Tag Archives: finance

9 Reasons Credit Cards and Small Businesses Have a Complicated Relationship: Guest Blog

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Guest blog by Daniela Baker of CreditDonkey.com

Small businesses and credit cards have a complicated relationship. Entrepreneurs often turn to small business credit cards to provide capital during the early years. Some entrepreneurs use their personal credit cards to provide the seed capital for their dream. A smart entrepreneur should understand the dynamics behind the relationship.

  1. Small businesses are being courted aggressively. With upwards of 27 million small businesses, spending a sum total of $5 trillion a year, credit card companies are making a move on small businesses. From free roundtrip tickets to double rewards points for every dollar spent, things are heating up.
  2. Businesses have received a increase of credit card mailings from 2009, to the tune of 256 percent in the first quarter of 2010. That must make the small businesses feel extremely special. That, or completely inundated with junk mail.
  3. A corollary of this growth though is that business credit cards don’t get the same protections as individuals. Since January 2010, business credit card rates have skyrocketed – Up more than 30%. The Credit Card Accountability, Responsibility, and Disclosure act limits rate increases and asks banks to mail bills 21 days before the due date… Except these are individual securities and aren’t meant for businesses. Hope those businesses have a back-up plan.
  4. The fact that small businesses are targets for credit card hikes is no secret. What’s really interesting is that banks are so excited about these rate hikes, they have reportedly started offering business credit cards to people who don’t actually own businesses.
  5. In a SurePayroll poll a few years back, out of a sample size of small business owners, 29% used their cards to help keep personal and professional expenses separate, 22% used the cards for bookkeeping, 20% highlighted convenience, 18% liked the rewards received, and 10% said it helped with short term cash flow issues.
  6. Small business credit cards have the ability to actually create jobs, both directly and indirectly. From 2003 to 2008, the small business credit card increase created (according to a report by Keybridge Research) “more than 592,000 small business jobs as well as one million direct or induced jobs throughout the US economy.” The total impact of small business credit card use: 1.6 million jobs.
  7. It may have one of the longest credit card names in history: The Capitol One Visa Business Platinum Preferred No Hassles Miles Card. How could you go wrong with that? Only the fact that you might have to remember its name every time you called in to check the balance or question certain suspicious charges.
  8. In the Federal Reserve’s recent Senior Loan Officer Opinion Survey, 75% of banks explain they’ve tightened rates for businesses (up five percent from only three months back). One cardholder’s lifetime fixed rate actually jumped from 2.99 % to 9.99 %. His cash advance rate jumped an astounding 17.85% in the same time period. Businesses can opt out of the rate increases, but they then also have to opt out of their credit card. Talk about a lose-lose situation.
  9. Maybe the break-up is coming sooner than expected… From the National Small Business Association – In the past year, the number of small businesses relying on business credit cards has dropped from nearly half to just about slightly over one third. In the same time, credit cards have dropped from the list of financing options, from first to third.

Once armed with knowledge, small business owners should still consider credit cards as a financing option. Business credit cards often provide the necessary capital needed for growth. With the Small Business Administration pointing to “impending growth in small business lending”, the future looks bright for entrepreneurs.

While You Were Watching Google

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SAN FRANCISCO - FEBRUARY 15, 2005: (FILE) Mic...

Image by Getty Images via Daylife

I spend a lot of time at George Mason University for someone who doesn’t teach or attend the school.  I’m an alum, but I visit now to either pop into a friendly professor’s class and spread the evils of marketing to impressionable minds or as a judge in the School of Management’s case study competition.

While judging the latter in a small class this month, I asked the same question of each group that was posing as consultants to a Fortune 500 company.

What was our profit last year?

The groups didn’t know, confused revenue with profit (a great coaching moment) or in one especially sad case, insisted  that the “entire industry” was $187 trillion.  Yes, with a “t”.   They were prompted to check the number, but confidently insisted the number was trillion.

There are stories of me as a college student too so I understand.

And students can mix their -illions because adults continue bemoaning Google‘s growth while ignoring Microsoft.

Google receives the majority of North American search queries.   Google also rolls out new ventures right out of the Ready-Fire-Aim playbook.  But as we crown Google and write about its search and advertising dominance, its still unproven forays into health, operating systems, telephony and more, I just have one question:

Has anyone looked at Microsoft’s profit lately?

Even financial pundits are writing off Redmond for an anticipated year-over-year decline in fourth quarter earnings announcement due any day.   Until 2008-2009′s “Worst Financial Crisis Ever [except for 1987 and 1973 and that Great Depression thing]“, Microsoft consistently posted profit of more than $4 billion every quarter.  Those of you scoring at home will note that the company generates profit — not revenue — of more than one billion dollars every month.

Profit slumped in 2009 and looks to decline again in Q4.   But compare the two companies before crowning royalty.  First, let’s agree that 2009, the year that saw government bailouts and the destruction of many household names, isn’t on the table.  We’ll go back to the end of 2008, when our current economic crisis was in full swing.

Google posted great growth numbers.   Gross profit rose every year from around $3 billion in 2005 to more than $13 billion in 2008.   As any good company in hypergrowth does, Google continually reinvested and still created net income of $4 billion in 2007 and 2008.

Or as we say in my family, Google earned as much in 2007 and again in 2008 as Microsoft did in any 3 month period during that time.

Laugh about Vista or say that Wii won the hearts and minds of console gamers or that Google Apps and SaaS spell the death of Microsoft.  But remember that the company you dismiss continues throwing off profit that dwarfs many industries.

Another sound bite for you:  between 2007 and 2008, Google earned about $8.5 billion while Microsoft earned double that in 2008 alone.

Pundits and other navel gazers ignore Microsoft at their peril.  The company surely needs new cash cows.   The on-again deal for Yahoo! may fall through once more.   Even if Microsoft buys Yahoo!’s search business, Google will still hold a 3 to 1 margin in the free search market.

We teach business students that corporations exist to create profit and thus shareholder value.   By that measure, Google isn’t in Microsoft’s class yet.  And any company that can throw billions at R&D or M&A while retaining more profit than its competitors is a company profit-focused marketers should be watching.

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Cool Content Ideas Can Drain Profit

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Internet Evolution’s David Silversmith, who has guest blogged at Big Thinking for Small Business before, has folks buzzing about his article on the estimated drain YouTube creates on Google’s profits.

Silversmith authored a study projecting YouTube drains Google profits.

Silversmith authored a study projecting YouTube drains Google profits.

Silversmith used data from Bear Stearns (yes, they still exist) and Credit Suisse to calculate that Google is losing about $1.5 million each day.

There are indeed times when market conditions dictate a product or service launch before profit is expected.  I’ve worked at more than one organization for whom speed to market was key.  In at least one case, that wager paid off handsomely.   In others, well, we got to market fast and first.

No single rule exists for product development, especially in small business, except the iron clad law that cash is king.   Beyond that, spend it if you got it, but make sure the road to profitability, not the road to revenue, is clearly mapped. Too many times, our audits of a small business conclude with a recommendation that one or more programs be shuttered.  These might be affiliate programs with big admin costs that only have a handful of super affiliates.  Or perhaps a company offers a product extension that drags down profitability in an attempt to be as vertical as possible.

Virtual organizations can work.  So too can an organization teeming with specialized knowledge workers or service technicians.  Your company may invent a better widget, but if you build it,  you may not sell the darn thing.  That is precisely what Silversmith’s analysis at Internet Evolution shows about YouTube.

In one of the worst financial environments in several decades, Google gushed cash in Q4 of 2008, able to spend $5.3 billion and still finance everything thorough operating cash flow.   The search company’s current and quick ratios are 8.7.   Remember Microsoft?  Their ratios are at 1.5.  Which company can afford to let money flow out that fast?

But should they?   Who cares.  The question here is:  should you?   Knowing when it’s time to cut and run is a critical business skill to have.  We often spend so much time developing our businesses that we forget to test the floor for when an exit strategy is necessary.  Unless your business is generating billions in cash flow each quarter, leave YouTube for the big players and break down your own business’ service and product lines to see if you’ve got a cahs leak somewhere.

Perhaps our friends in Mountain View should heed Kenny Rogers’ advice from three decades ago right before the last economic crisis of this magnitude.  Thankfully, Google’s YouTube service let us watch Kenny sing with The Muppets at no charge.    You’ve got to know when to hold ‘em…

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Dow Jones Defined – Marketing’s Biggest Success

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Yes, the Dow Jones Industrial Average (aka the Dow or the DJIA) bounced like a pogo stick today.   Many people were surprised because today looked like the fourth bad session in a row for U.S. stocks.  Then an artificial floor was touched, and the frenzied purported wisdom of crowds kicked in and all was right today.

You’ll also read or hear about the 800+ point swing in today’s DJIA is the third largest on record.   Please remember that this huge stock swing is not adjusted for inflation.  More importantly, you should know that the DJIA is one of marketing’s most enduring successes.

Today’s Dow Jones averge has little to do with the U.S. economy.  The number is a formula created over one hundred years ago by Wall Street Journal co-founder Charles Dow.  The Dow Jones Industrial Average has nothing to do with industry, a “divisor” or fudge factor that only people who dig finance actually understand and was created to sell more newspapers.  The DJIA is now owned by News Corp (NYSE:NWS), which also owns more media properties than you can imagine, including MySpace, Fox, Harper Collins Publishing and yes, The Wall Street Journal.   Along the way, the company run by Rupert Murdoch made more revenue in 2007 than Google and Yahoo combined.

And why do we care?  Because the Dow Jones Industrial Average is a number calcuated by figuring out stock prices and other elements related to the stock of 30 companies — 4 of which joined the DJIA this year.

That mainstream media continues to rely on breathless reports of “The Dow” when the rival Standard & Poors 500 (aka S&P 500) reflect similar variables, but for 500 companies.  It’s important that both stock indices are comprised of only American companies.  Now for the part no one ever believes:

Every company reflected in the DJIA is also reflected in the S&P 500.

Sure, go check.  I’ll wait.  While we do that, though, stop listening to headline hungry media folks yip about the “third biggest single session gain ever”.  You may now knowing chortle when reporters actually use the phrase “third best”.  This is the second important issue.

These point swings are not adjusted for inflation.  If you’re reading this, chances are you were around when the Dow finished above 5,000 for the first time ever just 13 years ago in 1995.  The Dow stands at just over 8,000 today.  The number has gone high and low, but ultimately remains the province of rubes and media who insist on spoon-feeding financial information to the masses.

Charles Dow’s invention — a scorecard, if you will — is more than 100 years old and makes international headlines decades after his death.  That is a true marketing success.

But calling the Dow a financial barometer is like believing that The Dark Knight is the second highest grossing movie of all time at U.S. box offices.  Yes, it is true, that yet another Batman movie created more than $500 million in revenue in 2008.  Thankfully the good folks at BoxOfficeMojo.com, one of my favorite movie sites,  created a chart that accounts for inflation while reporting on box office revenue.

Their data shows that The Dark Knight has finally surged ahead of The Jungle Book and Sleeping Beauty and remains in 27th place, safely behind The Lion King, Grease and Thunderball.

Charles Dow must be beaming in the cosmos whenever a media report cites The Dark Knight as the second highest grossing film ever.