Sharpen Your Financial Skills

Hi guys, it's Evan Carmichael. Welcome to a special presentation. Now just over an hour ago, I was sitting in the offices of Intuit, and we were all getting ready to have this awesome webinar on sharpening your financial skills, and then WebEx died on us, and people could see the screen, but they couldn't hear the audio. So I ended up writing this message: Hi guys, Evan here. WebEx is having major problems. I'm going to go back to my office and record this for you right now, and we'll send the presentation. I'll answer any questions afterwards. So sorry, we'll send it by email. Stay tuned. I drove back, I'm at my office, and I'm ready to record. So hopefully you get some good information here. And to thank you for all your patience, we had over 700 people sign up for this webinar, and I was really excited to talk to you guys because it's part of the, the best part of my job, really. You know, best part of my business is being able to talk to you guys and help answer your questions. So I was really excited and looking forward to it, and we did have over 700 people signed up. I'm going to include a couple of free bonuses that weren't initially supposed to be included, but I'm going to put them in because of all the great reaction that you guys have and your patience and understanding. So I really appreciate it. And without further ado, let's get started. So this was something that we wanted to put together as a partnership between myself, Intuit, and Staples just to give some more information to entrepreneurs and help them understand the numbers side better of their business. It's something that entrepreneurs run away from. We don't like talking about the numbers. We'd rather go out and make sales and run our business, but it is really important. So that was the point of the presentation, and we're going to have another webinar later that I'll tell you about later on. And stay tuned at the end for all the free bonuses that we're going to talk about. So just moving on. So quickly, a little bit about me. For those of you who don't know me, I'm Evan Carmichael. I help entrepreneurs. When I was 19, I built and sold a biotech software company. 22, I became a venture capitalist and was raising $500,000 to $15 million for companies. And my goal is to help a billion entrepreneurs. So big goal. I love helping entrepreneurs. It's what I do. A couple of miscellaneous facts about me that you can read at your leisure if you want. But that's a little bit about me, and I want to talk a little bit about Intuit. So Intuit is a partner company that I've worked with for a little bit. They have accounting software to help entrepreneurs. So the financial backbone for a lot of businesses— accounting, payroll, tax. Basically, the idea behind their company is to help save you time and let you focus on what you do best. You know, I think accounting is one of the things that entrepreneurs hate the most. We don't want to do our books. We don't want to understand our numbers. We just want to go out and run our business. And so instead of using Excel or Shoebox or whatever you're using, having financial software to help you run your business makes such a big difference. Right now I spend about 20 minutes every quarter doing my accounting. Because of accounting software, and it's so much easier. And the story is really cool, and Intuit is an awesome company started by a guy named Scott Cook, Scott Cook, and he started the business because he was watching his wife pay her bills at the kitchen table and saw how time-consuming it was and thought, well, I got to make some software to help her do this better. And I think that's something a lot of entrepreneurs can relate to. You know, you saw it, you see a need and you solve it. And so he's a great entrepreneur. It's an entrepreneurial company. Here are some of the products that they have. So QuickBooks, QuickBooks Online, Payroll, GoPayment, TurboTax Business, a lot more on the website. But they helped partner with me for this webinar, so wanted to give them a quick shout out. The 3 things that I wanted to talk about in this webinar: understanding your balance sheet. So what is a balance sheet? How can you make business decisions from it? How you can quickly boost your cash flow for short-term and long-term success. And then also how you can raise capital. Usually questions I like to answer them as they come up. This is now, I guess, not a webinar, more of a seminar, so there's no questions, you know, obviously during the presentation, but I do want to be able to take your questions afterwards, and I'm going to do a video mashup with all the answers. So if you have questions, let me know, and I'd be happy to answer them for you. So the 3 things we're going to talk about: a little bit of background information to start, and then the 3 things—your balance sheet, boosting your cash flow, raising capital—and at the end I'm going to give you a model to evaluate your business. So if you're looking at raising capital and thinking about how much is my business worth. I'm going to give you the model that I used when I was in the venture capital world and also a free worksheet on how you can raise your first $50,000 for your business. So some quick background information. Intuit is awesome because they put out a lot of studies and reports and they're really trying to learn more about the entrepreneurial market. And so they had two really cool reports. One was called The $5,000 Question and the other is Bridging the Gap. And basically just trying to figure out what are the problems of entrepreneurs and how can they help solve them. So the first one was they found that 58% of entrepreneurs started with less than $5,000. So we're not starting with a lot of money. We're starting with a little bit of money, bootstrapping our way up, and eventually building successful companies. Half of entrepreneurs take financial risk, and that's getting a line of credit, we drain out our savings, we max out our credit cards, we pull out our RSPs as much as we can to take our business forward. The number one regret that a lot of entrepreneurs have is they didn't spend more time learning the financial management. And if you look at why businesses fail, you'll see that most entrepreneurs don't make it. You know, it's one of the sad truths. You know, we have great intentions, we want to help people, but a lot of entrepreneurs just don't make it. And a big reason is because we don't understand the numbers side of our business. And you know, you could be profitable and still go out of business because you know, you're negative cash flow and you just run out of money. We struggle with financial management. You know, 83% have a basic or lower grasp of our fundamentals. We know that financial management is important. We want more help and resources. And the top 3 requests were spending time with an accountant, networking with other entrepreneurs, and online tutorials. And we get help when— that we need by using financial management software and accountant. Those who do that are 5 times more likely to feel confident about managing our finances. So the people who are reaching out and who are learning about the financial management side of their business are having more success. And that was part of the reason behind creating these webinar series was to help educate you guys so that you understand your numbers better, you can make better decisions, and it increases the chances of you being successful. So these are just some of the findings that came out of those two reports. You can check it out off of Intuit's blog. But a lot more probably coming. They, they do a lot of great work with their research. And so let's get started on the presentation to help you understand your numbers better. So the first one is your balance sheet. And I think a lot of entrepreneurs, you know, if you use an accountant or if you have a bookkeeper, you get your balance sheet at the end of the year and you look it over and say, okay, you know, great. But you don't really understand what it means or how to make decisions from it, right? How do you know if you're okay or not? How do you make an important growth decision from your balance sheet? So I want to quickly touch on what is a balance sheet, and how you can make decisions from it. So the first part of a balance sheet is your assets. And the assets are basically everything that your company owns. And it's divided into current assets and fixed assets. And what I did here was take a screenshot of a QuickBooks Online account. So if you're using QuickBooks, you'll be able to find this in your settings. You can go to assets, and you can see what you have under here. The current assets are basically assets that can be— are either cash or can be converted into cash within 1 year, a very short period of time. So it's almost like cash. So in this case, they've got various bank accounts, and that's set up as their current assets. They have some accounts receivables as well, so hopefully those are going to get paid off pretty soon. And then the fixed assets are assets that cannot be converted into cash very easily. So example here, we've got a truck. So that's the main thing as a fixed asset for this business. So, you know, when people are talking about current assets or fixed assets, that's basically the main difference. Current assets are cash or cash equivalents, something you can easily turn into cash. And fixed assets are things that are, you know, buildings, land, equipment, trucks, that kind of stuff that is harder to sell, harder to trade for cash. Next is your liabilities. So the other side of the balance sheet is going to be liabilities, and here again it's divided into current and long-term. So your current liabilities are things that you owe within the next year. So again, things that are in the short term you have to pay back. It could be debts that you have, credit card statements that you have, things you have to pay back quickly. Where long-term liabilities are things that are owed beyond 1 year. So if you have a loan that's paid out over 5 years or 10 years or however many years you have it, those are going to be your long-term liabilities. And again, I just quickly pulled up a QuickBooks Online balance sheet here for the company, and you can quickly see what kind of liabilities they have. Current liabilities are here, so it's accounts payable, credit cards, you know, others, small loans, sales tax payable. And then your long-term liabilities, they've got 1 big loan for $25,000. That's long-term liabilities. The last piece of the puzzle here is your equity. So it's called the balance sheet because it needs to balance. So your assets, what your company owns, has to equal the liabilities plus the equity. So liabilities, again, are what your company owes other people, and the equity is what you have left in the business. So that's basically what you as the owner own. So you have your assets, which is how much, you know, you own in the— how many long-term and current assets that you have, things that have value in the business. The liabilities are things that you have to pay to other people. And then the equity, what's left, is what you own as the owner of the business. So everything at the end of the day has to add up. And if you look at this example here, we have our assets and our total assets. So it's going to be here, $26,684 is what the assets are. The liabilities Total $30,000. So he's got, in this company, not in a great situation because he's got more liabilities than assets, and so his equity is going to be negative. So he owns a negative amount in this business, which is not a great situation to be in. So that's the basics. That's what it means. That's what assets and liabilities and equity mean, and it always has to equal at the bottom. If it doesn't equal, then something went wrong and you got to do it again or talk to your accountant, because it's always got to equal up. So that's great. A lot of people will know this. If you don't know it already, hopefully that helped. But the big thing is, now what? Okay, I get that, but so my accountant gives this to me at the end of the year. What does that mean? How do I make decisions from it? And so there's 3 main things that I want to talk about of how you can make important business decisions from your balance sheet. The first one is look at your current assets to current liabilities. And I pulled in our balance sheet here again from QuickBooks. And I've just highlighted them with a red arrow. Current assets and current liabilities. Again, the current assets are things that are cash, or can be converted into cash really quickly, and current liabilities are things that you owe to other people within a 1-year period. So again, very quickly. And what this does is tell you the short-term viability of your business. Basically, can you survive the next year or not? And if you look at this one, they have more current assets than current liabilities, So all the money that they owe other people, they can pay back within that year. So in the short term, this company is pretty healthy. And it's a good idea just to run that quick little ratio on your business to see how you're going to do in the short term. Because if you have a lot of debts coming up and not enough cash to be able to pay it, you're going to run into a problem. The second one I want to talk about is fixed assets to long-term liabilities. So again, I'm just pulling off our balance sheet. and with the arrows I've marked it off. And our fixed assets here are $13,000, and our long-term liabilities are $25,000. This is a problem. So the fixed assets to long-term liabilities ratio here will tell you the long-term liability— long-term sustainability of your business. Can you survive in the long run? And basically what it's showing here is I have more money that I have to pay out than I have actually in my business, in my fixed assets. So this is going to be a challenge for me. I need to find a way to make more money into my business. In my first year, my next year, I'm going to be okay because in my first ratio, the current assets to current liabilities, we have enough money to pay our short-term debts. But our long-term debts are big. So we got to find a way within the next year to solve this problem, or we're going to be facing a major cash crunch. And it's good to know this in advance because, you know, otherwise you may not plan for it and be stuck in a year. Where now I can plan for it and try to make sure I have the cash to be able to support these debts that I've taken on. The last quick thing I want to talk about here when looking at the balance sheet is about raising capital. And anytime you go to raise capital, if you're looking at getting any kind of debt from a bank or a lender, or if you're trying to raise equity from an investor, they're gonna want to see your balance sheet. And so you better have it ready, and you better be able to explain every item on that balance sheet. When I was in the venture capital business, we could ask about any line item on here, and we'd expect the entrepreneur to be able to answer it and know exactly what each item was. And if they didn't, it would really reduce their chance of being able to get the money from us. So you have to be able to explain every single item on your balance sheet before you go talk to an investor. But one of the main things they're going to look at is your equity. They want to see that you have a lot invested in this business and that there's something here that, you know, if you've put money in and you have a lot into it, then there's some skin in the game and they're more likely to invest as well. Here it looks like you have negative equity, which is not good. It means your liabilities is more than your assets. You owe more than you own. This is not a good business to put money into. So it's going to be really hard for this company here to go out and raise capital because they have negative equity. So something to think about is, you know, thinking about how you can raise your equity so that the next time you are going out looking for capital, it's going to be easier to get a yes. So that's about looking at the balance sheet. The next thing I want to talk about is boosting your cash flow. And a big reason why entrepreneurs fail is they run out of money. You know, you may have a great plan, you have great ideas, your customers love you, but you just run out of money too soon. You need to find ways to keep it going and get that cash flow coming in. Again, you can be a profitable company but still go out of business because your cash flow sucks. It means basically that you're taking too long to get paid and you're paying out too quickly. So with cash flow, we're trying to figure out ways to pay out other people less quickly and also find ways to make more money more quickly. So I'm going to look at 15 quick ways that you can boost your cash flow that will help you both in the short term and also the long term. So the first 2, one is have a sale. So if you're in a really big cash bind, you need money right away to pay off some kind of debt, have a sale. You don't want to do something where you're going to lose money on it, make it unprofitable, But if you have some kind of sale, it's a great way to be able to quickly bring in some money. People who are already customers, know you, like you, can potentially buy more from you and maybe also tell their friends about you. They see a sale, they're going to come into your website or your store, hopefully buy whatever is on sale, and hopefully buy some other stuff as well. Number 2 is cross-sell, upsell. This is great because anytime you have any kind of customer base, Those are the easiest guys to go back to and sell to them again. People who have already bought from you, hopefully you have given them a good experience and they know you, they like you, they trust you, they want to buy from you again. And that's a great way to be able to reach out to them and say, hey, we have got either a new product or service or try to sell them again on what they have already purchased depending on what you are selling. But a great way to be able to boost your cash flow in the short term is to go out and talk to your existing customers who have bought from you in the past. And also try to convince them to buy from you again. I love this picture that I saw on the internet and I wanted to find a way to incorporate it. I thought this was the best slide to put it on. This is a complaint jar at a store and if you want to write a complaint, you have to write it on a bill that's a dollar or larger. So another great way to boost your cash flow is have a complaint jar where they have to put in bills. Now hopefully you're not getting complaints, you're only getting compliments and people want to give you more money and buy more products and services from you. Okay, number 3, and this is a big one. Look at your accounts receivable. So I just pulled up again QuickBooks Online and was able to pull up a collections report. And what this will basically show you is who owes you money and are they overdue or not. So this is a list of everybody who owes this company money and how much money. So they have almost $9,000 that's owed to them and and it shows you the past due. And this is the important thing to look at here. This is number of days past due. So, you know, this person Alden, he owes me $22 and it's been 60 days past. So that's a long time, not a lot of money, but a long time. 68 days, 38 days, 126 days. Like, these are people you have to follow up on. This one customer here owes, you know, half of the money that is owed total, $4,500. And look how long it's taken them to pay. 126 days they still haven't paid and 50 days they haven't paid. So you have to get on your customers. I mean, ideally you want good customers who are paying on time and who are buying lots from you, but the ones who aren't paying on time, you got to get after them and make sure that you're making the phone calls and reaching out to them until they do eventually pay their bills. That's a— it's a great way to be able to boost your cash flow short-term because that's money that's already owed to you. You've already made those sales. Now you got to go out and collect. Next, number 4, give incentives to pay early. And this is something you can do depending on what your margins are, you know, how profitable you are with each sale that you make. But you can give them a discount if they pay early or in advance. And again, if you work with bigger companies, they'll typically stretch you out. You know, you'll be 60 days, 90 days, 120 days before you get paid. And a lot of times you're at their mercy. That's their policy, and if you want to work with them, that's how it's going to be. But you may be able to give incentives, and especially to the smaller clients that you work with. If they pay in advance or if they pay upfront, if they pay right away, they get a certain percentage off the bill. And sometimes that's going to be good for them, and sometimes that's not going to work for them. But you give them the option, and the benefit to you is you get your money upfront. Something to think about. The next thing, number 5, is one that is really important that a lot of entrepreneurs make the mistake on. Make sure you invoice on time. A lot of entrepreneurs are so busy figuring out how to go out and make sales and take care of the customers and do all the crazy things that we need to do to run our business. I know it's hard. You're wearing every hat in the company, and even if you have a team, it's still a 24-hour-a-day business almost. One thing that you often forget to do is invoice. You know, we hate invoicing. That's not the, that's not the fun part of the job. We're not really servicing our clients' needs there and, and you're getting a high from sending out an invoice. But you got to invoice on time. You know, as soon as you're able to, you want to make sure you invoice. Because if they have a 30-day or 60-day policy of paying, that doesn't start until you invoice. You know, if you complete a job or you give somebody a product and it's a 60-day period until you get paid, it's not from when they get the product or from when you finish the service, it's from when you send the invoice out to them. So you gotta make sure as soon as you can, you invoice. You don't want to be this guy who has this license plate where you're always late. You want to make sure you're always invoicing on time. That's an easy fix that can impact a lot of entrepreneurs. Next, change your billing structure. And this is where you basically try to get it so that your clients are paying you in advance. And what I do with my clients— and I work with some, some major clients, you know, huge companies with long periods of waiting— I don't do work until we've got an agreement in place, and I have— I work off a retainer system. So I get paid in advance for the work that I'm going to do, and then every time I do a job, that gets deducted from the total. And that's not how a lot of the companies will work, but I say to work with me, that's what I do. And, you know, I also deliver good results for them, so they're willing to do that. But you may want to think about ways you could change your structure just so that you make your money upfront and you deliver over a period of time. So think about ways you could have bundles or ways that you can have prepaid packages subscription services and give them some kind of incentive so that they pay all upfront in advance for a year or a month or however long makes sense for your business. It gives you cash flow right away that you can use to grow your business. And often it's good for the customer as well if they get some kind of deal as a result of it. So look at ways you might be able to change your structure so that you get more money upfront in advance. Next one, accept credit cards. A lot of companies don't accept credit cards because there's a fee. And it's true, there is a fee to have credit cards. You know, there's a merchant account you have to get set up and you got to pay, you know, every time a transaction goes through. But studies have shown that when you accept credit cards, when people are spending with a credit card, they're going to spend more. You know, when they're spending with cash, they see the cash going out and so they're going to be more hesitant to spend it. But with credit cards, people are more likely to make bigger purchases. So you may be saving a few pennies here and there, but you're missing out on the big dollars. So you want to make sure you can accept credit cards if you can. And usually from the credit card companies, you get money pretty quickly from them as well. So that leads to instant cash flow into your business. Number 8, factor your receivables. Not a huge fan of this one, but basically when people owe you money, you could have brand name clients that owe you money that's going to come in 60 days or 90 days. You can go to a factoring company and they'll pay you a percentage of the total. They won't take— they won't give you 100%. They'll give you a percentage and then they'll collect when that money comes in. So they're basically taking a few points off of your total so that you can get the money up front and quickly, and they're going to wait on the receivable to come in. I don't really like that idea if you can avoid it, but it is a way that you can get money in quickly if you absolutely need to. Number 9, sell excess inventory. So if you have inventory that you bought that you don't need anymore, or it's seasonal, it's going out of stock, sell it out. You know, have a sale, sell that inventory if you don't need it to grow your business anymore. A great way to turn something that might just be sitting at your office or in your storage room or in your garage and turn it into money for your business. Number 10, negotiate supplier terms. And this one I want to put a strong caveat on. And so the idea here is you want to slow down the amount of money that you're paying to other people. So if you can delay payments to other people, then that improves your cash flow because you're not spending as quickly. The challenge I have here with it is it makes sense in theory, but it depends on who you're doing it to. And I usually advise doing this against small businesses. I wouldn't do it if your suppliers are entrepreneurs. The reason is they're facing a cash crunch too, right? And you know what it's like being an entrepreneur. You, you love working with clients who are on time, who pay well, and who, you know, kind of respect your time. Where you don't like working with the guys who try to stretch you out, haggle over every single penny, and want to pay you in 90 days, right? Those are not great clients for you. So why would you want to be that client for somebody else? Do you think you're going to get the best service? Do you think they're going to be on call for you and do their very best to help you if you've negotiated every last penny of profit out of the deal and you're paying them in 90 days? Probably not. You know, when I work with entrepreneurs as suppliers, I usually don't negotiate too much and I usually try to pay them right on time. And that makes sure that when I need something, they're there for me. You know, if there's some kind of emergency, I need their help, they've got my back. And so I hate doing, you know, big negotiations on terms when it's working with smaller companies. When you're working with the bigger guys, go for it. You know, they have a budget, but a lot of times it's not going to make a big difference in their own business, and the quality of service you're going to get from it isn't going to make a difference from the person you're dealing with. So get the best deal you can out of them. But for the smaller guys, I'd really watch out and I think it's worth investing in the relationship to make sure that you always get really good service from them. So that's my rant on negotiating supplier terms. Number 11, create a referral program. So again, if customers love you, they like what they're buying from you, then chances are they're going to have people who they know who they can refer to your business as well who can also hopefully help grow your business. If you create a program, give them either an incentive to do it. It could be points, it could be dollars, it could be products, services, something. Think of ways that you may be able to entice your current customers to tell their friends about you. Number 12, refinance short-term debt. And the idea here is, remember when we look back at our balance sheet and we saw current liabilities and long-term liabilities? The current liabilities are what's due within the next year. And that's really critical because if we have a lot of money owed in the next year and we don't have a lot of money coming in, we could go under. Like, this could be our last year. So the idea here is to refinance some of your short-term debt and turn it into long-term debt. So you talk to the people who you owe money to and maybe you add a few more years onto the deal. Basically, to get that short-term debt lowered, even though it may increase your long-term debt, but it improves your situation for the next year. So something to think about if you find that your current assets are a lot less than your current liabilities. Number 13, sell and lease back. The idea here is if you have any fixed assets, so if you own a building or you have equipment or you have land that isn't really making you money, you could sell it to somebody and then rent it back from them. So you get a big cash infusion into your business. So if you have an office that you own, You could sell the office to somebody and make money right away, and then you make an agreement to rent the office from them. So it adds to the expenses on a regular basis, but you get that big cash influx that can boost your cash flow short-term. You can only do that once, because once you've given up your ownership, that's it. You can't do it again. 14, convert debt to equity. The idea here is you look at who you owe money to and if you can convince your supplier or your lender that you have a really good business opportunity, then you can potentially convert that debt and have it become equity where they become a partner in your business. So instead of owing you— sorry, instead of you owing them $10,000 as an example, you could give them a certain percentage of your business and so they become a smaller partner in your company. Very dangerous one, you know, very dangerous method to go after. You want to make sure that you want that supplier on board with your business. Do you want this person who's always going to have a percentage of your company ongoing? Do you want to make them part of your management team or not? There's a lot of things to think about, but it is an option that I want to let you guys know about. Number 15, bootstrap. This is my favorite one. Basically, you're not spending money until you're making money. I really hate spending money until I found a way to make money, and I'll invest my time, energy, efforts into trying to make something work. And then if I see that I can get even a little bit of money out of it, then I start investing a little bit of money back in. And a lot of the best businesses in the world have been built by bootstrapping. Basically find ways to make money by hustle and blood, sweat, and tears goes into it. And then as you start making money, you pour back into the business and you can see the growth. And that way you're making sure that you're spending money on things that you know are going to make you money back. So those are my quick 15 tips on how to raise cash flow if you need to in a bind. And I want to move on to the third topic now, which is raising capital. And this is a common question I get, you know, how do I raise money for my business? It could be startup funds, it could be expansion funds, it could be trying to get a loan, or it could be trying to get an equity investor into the business. And I'm going to give you some quick tips to help you with all of those scenarios. The first thing I want to quickly look at is small businesses. They say SMEs, small and medium enterprises, are typically underfinanced. It's usually the high, you know, high growth but young companies that have the hardest time getting money because there's no track record. The more established you are in business, the easier it is to get money because they can make some kind of prediction. If all you have is a business plan and kind of a dream, it's a lot harder to get money and a lot of people are going to say no. If you're looking at debt financing, and debt financing is basically where you are borrowing money and you have to pay interest typically and give that money back at some point. So if you're looking at any kind of loan from a bank or friends or family as an example, that's debt financing. And here are some of the most common types of debt financing. So line of credit, business loan, commercial mortgage, credit cards, loan from family or friends. If you look at the top ones— line of credit, business loan, commercial mortgage— these are usually for older companies, right? In order to qualify for a line of credit, you have to have some business success already built in. So you have to have, you know, at least 3 years typically of being in business before a bank will look at giving you a line of credit on your business. It could be a personal line of credit, but that's a different way to finance it. It's not just off your business. Where the younger companies are typically looking for credit card balances, loans from friends and family, other ways basically to be able to borrow money. One thing you want to look at if you are going to get any kind of debt financing is make sure you find out what's going on and why you get rejected or not. This is a quick study that shows why banks are rejecting people for for their loans. So you go to a bank and they say no. The biggest reasons: too much outstanding debt, lack of owner equity, insufficient cash flow. If you look at the first two, too much outstanding debt, lack of owner equity, you can find that out from the balance sheet. Now, how are they going to make that decision? From your balance sheet. They're going to see how much debt you have, which is going to be your liabilities, and how much equity you have. And so the company that we showed an example of, they had a lot of long-term liabilities long-term debt, and they had negative owner's equity. So this guy is going to get rejected for sure. And the top 2 reasons can— you can pull right off your balance sheet. The third is insufficient cash flow. So the topic we just talked about was how to raise more cash flow. And again, with your QuickBooks software, you'll be able to figure out the cash flow statement that again your banks are going to want to look at. One thing that was really surprising to me on this was almost 12% of had no reason. So if you get rejected from a banker, from an investor, from anybody who you're trying to get money from, even for customers, partners, suppliers, if you get rejected, you want to find out why, right? You want to be able to go back ideally and hopefully sell that same person on the idea. But if not, just take that feedback and take it so you can improve yourself and go back another time. So if you're going to a bank and you're asking for a loan and they say no, Figure out why. You know, if it's because you have insufficient cash flow, then use those tips, boost your cash flow, and go back. Make sure you really know why you're getting rejected and not just letting it go as a no. The next few tips I want to give, then this is for raising money in general, if it's going to be debt equity— sorry, debt financing or equity financing. We've talked about debt where it's basically you're borrowing money and you have to pay it back, usually with interest. Equity is where you bring somebody on as a partner in your company, so they're paying you a certain amount of money and then they own a piece of your business. And there's usually not a debt component to it, so you're not paying them every month, but they own a piece of your business. So when you sell your company, they're taking a chunk of that, and there's usually some decision-making that they get as well. So things to think about when you're pitching investors or lenders: number 1, it's easier to lose than to gain. Anybody can spend money. It's not hard to spend money. If I gave you a million dollars, you can find a million different ways to use it. And that's a fear that a lot of investors and lenders have, is that you're going to go out and spend their money. What you need to show is you have a solid plan in place to make money and show that you've already made a little bit of money. They're not expecting you to have made tons of money yet because you're going to them asking for help. But you have to be able to demonstrate that you have a way to make money. right? That's why if it's just coming in with a plan on paper, it's really hard to get them to say yes because you haven't shown anything. Even if you go and get one customer, you've already separated yourself from most of the business plans that are coming in. So show that you're able to make money and not just spend the money. Next, look at what you're going to spend the money on. So it's called use of proceeds. Whenever you go and you're looking for money from an investor or from a lender, they're going to ask for your use of proceeds, which is basically looking at how are you spending the money. And it better not be to pay yourself a huge salary. I remember one business plan that we had come in when I was in the venture capital world. They wanted $500,000. There were 4 of them. They wanted to pay each of them $100,000 a year, and then they have $100,000 to grow the business. That's not something people are going to finance, right? They're expecting you to pour everything you have into this business and take out a minimal amount of salary because the money that you're going to get as a salary should be tiny compared to the money you're going to get when you build a huge business and sell it or take it public, right? So that's what they want to see is that you're not spending a huge amount of money on yourself. Yeah, you have to make enough, you know, pay the bills, but it shouldn't be a huge amount of money. They want to see that the money is going to be used to grow the business. Next, never say no competition. There's always competition. You know, whatever business you're in, there's always, always, always going to be competition. There may not be direct competition, but there's always an option for people, right? There's always some kind of option for people to spend their money. If it's not going to be with you, it'll be with someone else. So you never want to say that there's no competition because it looks like you're a child playing an adult's game. Anytime we said we had a business plan come in and the people said they had no competition, they got rejected right away. Because there's always that competition. So as an entrepreneur, you should be different, right? If you want to stand out, if you want to make money, you want to, you want to be a company worth investing in, you should be doing something different. If you're doing the same thing as everybody else, then how are you going to be successful, right? You have to be doing something different. So from that point of view, you are standing out from your competition, but you have to recognize who your competition is. You know, where will people spend their money if they're not going to spend it on you? So never say no competition. A little bit of financial wisdom that might help you save some money when you are getting equity investment is try to stretch the time period. So if you ask for all the money you need right away upfront, that's going to cost you a big chunk of your company because it's the riskiest time for the investor. So upfront financing always costs you the most amount of your business. So here's a quick example. If I needed to raise $500,000, and you could fudge these numbers to whatever fits your business, but say I want to raise $500,000. If I wanted that upfront, I might have to settle for a valuation of $1 million, which means I'm giving up half of my business because it's the riskiest time for the investor, right? If I'm right at the beginning of my business, I haven't built a lot of momentum, it's riskier for them to come in than if I already have some momentum built in. So the optional way here is say I need half a million dollars, but I don't need it all up front. I want $150,000 now, and I'll take that million-dollar valuation, and then I want $150,000 in 3 months, and I want a better valuation because I'm going to go out and get momentum. I'm going to go out and get sales. I'm going to show you that I can build a business. And then in 6 months, I want another $200,000 at a $2 million valuation. So I'm still getting my half a million dollars, but I'm stretching out the time periods and I'm basing it on goals. So I'm going to say, in 3 months and in 6 months, I'm going to reach these sales targets. I'm going to show you that I can build a better business. And that reduces the risk for the investor. So they're more likely to say yes if you go and hit those goals because it's an easier bet for them to make. Now, your challenge is on because you got to go and hit those numbers that you said you're going to hit, but that's a good challenge. You're betting on yourself. Hopefully you don't make the numbers so unrealistic that you can't go out and hit those numbers. But the idea here is I'm still getting the same amount of money, this $500,000, but I'm only giving up 35% of my company instead of half of my company. So as much as you can, stretch that time period. Next thing, write your plan in plain English. I can't tell you how many business plans we got, and this applies to getting debt equity or— sorry, debt lending or equity financing in your business. Where the business plan was too complicated to read. And if they can't understand it quickly, they're not going to say yes. And it all starts with your executive summary. The executive summary is usually 1 to 3 pages at the beginning of your business plan that explains what it is that you do at a very high level. And if the people like it and they think it's interesting, they're going to read on. If you can't sell them in the executive summary, they're going to throw away your business plan. So here's an example of one that came in. This is a real executive summary that came in to me when I was at the venture capital business. XYZ Company— I left their name out— has developed collaboration applications that are based on a flexible, modular, and extensive— sorry, extensible software framework. Our products are ideally suited to cross-enterprise, cross-platform applications. Our system architecture gives us a strategic advantage for deploying collaboration on many platforms, including the latest generation of wireless handheld devices, while providing organizations with a strongly encrypted Collaboration capabilities, fine-grained security and access control. Whew, let me breathe now. This is crazy. This is the first paragraph of their executive summary. And I came from a software background. I had to read that 5 times before I even got a sense of what they did. I found myself reading it and drifting off. You know, you're kind of reading something, you start thinking about something else, and then you have to come back to it. That's what I get from here. These guys got a no. And absolutely they're going to get a no because this is something that is not in plain English. A lot of them, a lot of entrepreneurs, if you read it yourself, you say, "Yeah, that's what we do. It makes sense. How does this not make sense? This is exactly what we do." But you got to step out of your zone and remember that any investor or lender, they're not experts at what you do. They don't understand all these terminology and jargon that, you know, makes sense to you. So you have to dumb it down and write it in plain English. And one test that we see often in the VC world is called the grandmother test. And basically the thought here is show your executive summary to your grandmother. If she can understand the opportunity, then you've done a good job. And the idea is basically you show it to somebody who doesn't know your business, right? Show it to a family member, a stranger, you know, a colleague, somebody who, you know, kind of understands a little bit maybe about what you do but doesn't really understand. So if they can understand the opportunity and see that this is something that has potential, then you've done a good job. And you're able to start submitting it to investors. And I would do that before you start sending your business plan out to people. Have somebody who, you know, you trust a little bit and have them look at it and see if they understand what you do and see an opportunity or not. Make sure you pass the grandmother test. Okay, next, valuation. So the last main thing I want to talk about in this presentation, and thank you for staying with me through the whole thing, is the valuation and how do you evaluate your business. And so how do you come up with a number? If you're looking at raising any kind of equity financing, you're going to have to say my business is worth X amount of dollars— $100,000, $10,000, $1 million, whatever it is. So I want to share with you the valuation model that we use when we were— when I was in the venture capital business. Now from here, you can adjust the numbers to make it make sense for what you're doing. But basically what I would do is project 5 years out. So 5 years down the line, what do my earnings look like? So how much am I going to be making with my business? So in this example, the projections of the company was almost $6 million. You take out the tax rate and you have your net earnings. You think about how much you're seeking to raise today. So that's what I'm going to be making in 5 years. What am I looking for now? And the company at this time was looking to raise $3.5 million. Next, money in the future is worth less than money today, right? You'd rather have money right now than money in the future, so you have to discount that money back. So if you see here, we have a 30% discount rate applied to the valuation of the business. The valuation is associated with the P/E ratio, so it's a price-to-earnings ratio. So you times your earnings by 15, you end up getting $51 million. And then you discount it by 30% every year back. Next, we look at the company. So I'm assuming we're starting in 2014, that's our year right now. So we have our valuation at $12 million and change. We take out the $3.5 million that we are looking to get from investors, and we're left with $8.7 million. We take an additional discount of 40% because it's a private company, there's a lot of risk associated with the startup. And so it takes us down to $5.25 million. And basically that's what we end up with. So the business is worth $8.75 million. $5 and change is what we get to keep as the owner. And $3.5 million is what the investor gets to keep. So if you work through the numbers, you can apply to, you know, whatever situation you're looking at. Basically the two things you want to figure out is how much money you're going to be making in 5 years. You have some kind of projection, and it has to be a realistic projection, right? You're not going to be the next Microsoft in 5 years, so what's a realistic number for you? What kind of earnings are you going to be making in 5 years? And then the next thing is how much you're seeking to raise. So if you can figure out this top number of how much your earnings are going to be, and then this number of how much you want to raise from investors or lenders— well, this is her investors, her equity investors right here. Then you can just apply all the numbers and you'll work out to how much your business is worth. So that's how we did it. Very quick overview, but if you have questions on this, I'd be happy to answer it more in detail with another video or with emails. The last thing is, oh, there's a worksheet that I want to include for you guys. It's how to raise your first $50,000 for your business, and it's often called love money. So this is coming from people you know or people within your network, and it's usually the people people on the outer edges of your network that are the ones that end up investing into your business. They can surprise you. So it's a worksheet that I usually charge for on my website, but I'm going to give it to you guys for free. And if you have any questions, let me know. Normally around this time, it's question time, and that's my favorite part of any time we're doing a webinar. I love hearing what you guys have to think and answering those questions for you. Obviously, since this is a presentation now, I can't answer your questions, but what I want to do is answer them in another video. So if you have a question about anything we've talked about here or anything else for your business, I'd love to hear from you. If you want to leave a comment below or email us back, and I'm going to do a video afterwards of answering all the questions that have come in and hopefully be able to help you guys out with what's next. So final slide, I promised you some extra bonuses, and here's what I'm going to do. Along with the video responses I have a series of worksheets that I sell, and these are usually for sale off my site. And what I'm going to do is give one worksheet for free to anybody within the next week who is, you know, signed up for the call and wasn't able to make it on, or who was on the, was on the call and struggled there for half an hour as we tried to figure out the technical issues with WebEx. I'm going to give you any single worksheet for free. So the website here, let let me load it up quickly. If I go to my homepage and you click on any of these, these are our worksheets. So we click here and then at the top there's a link that says worksheets. These are all the worksheets and these are all different things that can help you grow your business that we're currently selling. If you pick any individual worksheet that you want, if you scroll down, pick the one that you like the most, I'm going to send it to you for free. It's going to be a lot of manual work for me But I'm really, I'm really apologetic for what happened with WebEx. It was completely out of our control, but I know you guys took the time out of your day to spend it with me and to try to learn about something to help you grow your business. And I know how frustrating it can be when people don't deliver on things that they said they were going to do. I know that that bothers me a lot, and so I really want to make sure you get the help that you need. Hopefully the webinar, the presentation today was helpful. You learned something new that you didn't know before. I want to throw one of these free worksheets as a bonus. To again help you out. Pick any one you want. There's 30 or so on here. How many do we have? 32. Pick the one that most resonates with you. I'll send it to you for free. And again, I'd love to hear your questions if you have one about this video, about raising money, or about the financial side of your business, or anything else to help you grow your business. Let me know and I'll do a video to answer those questions for you. And then finally, we're going to be doing another webinar on March 12th, and hopefully all our technology will work It's financial literacy part 2. So today was part 1, and we're going to do part 2 on March 12th. Staples has a promo where you can get up to $140 off of QuickBooks if you want to check it out. That's staples.ca/intuitpromo with this bonus code here, 74239. And we'll be sending these slides and worksheets out as well to help you as you try to grow your business. So thank you again for tuning in. Again, my deepest apologies for everybody who was frustrated, and we've received nothing but great comments from everybody saying, you know, we realize this happened, you know, sharing their stories of how it's happened to them in the past. And I know it does happen. It's embarrassing and it sucks when it does happen, but we've really appreciated all your support, and I look forward to hearing from you with those questions. I hope you enjoyed this video, and I hope we'll see you on the 12th for the next webinar. So thank you, and we'll see you soon.