Welcome To Startup Students

I had the opportunity to chat with serial entrepreneur Mike Michalowicz over the phone this evening, and really enjoyed hearing his insights on small business and more specifically young entrepreneurs.  I asked if he was interested in contributing to the Startup Students community, and he offered up the great article found below. Enjoy!

Mike Michalowicz, Serial Entrepreneur

I recently received a notice congratulating me on donating a gallon of blood. I quickly did some research on Wikipedia and learned that the human body has slightly over a gallon of blood pumping through it. Clearly, if I gave a gallon of blood in one sitting I would be a goner. Shoot, even if I only donated one third of my blood (approximately 3 pints) in one sitting I might suffer some tough consequences. But since I donate one pint of blood at a time, my body hardly misses it and I can donate as frequently as seven times a year without missing a heartbeat (pun intended). My blood donations have quickly piled up and in a very short time I have given a gallon.

We’ve all heard that cash is the lifeblood of our business. I think it’s hard to argue otherwise. Shouldn’t we treat our money like our business’s blood? Just like a medical emergency, a business in need of fiscal attention often requires an infusion of capital.

Medical needs sometimes can be predicted and sometimes can’t. Regardless of the timing, with a pool of easily accessible blood reserves the chance for survival dramatically increases. Sometimes our business problems are predictable and other times they blindside the living crud out of us. Regardless of the timing, with a pool of easily accessible cash the chance for business survival dramatically increases.

That’s why you need to regularly “donate” business cash flow to your reserves. The best method is by taking your profit first. What do I mean by this? Every time money comes into the business, and I mean every time, a percentage is automatically transferred into a separate account. Just like a pint of blood, a healthy business will hardly feel it being withdrawn. I like to call this reserve the Profit Distribution Account (PDA).

How much money can be transferred to the PDA without threatening the health of the business? Most stable companies should be able to post a profit of 10% to 25% after all expenses. So trying starting with a low threshold, maybe 5% of every inbound dollar goes to the PDA. Over time slowly increase the percentage and monitor closely to see if your business gets woozy. Once you have consciously (more often subconsciously) adjusted expenses and cash outflow to sustain your PDA withdrawals, you will quickly accumulate a tremendous cash reserve. Be cognizant not to stow away too much money too quickly. Just like donating blood, the rapid drain of cash exiting from business operations will cripple or kill your organization.

Should tough times come upon your company, and they often do, you now have a source of funds that you’ve built up. The PDA’s dinero reserve will see you through these times. On the bright side, as these funds grow they will ultimately be in excess of any imaginable rainy day needs. At that point you should take portions as an equity distribution. Trust me, it’s a real nice way to reward yourself for running a healthy business. There is a nifty little process I recommend on how to do this, but I’ll save that for another article.

If you’ve never given blood, I strongly encourage you to do it. There’s no question it saves lives. If you don’t currently donate to your company’s PDA account, I strongly encourage you to start. There’s no question it saves companies.

Author

Mike Michalowicz’s passion is making small businesses BIG and doing it fast. He was founder and former President of Olmec Systems, Inc., which he sold in 2002 through a private transaction. He subsequently co-founded and served as Co-Managing Partner of PG Lewis & Associates, LLC. There his leadership helped bring it to national prominence in three short years. The company was subsequently acquired in a public transaction in 2006.

Michalowicz was recognized as New Jersey’s Young Entrepreneur of the Year by the SBA in 2000, Young Entrepreneur of the Year in 1999 by the MCCC, and is a 2004 graduate of MIT’s “Birthing of Giants” Entrepreneurial Program. Michalowicz has been highlighted on entrepreneurial topics in Inc. magazine, the New York Times and other periodicals.

A graduated member of YEO (Young Entrepreneur’s Organization), Michalowicz has a BA from Virginia Tech in Finance and in Management Sciences. He is married, has three children and lives in NJ.

It’s been a while. Here is why:

• Internship (30 hours per week)
• Brett Adams Design LLC – my company (50 hours last week)
• Two classes
• College football season tickets
• Pro football season tickets
• My ice hockey league
• 192,837,490,823,749 other things

It’s been really tough juggling everything, but I will have you know I’m working on a killer post for late this week. It’ll be so big it might not even be navigable.

Today, however, I’m going to take a few minutes and talk to you about the first branch young entrepreneurs generally shake on the money tree. That is, friends and family along with any other fools willing to get on board. An example of a “fool” would be someone not in tune with the market or industry such as your dentist, mechanic, or mailman.

Don’t get me wrong, these individuals are a great way to go and often times make much more sense than aplying for commercial lending or an SBA guranteed loan. However, obtaining money in this manner often leads to strained relationships and in some cases can rip families apart. Personally, I’d like to avoid that and I’m sure you would too. Below are some tips to consider when approaching these individuals for startup cash:

• Put it in writing. Every last detail about repayment and usage of funds should be included.
• You are running a business, so make it a business loa – not a personal loan.
• Things happen – natural disasters, emergencies, etc. Be sure to add provisions that cover these types of things.
• Have a business plan? Make it required reading for your lenders. If you don’t have a plan then either:
  • Go write one
  • Or B, thouroughly discuss your company’s goals, ambitions, and forecasts.
• Create a continuous dialog and discuss potential problems, fears, and issues that are taking place on both sides of the field.

Again, sorry for not being around. Don’t hold it against me. Remember, just like you I’m a student entrepreneur, with the keyword there being student. Class dismissed.

I haven’t talked too much about financials, and I don’t really plan on doing so today.  I would, however, like to wet your taste buds with some tips on forecasting.  Remember, forecasting is in all reality BS.  Projections can only take you so far but they do help you when setting goals for your small business.

• You are better off selling yourself short than throwing out unrealistic numbers.  Be factual and conservative with your estimates.
• You arent going to go from making $10,000 to $10 million.  It just isnt going to happen unless something truly astonishing happens in your business or your market.
• Quantify your projections and dont just pull them out of a hat.  Make clear and concise assumptions.
• Back those assumptions up with a written list of your reasoning.  Pro forma financials will take your far.
• Utilize industry specific data and not just general data such as census publications.  Contact your local or university library for assistance in tracking down this type of information.  For those of you in school or who are stupid rich – try IbisWorld.
• This goes back to the above statements, but it’s important.  Your projections are going to be suspect if your sales or profit margins are higher (or lower) than the industry average.
• As you progress, compare your forecasts to actual results and determine what went wrong (or right!).

Yes, this was a bit “schoolish” but you are Startup Students!  Class dismissed.