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Going Somewhere?

Keeping a financial road map in your company's back pocket is always a capital idea.

Marcie Cooper is a social worker, not a business strategist. But with bountiful expansion opportunities, Cooper and partner Vicki Doueck are in the unusual position of devising growth strategies for their geriatric care management practice, Generations Counseling and Care Management LLC.

A growing senior population, coupled with a shortage of providers offering broad services to this demographic, has expanded the firm's client roster. At the same time, interest in duplicating its services in other regions has led the company to expand beyond New Jersey and the New York City area. Franchising is a distinct option.

It is foreign territory for the $1 million company, indeed. "Because we are social workers and therapists, we do not really have the background that we need to grow the business," says Cooper, 47.

Equally intimidating is the notion of raising capital: The Teaneck, New Jersey firm has operated for 17 years with little reliance on outside sources. "We don't see the need for that now," explains Cooper, "but when we look toward expanding nationwide or franchising arrangements, we might need that kind of credit." The firm is currently meeting with bankers to establish credit for any future expansion plans.

Be Prepared

A capitalization strategy is not only essential for the type of large-scale growth Cooper envisions, but also for anticipating long-term needs. It ensures disciplined spending, eliminating the likelihood that a business will burn through its capital too quickly, or obtain so little that it becomes hamstrung by funding constraints. Capital plans also help determine the best funding source for each stage of development. Instead of relying on leasing arrangements to fund equipment purchases, for instance, companies can gain more flexibility with a credit line for operating expenses. Or, if a business sees an eventual need for venture capital, it's not too early to start networking. Companies usually miss golden growth opportunities because they didn't seek investments sooner.

Entrepreneurs often struggle with their options. "We don't want to borrow," remarks Cooper. "We want to use our revenue to promote our expansion. We've even had offers to buy our business, but we want to maintain control. And to maintain that control, we may eventually need to borrow."

Despite the need for ongoing strategizing, entrepreneurs often fail to recognize the importance of a long-term plan projecting future capital requirements. "Business owners are often so tied up in a reactive management style that they don't spend time planning for what's coming up," says Philip Murphy, a partner with The Videre Group LLP in Parsippany, New Jersey, which is helping Cooper's firm prepare for growth.

The ability to anticipate future capital needs is closely tied to knowing when a company is entering its next development stage, Murphy explains. "Perhaps they need a better information system that can track data more efficiently. [Or maybe they need to] bring on a more sophisticated person internally instead of relying on an outside accountant who comes in on a quarterly basis to tell them what their business is doing," he says.

Those changes can enhance a firm's ability to formulate realistic revenue projections. Murphy also suggests a model that includes "worst-case, best-case and middle-of-the-road snapshots" to identify funding requirements later on. "Anybody should be doing annual budgets and going out a year or two to determine what the capital needs of the business are going to be," he adds.

Restricted spending, meanwhile, demonstrates to a lender or investor that the company is directing capital to appropriate expenses, says Murphy, increasing the odds that capital will be available when an acute need arises. "A lot of companies don't make cuts before it's too late," he emphasizes. "They erode their capital base and find themselves in a difficult position. They don't want to surprise their bank by not meeting loan-debt covenants. If you're not going to make them, that can be a costly process in dealing with your lender."

Averting Disaster

Another critical mistake is waiting too long to obtain funding, jeopardizing growth opportunities. "Financing is often done in crisis mode," says Alexander Berry, a former small-business banker and now a consultant. "All of a sudden, they're out of money and need to do something. Planning and continually updating the business plan isn't a high priority. Selling products and services and collecting money are."

Instead of making an 11th-hour appeal for capital, Berry suggests supplying accountants and lenders with regular progress reports and revenue projections. "If you want to have a true partnership, it's got to be open," he says. "Let bankers know [you] expect them to stay informed about [your] business and to help [you] anticipate needs."

The financial provider, in return, can advise you when your company's growth opportunity is "too ambitious relative to the company's financial condition and capital," says Berry.

Murphy concurs: "Lenders can give your projections a smell test and determine what the appropriate capital needs are going to be. Maybe there is a mix-of-term debt that is required, or you have equipment needs, or you need to finance software that is going to benefit future periods."

Lending a Hand

Stephanie Harkness, owner of Pacific Plastics & Engineering in Soquel, California, includes her bank in strategic planning for her $10 million firm, which produces customized plastic injection molding. "I think that's different than how some business owners view their bankers," she says. "Ours was a very strong partner as we considered different markets we were pursuing.

"We don't have covenants on our lines, but we always send monthly statements. We say 'This is a challenge we're working on, here is the plan, and here's what you're going to see in the financials as a result.'"

Offering the banker a say in capital planning provides more peace of mind when making tactical decisions. "Injection molding machines average $100,000 or more apiece," she says, "so it's not [an issue] of bringing a new staff person in or getting a new computer. These decisions need to be carefully thought through against what our customers' demands are going to be."

Harkness, who recently received a 50 percent credit line increase in anticipation of future growth, had a number of capital options to consider, including ongoing solicitations from venture capitalists. But the timing wasn't right. "Though we get asked to take on equity partners, I'm not willing to do that," says the 58-year-old. "If I were younger and had a 25-year plan, I would consider taking on partners because [I could] take some of my capital off the table and invest it elsewhere. Second, having access to a strong outside capital base as we hit pockets of opportunity, we would be able to go after those more quickly."


Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.

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This article was originally published in the December 2002 print edition of Entrepreneur with the headline: Going Somewhere?.

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