Don’t get stumped by financier questions: Techniques that will even satisfy the ‘Shark Tank’ investors

Richard Weinberger, PhD, CPABy Richard Weinberger, Ph.D., CPA

How many times have we seen small business entrepreneurs go before the investors on ABC’s hit show ‘Shark Tank’ and get tongue-tied when asked basic questions about their enterprise? It happens all the time, and the next thing we hear is: “I’m out.”

That doesn’t have to happen to you. What every small business owner needs, and what the sharks want to know, is that you have the operational knowledge to understand what it takes to run a profitable business.

Every small business owner should have a wide diversification of knowledge in many different areas of business, in addition to having the necessary proficient experience and technical skills required to perform the core functions of business. Without becoming an expert in every aspect of business, you still need to know enough to review and analyze key areas of your company to find inefficiencies and opportunities for more profitability.

Here are six questions the sharks would expect you to answer about your own business.

1. What were your total revenues in the last quarter and last 12 months? More important, what was your gross and net profit margin?

To get these numbers, you need to do a review of total revenue and expenses, review by product or service line, and a profit-margin analysis. All of this can be obtained from the company’s income statement. When properly analyzed using dollar- and percentage-income statements, the small business owner will see the financial ‘guts’ of the business—revenues and expenses—and spot anomalies that need immediate attention.

2. How much equity and debt is there in your business?

Sharks want to know how much ‘skin in the game’ an owner has in the business. This basically means how much of the business is being financed with equity (owner’s money) or debt (borrowed money). If a business is not doing well and the owner stands to lose very little money, the owner can easily walk away from the business. A review and trend analysis of assets, liabilities and relevant ratios will provide the owner with dollar amounts and percentages for each category.

3. Who is your competition, and why are you different and better?

“Know your competition better than you know your own business” is a great business principle, but small business owners seeking investors also have to know their own businesses inside-and-out in order to make logical comparisons. Do a critical self-evaluation of the business utilizing a ‘SWOT’ analysis. This is a great way for an owner to visualize and understand the strengths, weaknesses, opportunities and threats (SWOT) that exist in the business. With this knowledge, small business owners are better able to compare their businesses with the competition.

4. How do you get your product from origin to destination?

A small business owner can find a multitude of vendors for supplies, inventory, transportation and outsourcing. The key, however, to an efficient distribution channel is to know the best sources for necessary products and services, and how to make the entire distribution channel most efficient in terms of processes, time, and cost. A thorough review of a company’s supply chain management (SCM) system can improve operations, lower costs, and reduce wasted time and effort.

5. How much cash are you burning through each month, and how are you going to use my investment?

Shark investors want to know exactly how their money is going to be used, and how much cash is going to be burned each month before they can expect a return on their investment. Without preparing a cash-flow budget, a business owner seeking an investment will not be able to answer these questions. When an owner tells a shark he not only knows these answers, but also prepares a budget variance report to understand differences between actual and predicted results, a shark will know the business owner is on top of the financial game.

6. How are you marketing your product or service now, and what changes do you see in the future?

The life cycles of a business continue to change as the business emerges from the formation stage and enters early- and later-growth stages. Business decisions and marketing will change and evolve as the business grows. Marketing plans that worked during the early stages might have to change during later stages based on a number of variables, such as competition, economy, and new products or services. Without a solid business and strategic plan, a company simply operates from day-to-day without a real direction for the future. No shark wants to invest in a company that has no definite marketing plan—no marketing, no business!

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Richard L. Weinberger, Ph.D. CPA, has over 30 years’ experience as a financial and management consultant for small businesses. An esteemed thought leader and speaker, he is CEO of the Association of Accredited Small Business Consultants. His new book, Propel Your Small Business to Success: Accelerated Actions to Maximize Profit, gives small business owners a step-by-step method for reviewing and analyzing every aspect of their company in order to increase profitability. Learn more at www.aampapproach.com.

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