Denial is Not a River in Egypt!

By: Ken Walsleben
Date: 5/1/2007

Now don't be alarmed, but I really need you to think about your business for a minute.

Why are so many business owners in a perpetual state of denial concerning proactive planning for their business capitalization? Often, they enthusiastically report that they expect revenue to grow aggressively over the next 12 months. Yet, unless prodded, they rarely consider the financial complications that will develop from that additional growth. Worse yet, when I ask them straight-out how they plan to fund that growth, I often get blank looks in return. And, don't assume that self-funded firms are immune from this affliction! This column is directed to all staffing and recruiting firms, regardless of their chosen method of finance.

We've all heard horror stories of businesses that have grown themselves into such a pickle that they had to conduct a fire sale of their promising firm to a "merger partner," or they quickly raised capital on disadvantageous terms, or worse yet, they delayed a payroll. Sadly, I speak to quite a few each year. Despite the variety of calamities that befell these firms, they all shared the same mistake of improper financial planning.

All too often, owners who expect good growth just assume that cash flow will take care of itself. But, what if their invoice receipts are delayed just a little? A client, who routinely remits payment at 30 days, reports that their new policy is to pay at 45 or 60 days. Sound familiar? Your choices are to accept this new policy (through gritted teeth); try to raise your rates to accommodate this change (not likely), or choose to drop the account (not a chance if it's a good customer).

A prudent business person knows that they need to have plans for negative events. The most logical method is to have ready access to additional capital beyond today's capabilities and expectations. That could mean a bank or factoring facility with plenty of room. Listen up self-funders! At a minimum, those of you who presently self-fund should engage an institutional financier as a backup resource to call upon in a pinch. To those business owners who have the financial ability to self fund, allow me to congratulate you. However, if you don't have a bank or factor waiting in the wings, you're absorbing undue risk, and your firm cannot grow as aggressively as possible.

Typically, self-funders are privately held and the vast portion (if not the entirety) of the owners' wealth is comprised of the money they've invested into the business in the form of cash, property, and their internal funding of accounts receivable. So, please allow me to pose a quick question to cause you to think: If you worked with a financial planner who encouraged you to put all of your personal wealth into one stock, would you do it? Of course not! You'd rapidly show that planner to your door. So, why would you keep the vast portion of your personal wealth tied up in a single business enterprise (even your own)?

Yet, many staffing and recruiting business owners do just that. They convince themselves that since they're not paying financing fees, they are making a smart play. They theorize that a lack of funding expense is just like a return on investment. I humbly suggest that this reasoning is myopic and still doesn't address the risk side of my concern.

Self-funders, I encourage you to diversify. Consider aligning your business with a bank or factor and use that funding. Let the business run on its own - to flourish and grow in the ordinary course. By doing so, you can take your personal cash out of the company, and happily place it into your pocket, where it belongs. Then, you can direct this wealth into prudent, diversified investments! After all, isn't that the dream you initially had when starting your firm? You've seeded your business with capital, and you've absorbed all of the financial risk to get to this point. Now, you can return that cash to its rightful owner (you), and the business will continue to flourish on its own. You may now enjoy diversified wealth - which is the best kind to have.

As you can see, regardless of the age of your firm, or your chosen method of funding, you'd better not be in denial. Prudent financial planning is required throughout your journey. Don't be complacent, don't fail to plan, and remember to diversify. Your financial planner will be proud of you. And, so will I!

Ken Walsleben is the Principal and Co-Owner of The Hamilton Group. He can be contacted at 800.351.3066, or by email at ken@hamiltongroup.net.