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.
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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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