One Accountant's Perspective: Types of Investors

Question:

Dear Tran:

I recently came across a client that is in need of an investor(s).  The primary objective of the business is to provide digital media marketing, business social networking and information technology services for the Supplier Diversity community.  Any ideas as to how to go about and find these investors?

Answer: 

As an accountant, I get approached a lot to help with formulating business plans for potential investors. This also includes, introducing the business owners to new investors, potential investors, long-term investors, and angel investors (if I can find them).

When I approach any individual, I like to start within my own circle first -- high school friends, college classmates, and chamber of commerce. Once I have identified my initial roaming area, I then classify the "investors" into "New Investors", "Potential Investors", "Long-Term Investors", and "Angel Investors".

The reason for such categorizing -- so I know how to approach and what to approach them on.

New Investors

-- this is likely to be their first investment and they will range from terribly reserve/conservative to being very liberal with their investment. They are likely to care more about the infrastructure of the business and because this is their only investment right now, they are likely wanting to be a part of the business on a more active level (weekly financial reports opposed to monthly or quarterly).

-- I approach these investors according to my profession. I am an accountant and have an established reputation for careful money management and working on a tight budget to make a company successful. I also have a reputation for "not needing a large client. I will make your company into a large client". Thus, they have confidence that an accountant with such reputation is going to watch their investment.

Potential Investors

-- These investors already have other investments and are just looking to diversify their portfolio. They likely won't want an active role in their investment due to the quantity of their investment. They are also a slightly older crowd and have their own accountants & financial analyst on reserve somewhere on their phone.

-- Approaching these investors require more skills, but the payoff is bigger -- more money, more resources, and they're ok with being absent from their investment. However, they'll definitely want to see you polished up, suit and tie, and at least a good level of assurance that you're not an "upstart kid looking for money" as one of them had told me. Approach them as you would a new investor -- just expect to have all the questions answered, good responses, and a lot of projections.

Long-Term Investors

-- These investors are normally older and you will likely be dealing with their accountant(s) than you will with them. They are old money and have been investing a long time and thus, are highly experience and can smell a good business plan when they see one.

-- When you approach these type of investors, approach them with significant care. You are not only presenting to them, but also to their accountant/financial team. They will bring the idea back to their accountant and relay it, which means, anything and everything you say have to be extremely clear so not to be lost in translation. Also, copies of business plans, projections, investment amount, and so on is your best bet. Finally, if you know a friend or a family member who knows this type of investor, it is going to be your best approach.

Now that we have the type of investors out of the way, finding them is not that difficult. Chamber of Commerce is a great place to meet business owners and investors. Also, approach your local investor's organization -- there are about 10 big ones in St. Louis and I just did a quick search. Approach friends and inner circles. Failing all of this, go to a Financial Advisor or Accountant that you do business with frequently. They are the money handler and will know who is interested and who isn't.

Anyway, I hope this all helps!

Tran Nguyen

Accountant

One Accountant's Perspective: Bulk Order

Question:

Dear Tran:

I have a small business that has been in operation for about 6 months. I have about $7,000 dollars in gross sales per month. I offer a product that currently costs me $24.00 and I sell it for $30.00. This price is pretty fixed due to other competition.

I found out I can purchase a crate of this product from China for $50,000. This amount equates to $18.00 per item (substantial savings). At my current rate it would take me about 1.5 years to sell the entire inventory. I do not know much about loans and getting capital (started the business with $300 ) so any suggestions you may have is appreciated. I did a few calculations and it looks like a 2 year loan even at 20% would save me $9,000 per year. But where do I get a loan from? Or maybe my calculations are wrong?

I applied for a business/personal loan from my local bank, but as I expected I was denied as I do not have any equity.

What are my options? Should I go with this plan?

Answer:

To be honest, your options are limited by several factors. First, being that it takes roughly 1.5 years for you to move the entire shipment, while the bank has to wait 2 years for full repayment -- that is assuming everything goes according to plan.

So the turnover rate is not in your favor. But do not be disheartened just yet. A small business loan is possible if you have a working and fully written business plan. Most bankers will listen to your idea and make a personal judgment on whether your ideas are feasible or not. A written business plan will always help that along.

Another thing you can try and do is to go through a third party. An accountant who knows your businesses would be a great person to approach. They are likely to have contacts with banks and bankers that trust their judgment and thinking. Thus, you are using their credibility to get a loan.

One more possibility is to approach the company selling these items directly. See if they would extend to you a credit line as long as you moved the items and sold it for them. Most companies will agree to extend this courtesy if you are able to sell the products and pay them on time -- just do not ever miss a payment or that trust will disappear.

On a personal note, I would recommend finding investors. At a 10% per year return, you can find some decent investors who are willing to go into the business with you. Plus, a short-term investment is great for those just wanting to get their feet wet so that gives you a wider range of investors to pick from.

As an accountant, I would advise against such an idea. While it is true that you would go from a gross profit margin of $6.00 to $12.00 if you made the switch; you would also be incurring a large risk to your business. There are several factors to consider when looking at such a bulk order and one from a different supplier.

The first of which, is it the same quality material. It is possible that your $24 product is built more reliably than the $18 product item. Thus, a switch might cause more faults and defects to occur. Which would ultimately result in higher warranty costs -- if you offer warranties -- and lower customer satisfaction.

Second, if the items are comparable then, you are faced with having a huge amount of your money invested into your inventory that is staying on your shelves for nearly two years. That is money you can be spending on advertising, customer service, expansion, investing, and the list goes on -- the opportunity cost could potentially be too high.

For example:

1. $50,000 for the bulk order at $18 per unit equates to 2,778 units
2. 18 months (or 1.5 years) to move all 2,778 units, means you must sell 154 units per month to stay on schedule
3. (2,778 units on hand - 154 units sold) = 2,624 units on hand
4.  (2,624 units on hand x $18 per unit) = $47,232 inventory costs
5. If interest is at 0.0083% (10% per year), your opportunity cost is at: $47,232 x 0.0083% =$393.60 per month (or $6,691.20)

This means you would lose roughly a month worth of sale by purchasing this bulk order -- despite the more appealing pricing.

Lastly, you are potentially facing another problems with obsolescence. The product could be replaced with a better product or you could have issues liquidating the items in the event you need cash. Overall, I would recommend against such an idea.

I hope this helps!

Tran Nguyen - Accountant