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Posted: August 01, 2011

On management: Small-company financing

Learning how to make a profit and still be broke

Pat Wiesner

Sometime in the next few months I will retire fully and maybe take up writing in a different mode. I have to quit writing about business and sales and marketing because I'm not in the thick of it anymore, and so I don't get as much new material as I used to.

Perhaps I'll try a novel or something. Maybe I should try a murder mystery featuring an ad salesman turned serial killer who was getting even with people who didn't buy ad space from him? I'll need to do research.

In the meantime, some thoughts on running a small company.

In the beginning we never had enough cash. For a young guy just learning the difference between profit and cash, they were hard lessons. After our first set of issues we realized we had some good magazines that people liked to read. Advertisers sensed this also, and we started to get more advertising. In order to be able to put out more pages and better content we had to have more, good people, better machines, better distribution, etc.

And so it goes with initial success.

We sold more in the first issues than we had dared hope. I remember one of my partners, a technical guy for whom two and two always equaled four, saying good naturedly, "I can't believe we are doing this, Pat!" He knew we were growing and that we were going to be successful! We were making a profit after only two months of publishing of our first magazine! What he was missing was the difference between "cash" and "profit."

What also goes with initial success in any young business is that you begin to realize that when you invest in anything for growth, i.e., more people, new computers, more salespeople for your product or training your sales force - the cash to pay for these upgrades is due now and the increased sales to pay for these improvements in your business may come later.

We paid our people, published our magazines, paid our print bill, sent out invoices, waited, etc.; all before we got paid for ads. We developed a formula that worked for us in budgeting for years: In any given month we would receive 33 percent of what was owed to us at the beginning of the month. In other words, at any time, two-thirds of what was owed was outstanding.

When you are growing or investing this "gap" amount grows and must be financed. In the early years before we were considered a "going concern" this was our biggest problem.

We tried lots of things. First, I tried to establish a relationship with a local bank. I did all my banking with a Littleton bank (interestingly, it no longer exists.)
We got along great until we asked them for a loan. Our financial team (myself and our accountant) felt we had developed a good balance sheet and a good relationship with the bank, but some bean counter in that bank, whom I never met, decided we weren't strong enough to make a loan.

For the first couple of years we factored our receivables, borrowing against the two-thirds we spoke of earlier. At something like 15 percent interest from a big downtown bank. Not a good way to spend your profit.

All this time I was looking for the right investor. But that will be our story for next time.

In the meantime let me say that first we blew through our personal stash with which we started this venture. That brought us to the point where we had given life to a successful magazine, had learned a painful lesson on the difference between "profit" and "cash," and for a couple of years we financed our "cash" shortfall by factoring our receivables because it was the only path open to us at the time.

There are better times ahead as you will see.

I don't think there would be much difference today. That is to say a) there would be little help beyond a checking account available from a bank for a startup, b) factoring is still available after you are actually started and have receivables and c) surely you would have to keep looking for an investor.
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Pat Wiesner is the retired CEO of WiesnerMedia, publisher of ColoradoBiz. He still leads sales training for the company. E-mail him at pwiesner@cobizmag.com.

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