5 Finance Trends Every Entrepreneur Needs to Know
Rather than list it, I’m just going to start with the main trend everyone’s concerned about: Economic turmoil will continue through the year 2011. And, believe it or not, that is good news for most entrepreneurs. While macro-level economists try to make sense of it all, entrepreneurs are taking advantage of the following five trends that are creating opportunities the old economy never knew.
1. As Start-Up Costs Decrease, Barriers to Entry Are Reduced
It just doesn’t cost as much to start a business as it used to. Thanks to the cloud and other technological advances, you can start a business in a lot of different industries with a very lightweight infrastructure and still be able to compete with the much deeper pockets of larger competitors.
2. The Working Capital Cycle is Tightening
Almost every company has had to write-off some bad debt (receivables owed but never paid by customers) in the last couple of years. Entrepreneurs are managing the credit they give their customers much better, and they’re staying on top of their receivables as well. And this is true for all of the companies in the supply chain. Cash is flowing better for those who manage their working capital well, while those that don’t are exposed to savvy customers who will try and lengthen the days they hold payables and accelerate payment from their own customers to squeeze more business through smaller working-capital requirements.
3. Variable Cost Models Are Back in Fashion
I have always been a fan of using operating leverage, meaning organizations base their business models on relatively high fixed costs and then make exponentially more profit with just small increases in revenue. But a lot of entrepreneurs who were not careful with this leverage were burnt in the last few years, primarily because small decreases in revenue quickly eroded margins and generated operating losses from which it may be very difficult to recover. The result is a lot of businesses relying heavily on variable, not fixed, costs in their business models. One entrepreneur I spoke with recently is adding two high-level, professional sales positions to her team on a commission-only, or 100% variable, basis. A few years ago the same people would have required high base salaries with handsome expense accounts and more — all fixed costs. The market is very forgiving of high-variable cost models now and will continue to be through 2011.
4. Equipment Expenditures Are Increasing
Lots of fanfare surrounded the Small Business Jobs Act. One of the most notable provisions of this act was an extension through 2011 of Section 179 capital expenditures along with an increase in the allowable maximum expensing amount. But with customer demand still unstable and entrepreneurs still uneasy about projecting their equipment needs over the next twelve months, few will hurry out and buy equipment before 2010 is over. Besides, a lot of struggling companies don’t have enough profits to fully benefit from the deduction, anyway. The pent-up equipment needs will be deferred until 2011, and, if another extension is not granted, will drive significant equipment purchases, most likely in the 4th quarter of 2011.
5. Knowing Numbers is Key
Some business owners spend a lot of time reading about and studying economic trends, following every move of the financial markets. But very few entrepreneurs approach the numbers, metrics, and key trends of their own business with the same fervor. If I had to pick between knowing general economic trends versus my venture’s numbers, I would pick my company every time. There are thousands of businesses that have no idea a recession has even occurred, except that the news is talking about it. The right metrics and numbers delivered at the right time to the right people in the right format will bring tremendous benefits to any company.
Bonus Trend: Micropayments and Subscriptions Rule
$1.99 for this iPhone app. $9.99 for that monthly service. A major movement in business models is towards small, one-time charges and small, monthly subscription fees. And almost all of these transactions are processed electronically by credit card. More businesses will move to one or both of these models in the future, with the subscription model continuing to show its prowess in terms of cash flow and overall business valuation.