This episode follows on the interview with Eighteen Twenty. I talk extensively about the need for cash flow forecasts, and how you can make one easily with free help! I also talk about my wine crowdfunding research in some detail, the hidden challenge of applying to pitch competitions, and an important lender option all small businesses should know about: CDFIs.
Links and Resources
CDFIs – complete listing
brandingcompass.com, use thefundingcoach code to get $10 off any license
In this episode I want to follow on to the interview that I did with Eighteen Twenty rhubarb wine. I’ve known Amanda O’Brien for a couple of years now. I talked to her after she’d had a very successful first full season of opening the doors, selling wine, running out of wine in three to four months, and she needed to plan for the next season.
After that interview, which I hope you listen to in the last session, I then sat down with both Amanda and her partner Pete at their tasting room in Portland Maine.
It was Amanda’s night to serve customers. So as the customers started to come in and drink the craft small batch specialty rhubarb wines and ciders that they had made to kind of tide them through until the next season, I sat down with Pete and we talked numbers as well as his own perspective on what he wanted to see the business do going forward.
Pete’s got a very strong technical background. I’d say he was a little bit on the conservative side, which is fine – everybody has to be comfortable with where the business is going. So I learned a lot about how the business had been funded up until that point in this session.
What I want to do is walk through the steps of what I learned and the steps towards figuring out how much the company is going to need in order to successfully get into the second season of Eighteen Twenty rhubarb wine. But then I also want to walk through some of the different options that the company ought to be thinking about, and figure out which of those options they ought to be focusing on going forward.
To begin with, we needed to figure out how much money the company is going to need.
Now I should say that because the rhubarb plants grow particularly well in Maine, I kind of bought into the vision that Amanda and Pete have had that rhubarb could be a huge part of the economic future of Maine. Because we can grow lots of rhubarb and we have lots of tourists who will drink wine made here.
In any case, I sat down with Pete and learned a few things about the way the business had been funded. Not surprisingly, he took out a Discover line of credit loan. I think it is about $35,000 in order to get the business launched. And he used his own personal credit to secure the loan because of course the business didn’t have any credit rating. That line of credit is now being paid down at just under $1,000 a month.
In addition there were several personal loans that both Pete and Amanda took out. So they’ve put in significant funds into the business so far. And finally there was a $5,000 loan from a friend of theirs that was going to start needing to be paid off in June. Now June is an unfortunate timing for them because that’s when the new crop of rhubarb comes in. And cash has to go out to pay for not only the rhubarb but soon after that things like bottling.
So the business has been funded to date with a fair amount of debt. And they need to figure out going forward what are their funding options.
And of course first, they have to figure out how much money are they actually going to need in order to successfully launch the second season and make sure they have enough rhubarb wine that they can sell it throughout the year. And importantly that they can continue to generate cash from those sales throughout the year.
I had a good discussion with Pete about how much he wanted to grow and as I mentioned he’s a little bit of a conservative guy. And he was most comfortable doing about a three fold increase in production in year two versus year one. And there were a bunch of good reasons why he wanted to keep it at that level. Part of it was, overall, he conceptualized that this business was still at the risky stage and he wanted to make sure that everything would work before he really jumped in with both feet and said “OK I’m really going to go for it.”.
And that’s not an unreasonable way to think about things because there is such a high risk of failure. And so from his perspective, taking on the financial burden necessary to do three times production was about the amount that he was personally comfortable with.
Something for you to think about: if you are funding your business with some kind of personal debt, what is your comfort number beyond which you really don’t want to commit until you’re sure that the business is actually going to fly?
When I think back on my a cappella music business, my initial amount of funding was a certain amount. I had some stocks from the venture capital days and I sold those stocks and I said: OK, I’m going to try to launch the business with just this. And if this runs out before things are going well, I’m going to have to reconsider. That’s not an unreasonable way to think about the initial outlay of your own personal resources in building a business.
Still, it raises the question of how much money the company’s going to need in order to get through season two. Pete had a $30,000 number in his head, but what do the actual numbers say?
Pete sent me some information so that I could put together a first pass at a cash flow forecast. The cash flow forecast is a pretty useful universal tool every entrepreneur ought to have. It tells you how much cash is going to come in and out of the business over the next period of time, usually it’s about 12 months. And it allows you to plan ahead… What a concept, plan ahead! …to make sure that you don’t run out of cash. Because running out of cash is the way that a lot of businesses die.
So you want to be able to forecast what cash is going to be looking like. I did write a blog post about the Microsoft template for a very simple cash flow forecast. And I wrote that actually with the folks at Eighteen Twenty in mind.
And so armed with this information from Pete, which was simply three and a half months output from their Quickbooks accounting software of their profit and loss statement for the beginning of 2018, plus a few other notes about cash requirements that he knew the business was going to have coming up, I decided to sit down and take a stab at putting together a cash flow forecast.
And it took me about 35 minutes of noodling around. It was really the first time I had used the Microsoft simple cash flow forecast template. So it’s not like I really knew exceptionally well what I was looking at. I bring this up because 35 minutes is not a huge investment of your time. It also didn’t require a lot of work beforehand. If you have Quickbooks you can pretty easily generate a report of the profit and loss statement. And if you spend a few minutes thinking about… oh yeah, then there’s that loan payment, and then, oh yeah, we got the regular rent and then we’ve got the insurance we pay quarterly… Before long you have all of the elements you need to put together a simple cash flow forecast.
But it’s still a barrier here for some people that try to put it together themselves. In the case of Eighteen Twenty they are relying on me to put together the first pass at a cash flow statement. What can you do?
Well it turns out here in the U.S. we have lots of great free resources. SCORE… SBDC, Small Business Development Centers and Women’s Business Centers are all partially funded by the federal government. And they provide free business advisory… counseling… mentoring… it’s called slightly different things. But you’ve got a whole bunch of people who know a lot about cash flow forecasts.
And so what I strongly recommend is if you haven’t put together a cash flow forecast yet, go to the blog at fourcolorsofmoney.com. Take a quick look at the blog post on the Excel cash flow forecast. Assemble a little bit of your own financial information. And then make an appointment. Choose your organization – SCORE, SBDC, Women’s Business Centers, any of them will be the right door for you.
Go in, sit down, and within an hour you will suddenly have visibility on how much cash you’re going to need in order to grow in the coming year. As hopefully you are going to grow in the coming year.
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Back To The Analysis
OK so that’s the first thing. I went through the cash flow forecast and my first guesss said that the company was going to need about $40,000. So a little bit more than the number Pete was thinking in his mind. But I was putting in just guesses, and it may well be that when Pete and Amanda sit down and they put in their own numbers into the cash flow forecast that I started for them, that they will come closer to that $30,000 number. So now we know about what the number is.
The question is, where is that money going to be coming from? Well it could come from several places. It could be that Amanda and Pete are personally going to need to put some of that money or maybe all of that money into the company. So this will be helpful for them to start planning for that personally.
It could well be that they’ll be other friends and family who will be able to contribute. That’s a possibility.
But I wanted to look at some of the other available options out there. One of the first things I thought about was Kickstarter.
I am a fan of Kickstarter. I think of it as a form of digital bootstrapping. Now why is that the case? Well a lot of Kickstarter crowdfunding campaigns really take the form of a young company saying: hey I’ve got this great new product that I’m working on. And if you pay me right now I’m going to give you a discount on that product in the future.”.
And getting customers to pay you early for something you’re going to deliver in the future? Well that’s a classic form of bootstrapping.
And so I said, well, how many wine companies have been funded on Kickstarter? I dug hard. And I unfortunately found that the results are not terribly encouraging. What I did was pretty straightforward. I just went to Kickstarter put in the word “wine” into their search function and then plowed through a whole bunch of results.
And unfortunately only 11 successful Kickstarter campaigns have been conducted by wineries. There were a bunch of unsuccessful campaigns as well and that’s not unusual. It’s a small percentage of companies that try Kickstarter that actually do succeed. I’ll put in a post about those success rates. But 11 out of the zillions of Kickstarter that have gone on is just not a huge number. And the average was about $13,000 that they raised. Again, that’s pretty typical for a Kickstarter.
We know that the company needs $40,000; Kickstarter might on average give them $13,000, but the odds are pretty low. Not a great option.
But I’m a persistent entrepreneur so I looked under Indiegogo. Even fewer successful crowdfunding campaigns there. And then I looked generically on Google for wine and crowdfunding. And I did find some specialty wine crowdfunding sites, but they’re mostly equity crowdfunding, and a few of them were French not surprisingly. And they’re really all about trying to connect wine makers who already have a vineyard and have a reputation with potential investors who like to do that kind of thing ‘cuz it’s kind of fun and a cool place to put their money.
So all in all then crowdfunding doesn’t look like it makes sense. Which is kind of too bad because Amanda O’Brien actually has a background in social media marketing. So if it were an opportunity out there it would be great match with her skill set. But it doesn’t look like it’s going to work.
Another option that Amanda had asked me to give her some guidance on were some of the business pitch competitions that have been going on for a few years here in Maine. One she had already been on. I was the host of the television show Greenlight Maine for the first two seasons. And Amanda had appeared on the show when she was way early. She hadn’t yet produced the first full vintage, and she lost to a company that had already produced one or two seasons of blueberry champagne – a very Maine thing to do. So she was reluctant to invest the time to go down that road again.
There was another competition here in Maine. Gorham Savings Bank has a competition called Launchpad. And the winner gets $50,000. And she was asking me whether or not that was a good use of her time. I did take a look at the application, and in this case it would have required a significant amount of additional work for her. Because the application had a whole bunch of questions that maybe wouldn’t be difficult if she was in the middle of writing a business plan. But given her current situation and the fact that she really doesn’t have a lot of extra time, I recommended that she could just pass on that for this year. If she did have that extra time it might have been a good use because her use of proceeds are very much in line with a bank loan. And in this case because the competition’s sponsor is a bank, they like to see the kind of business that might be a good customer for them in the future.
So the competitions and crowdfunding are not good options. And so it does look like the potential option for them now is going to be additional debt.
We had a brief conversation about equity, but right now at least, the company doesn’t have the high aspirations of trying to build a company that’s going to have a national brand and huge growth that would be a fit for equity. So at least for now their own goals don’t align with the goals of equity investors.
But when it comes to that debt option, what I’m going to encourage them to explore is community development financial institutions or CDFIs – yet another acronym. It just so happens that here in Maine we have Coastal Enterprise, CEI, which is a CDFI, that is a source of both funding as well as business assistance. They are focused on serving underserved populations. And in particular they do a lot in supporting agriculture, and because they are rhubarb wine and Eighteen Twenty is supporting farmers – in particular they’re putting cash in farmers’ pockets in springtime when the farmers need it the most – it may well be that CEI as a CDFI could be a mission aligned source of debt funding. In other words, it’s an organization that’s trying not just to make a profit, but also do good for the community. And so I’ll be connecting Eighteen Twenty with CEI to see if they can provide not only the $30,000 to $40,000 that the company needs now, but perhaps even doing a refinancing of some of their existing debt and turn some of that shorter term debt into longer term debt.
One other important thing to know about CDFIs is that they do provide microloans. Those are loans of typically under $50,000 although they’re often in that $30,000 range. So it may well be that CEI as a CDFI has a microloan program that would align with the company’s needs at Eighteen Twenty.