business model.  Well, duh!  Apparently this “green” company wasn’t so good at bringing in the green.

I hope it turns out to be a case of corruption – because I would hate to think that it was mere stupidity on the part of policy makers in the federal government.

I guess I should be thankful.  The small business credit crunch is good for (my) business.  When sources of capital dry up, business owners just have to make do with less.  Good cash flow planning and decision making is critical.  SurvivalWare shines in this environment.

But let me say this:  we’re not going to put up with this incompetence much longer.  Remember who the front line tax collectors are.  That’s right: business owners with employees.  We are not totally without political power.  It’s time to give us a voice.

Small Business Lending: grade “P” for pathetic

“Few Banks Seek Funds For Small Businesses” was the headline of an article on page C1 of last Thursday’s Wall Street Journal (3/31/2011). 

Some banks reached for comment said there was little demand for loans.  Some small business owners reached for comment begged to differ. 

I don’t know whose fault it is – Congress, the SBA, an Obama advisor, the President himself – but their performance at helping small business has been pathetic.  With a capital P. 

What gets announced with great fanfare (we’re setting aside $30 billion to revive small business lending!) languishes in complexity and red tape (if you increase small business lending by 10% the interest rate we charge you is 1%.  If you increase lending by just 2.5%, the rate is 5%.  Now here are the forms to fill out each month so we can track your level of small business lending).

Community banks had applied for $7.6 billion of the total as of the deadline Thursday, so the Treasury department is extending the deadline until May 16, 2011.  The program is the centerpiece of September’s Small Business Jobs Act, according to the WSJ. 

One of the mistakes policy-makers make over and over again is to equate small banks with small business lending.  Actually, it’s the large banks that do a better job of making funds available to entrepreneurs.   They do it through credit cards and home equity lines.  Some might even be considered sub-prime because most struggling entrepreneurs are unbankable.  We are the un-touchables in a caste system of capital allocation.  We smile and pay the 24% annual interest rate because we can’t get credit anywhere else.  If we can just keep the doors open another month, we will change the world.  But bankers get all worked up if they see that you actually need money, or that you have taken risks.  Sorry – but I believe “risk-taking” is part of the job description for an entrepreneur. 

And now they are tinkering with that precious source of small business capital in the name of consumer protection.  I think I’ll move to Amsterdam and open a coffee shop. 

OK  – that’s the Treasury department.  How about the SBA?  Shoot, if the federal government can subsidize the automakers to the tune of $7,500 per car to make electric vehicles, or ethanol producers 50 cents a gallon to disrupt the grain markets and make it look like we are doing something about the energy problem – surely the federal agency tasked with helping small business must be a wellspring of help and hope for their small business constituency. 

First, the report card for Treasury and the SBA Combined – the article included a chart of Total Outstanding Small Business Loans for 2008 to 2010, sourced from the Small Business Administration’s Office of Advocacy, March 2011. 

2008    $712 Billion

2009    $695 Billion

2010    $652 Billion 

That only confirms my suspicions, my own experience, and the stories from a multitude of small business owners who sometimes have to scramble to survive.  New lending ain’t happening.  Just the opposite – debt is being paid back.  If recent trends continue, small businesses will be lending the banks money in about 15 years. I give the federal government a grade of “P” – not for “Passing” but for “Pathetic.” 

With all the money the federal government is spending on other things that perhaps have lobbyists – (I live among these people near Washington, D.C.  I can see what goes on.) – they can’t find a way to spend any of it in a way that actually helps small businesses survive and thrive?! 

Rather they’re putting up barriers to make it tougher on us.  It’s because we don’t have a voice, and they don’t have anyone writing or implementing the laws who have a clue about what it means to be an entrepreneur.  Shame on them!

 Back to the fund: the WSJ says “Detractors of the fund say some banks are applying for money to refinance outstanding government debt rather than to boost their small-business lending.”   Unintended consequence?  Or maybe not?

Here’s the link to the WSJ article

In Defense of the Virtual Family Firm (VFF)

Venture capitalists may look down on us as hopeless romantics, government policies may try to cut us off at the knees at every opportunity, bankers may be bankers, lending umbrellas when the weather is clear and demanding them back when it begins to rain – and yet we do not despair.  Because we are entrepreneurs.  We are forever hopeful.  We do not give up.  We persist. 

As entrepreneurs, we are hell-bent on making a better life for ourselves, our families, and yes the world. And you know what, Luhring SurvivalWare is leading the charge.   We are leading the charge to increase the financial sophistication and nimbleness of small business owners all over the world so that they are not buffeted so much by the complete failure of the financial system to attend to their needs. 

Pretty soon, banks will be asking “Are you using SurvivalWare?” and will compete vigorously to lend to those companies that do.  The smart banks will be the ones to do this first, because it fosters two way communication between the borrower and the bank, and makes the loan generating, approval, and ongoing monitoring process efficient for both parties.  This is one way to break the credit log jam. 

What we don’t need is a government program that rations credit by putting a ceiling on interest rates, and awards loans to those most skilled at filling out forms rather than actually contributing to economic growth. 

Living well is our ultimate revenge. 

I am so encouraged when I talk to entrepreneurs like Gregg Moore, CEO of WorkPlace Integra in Greensboro, North Carolina, (http://www.workplaceintegra.com) and a loyal SurvivalWare user.  Gregg says,  “I tell people I’m a blessed man.  I get to get up and go to work every day and do something I thoroughly enjoy doing.” 

Or Jarrod Osborne, founder and CEO of Solar Source in Long Beach, California, (http://www.solarsourcepower.com) who has a newborn baby and schedules his appointments for late afternoon after his wife gets off work so that he can care for the child during the rest of the day.  Jarrod is passionate about Clean Energy and building his business,  and is considering SurvivalWare as a potential tool to help him avoid the pitfalls of rapid growth as he looks to expand.  Jarrod still manages to play a lot of golf, and lead an active social life, while doing something he enjoys, and spending precious time with his family. 

This is why we persist.  Why we fight the battle.  And why we’re going to find a way around stupid government policies and the constipated credit market for small business owners come hell or high water. 

Hear this policymakers: you can’t keep us down.  You can keep throwing bullshit our way, but WE WILL PREVAIL.  But for God’s sake, it is in your interest – the whole country’s interest – to remove the shackles and let us innovate and compete. 

For this is the dawn of a new age in entrepreneurship and business formation.   The Kauffman Center just released their study of Entrepreneurial Activity which shows new business formation reached a 14 year high last year despite the recession.

New bNew business formation rates reach 14 year high in 2009


Contributing to this increase is a phenomenon that I call the Virtual Family Firm (VFF).  We are the family farms of the 19th and 20th centuries transposed into the age of the internet and Moore’s law.  We straddle generations and cultures in order to bolster our understanding of the latest technologies and social discourse.  Nothing like having young people around to make you humble about your usage of technology.  

What is a VFF?  It is a company dominated by family members related by blood or marriage, who may live in different places around the country, or even around the world.  The ties that bind and the mutual trust dispense with a whole host of problems and concerns.  You don’t have to come up with non-compete agreements, non-disclosure agreements, or employee handbooks.  Already we have a lower cost structure. 

Next is the frugal innovation enabled by family flexibility.  How about this:  my nephew Sam, who lives in Long Beach, comes to the East Coast and spends 8 or 9 days working with me on some sale videos.

Normal cost:

Airtravel:  $400

Car Rental: $200

Hotel:   $1,000

Meals:       $450

Total:  $2,050

Actual cost:  $300 – less than 15% of the normal cost.  Not too shabby!

Sam stayed at my house.  We did not eat out once.  I cooked every night.  He covered the flight out since he was coming to the East Coast on other business.  Oh yeah – that’s another advantage of a VFF:  I’m totally cool with Sam having outside business interests.  I trust him to devote the time necessary to LSI.  I want him to succeed in life, not just with my company.  The end result:  I know of other software companies spending $15,000 and up for a single 5 minute promotional video.  We get them done for a fraction of the cost.  It allows us to compete.

So you see, it is not just the developing world that practices frugal innovation.  We do it every day in the VFF’s of America just by our very existence.  We have to in order to survive.

Unfortunately, the Big Elites (corporate, media, and government) seem clueless about what it truly is to be an entrepreneur, much less a leader of a VFF.  The risk of wrong-headed policy is that it will stifle or choke off the one hope we have of growing ourselves out of this mess.  By “this mess” I mean the whole economy thing.  You guys are looking for solutions.  There are better strategies than pouring more slop into the federal trough for Wall Street bankers and porcine government contractors.

Here’s an example of the kind of stuff we have to put up with:

I just went through the obstacle course of “getting legal” with my work force, classifying some as sub-contractors, and some as employees to the best of my ability to discern the law (with advice from my accountants and payroll service).

So now I have to register in Pennsylvania and North Carolina in addition to my home state of Virginia.  And pay their un-employment tax. And workers comp rates.  Which means I have to get workers comp insurance.  In case one of my family members slips and falls in their home office due to my negligence and decides to sue.  Say what?!

I’m lucky to have found an incredible company to outsource my “bookkeeping and bullshit” as I like to call it.  (OSI Business Services – highly recommended.  www.osibusinessservices.com Just tell Bill Gerber that Rusty sent you).  Under the rubric “bullshit” falls income tax returns, payroll tax returns, un-employment tax filings, sales tax returns, state registrations, and generally anything that involves filling out a stupid government form.  It ain’t cheap, but it frees me to concentrate on developing product and serving customers.

Here’s my message to policy makers: let’s cut the bullshit.  Just because something is hard doesn’t mean it can’t be done.  We entrepreneurs have to do the impossible every day just to stay in business.  Shut up and listen for a change.  I have three simple suggestions:

Number 1:

Let’s make it easier for virtual companies to establish dedicated work forces across state lines.  Call it the Virtual Family Firm Act.  Is that so hard?  We’re not asking for subsidies or looking to avoid taxes.  Why can’t there be just one government entity to register with, instead of one per state.  How about a special employee classification so that we can treat family members as sub-contractors?  You realize the government forces us to be their tax collectors.  It’s time they did that themselves.  It is an un-necessary burden for us little guys.

Number 2:

Let’s tackle Social Security here and now before it gets worse.  Here’s what I think:

  • We as a country are willing to make shared sacrifices if they are deemed fair
  • We want to solve the problem.
  • Most people don’t understand the significance of productivity vs. CPI indexing, and would consider the lower cost method fair.  The difference is huge.  This is truly low hanging fruit, we need to pick it.
  • People live longer, and actually are happier the longer they work and keep active.  We should raise the age of retirement 1 to 5 years, in increments.
  • We should ask the actuaries how much benefits would have to be reduced to get the system in balance by some target year, say 2,050.  Or maybe phrase the question:  for each 1% reduction in benefits, what does that do to the solvency projections?  We need this information in order to make informed decisions.  Time to get the ole head out of the sand, and start crunching some numbers to frame the debate.
  • There should be no penalty for retirees holding jobs and earning income.  Just normal taxes.  That makes it easier to get by with less guaranteed benefits.  The current reduction in benefits is crazy.

Number 3:

Do not try to control the cost of credit – that will just make the banks become more selective, avoid risk-taking, and ration it.  Guess who is at the bottom of the totem pole when it comes to access to credit?  I’ll give you a hint: it’s not AIG, General Motors, or Goldman Sachs.

Yesterday’s USA Today featured an article on the money page with the headline “Rates rise for small firms – Credit card issuers charge 13.7% more.”   Apparently small business rates were 13.7% higher in April vs. October last year.  Consumer cards, on average, were just 2.4% higher.  Molly Brogan, spokeswoman for the National Small Business Association was quoted as saying, “The absence of any small-business credit card protection in this legislation is likely a significant factor in these increases over the last several months.”

You can quote Rusty Luhring as saying, ”Charge me what you want.  I have the tools to figure out whether it is a good deal or not, and how to work repayment into my future cash flow.  Just raise my limit so I can make those decisions without having to jump through hoops.”

Has anyone thought seriously about the lost opportunity that arises from this obscene mis-allocation of capital?  I have, and it makes my blood boil.