In the latest Batman movie, one of the villains is “Two Face” - a good guy turned bad guy who determines the fate of his victims by tossing a coin.
And some bankers today seem to be following his lead.
Bankers can be usefully divided into two categories - those in "sales", and those in “credit”. In the credit bubble environment, "sales" ruled and "credit" did what it was told. But now, what I call the "pendulum of bank benevolence" has swung from "profligacy" to "bastardry", and the credit people are back in the ascendancy.
When "sales" ruled, small business owners were seduced by their bankers to source all of their funding requirements with their bank, with offers of very low pricing, and the empty logic of “one stop shopping”. But now that "credit" is back in town, many SME's are finding themselves hog-tied and unable to restructure their business finances without refinancing every dollar of debt the business has.
An example will illustrate what I am talking about. I was asked recently to provide a debtor finance facility to an engineering business. They needed my services because they recently shifted premises. As always happens when a business shifts, they had underestimated the costs in terms of both expenses and lost sales through down time. Their bank (lets call them Big Bank) loaned the business nearly $1M to buy the new premises only months ago - the old premises had been rented. Yet Big Bank turned them down when they asked for an overdraft extension, and so their finance broker brought the matter to me.
I asked Big Bank to release the business's debtors from the debenture charge they (Big Bank) held over the business. The Relationship Manager agreed to help, but then, even though the debt was easily covered by mortgages held over the premises and two directors homes, he was over-ruled by “credit” (you can almost hear “Two Face” flipping his coin, can't you?)
The only option available to this client now is to refinance everything - the overdraft, the business loan, the equipment finance, the property loan on the new commercial premises, and the two directors home loans.
In this example, the client effectively has four classes of assets: Commercial property (the premises); personal property (the directors homes); the plant and equipment, and; the debtors of the business. I believe that each class of asset should be financed with different lenders – preferably specialists in those asset classes. That way, one asset class can be refinanced without the need of refinancing the other assets.
This client is now at the mercy of the decision processes of the bank, which frankly seem no more sophisticated than that of “Two Face”, with similarly dire consequences for the business.
Showing posts with label small business. Show all posts
Showing posts with label small business. Show all posts
Hubris and the SME "bull frog"
Have you heard of "boiled frog" syndrome? A frog thrown into a pot of boiling water will supposedly jump right out again. But a frog placed in a pot of "pond temperature" water will remain in the pot when that pot is placed on a stove where the temperature is gradually turned up until the pot boils. The point is, the frog recognises an event of sudden danger, but not danger that manifests incrementally.
Have you heard of "bull frog syndrome"? A number of years ago a researcher developed the "boled frog" theme by introducing the concepts of the "tadpole", the "drowned frog" and the "bull frog" to explain small business failure.
The "boiled frog" SME is one that fails after some problem incrementally ratchets its way up into an insurmountable disaster. This is also known as "death by a thousand cuts". The "tadpole" is that often talked about business statistic - the start up that never survives past its early stages. The "drowned frog" is the small business that swims from one bright idea to the next, but never really getting a grip anywhere before being overwhelmed and becoming "exhausted".
And the "bull frog" is the business owner who places their own short term selfish needs ahead of the needs of their business. They lease the boat, the flashy car, and/ or the borrow big to buy the big house before they can really afford it.
I have a friend - a turnaround and insolvency guru - who says "the business can buy you another house". He says this because clients sometimes refuse to sell their house or flashy car when they need cash to prop up their business, and in the end, lose the business, the house and everything else.
And I recently met a chap who needed to restructure his finances to avoid receivership - and probably personal bankruptcy. His business had hit trouble and he needed to raise some extra capital against his home. Unfortunately he had recently leased a $250,000 sports car, and the lease was collaterally secured by his home. He could not untangle the various securities in order to free up his house. In trying to hang on to the car, he ended up losing the lot. Had he contented himself with a used late model Holden, he could have rebuilt his business, and maybe in a couple of years he could have looked at taking on the sports car.
And this brings me to "hubris". "Hubris" is often defined as "excessive pride". In fact however, the term derives from ancient Greek tragedies, and really means the belief that you are superior to "the gods". In the Greek tragedies, the hero refuses the help of the gods, or undertakes some task so great that it is stupid rather than heroic, and tragedy ensues. And so the saying "pride comes before a fall".
SME owners - particularly in tough times - should bide their time, build their business, and wait until they are truly successful before seeking the rewards of abundant success. Otherwise the fate of the hubristic bull frog may well be their own.
Have you heard of "bull frog syndrome"? A number of years ago a researcher developed the "boled frog" theme by introducing the concepts of the "tadpole", the "drowned frog" and the "bull frog" to explain small business failure.
The "boiled frog" SME is one that fails after some problem incrementally ratchets its way up into an insurmountable disaster. This is also known as "death by a thousand cuts". The "tadpole" is that often talked about business statistic - the start up that never survives past its early stages. The "drowned frog" is the small business that swims from one bright idea to the next, but never really getting a grip anywhere before being overwhelmed and becoming "exhausted".
And the "bull frog" is the business owner who places their own short term selfish needs ahead of the needs of their business. They lease the boat, the flashy car, and/ or the borrow big to buy the big house before they can really afford it.
I have a friend - a turnaround and insolvency guru - who says "the business can buy you another house". He says this because clients sometimes refuse to sell their house or flashy car when they need cash to prop up their business, and in the end, lose the business, the house and everything else.
And I recently met a chap who needed to restructure his finances to avoid receivership - and probably personal bankruptcy. His business had hit trouble and he needed to raise some extra capital against his home. Unfortunately he had recently leased a $250,000 sports car, and the lease was collaterally secured by his home. He could not untangle the various securities in order to free up his house. In trying to hang on to the car, he ended up losing the lot. Had he contented himself with a used late model Holden, he could have rebuilt his business, and maybe in a couple of years he could have looked at taking on the sports car.
And this brings me to "hubris". "Hubris" is often defined as "excessive pride". In fact however, the term derives from ancient Greek tragedies, and really means the belief that you are superior to "the gods". In the Greek tragedies, the hero refuses the help of the gods, or undertakes some task so great that it is stupid rather than heroic, and tragedy ensues. And so the saying "pride comes before a fall".
SME owners - particularly in tough times - should bide their time, build their business, and wait until they are truly successful before seeking the rewards of abundant success. Otherwise the fate of the hubristic bull frog may well be their own.
Not my frog, MIFROG!
How fast can a business grow using only the cash flow it generates itself? MIFROG is the "maximum internally financiable rate of growth". Calculating it is an interesting academic exercise, but more useful is understanding how the result can be driven higher.
MIFROG is essentially determined by two sets of factors. The first is the length of the "Operating Cash Cycle". The second is profitability - including both gross and net margin.
The "Operating Cash Cycle" measures the length of time cash is locked up in a business, and is calculated by adding the number of average days stock and the number of average days debtors (the Trade Cycle), and deducting the average days payables.
At this point, let me say that if numbers frighten you, you should skip the next three paragraphs and start again at the paragraph starting with the words "Welcome back...".
A business holding stock for an average of 60 days and collecting its debtors on an average of 45 days has a trade cycle of 105 days. If it is paying its suppliers on an average of 30 days, it has an OCC of 75 days (105 less 30).
Lets assume it has a gross margin of 40%, overheads of 35% and a net margin before depreciation and tax of 5%. For every dollar in revenue it earns, it generates 5 cents in cash. How much cash does it need to make that dollar? Cost of sales is 60 cents, but only 75/105ths of this is required every trade cycle - in our example, 43 cents. Overheads are 35 cents, but assuming these are incurred evenly throughout the period, only 50% of this is required in cash - 17.5 cents.
So, using our example, to generate $1 in sales, we require 60.5 cents. Given we only generate 5 cents per cycle, the most we can grow per cycle is 8.26% - 5/60.5. To convert this to an annual growth rate, we multiply by 365 and divide by the length of the Trade Cycle - in this case 8.26/105 x 365 = 28.7%.
Welcome back numero-phobes! The main points are that there are two key drivers of limits to self funded growth. The quicker the business turns over stock and debtors, the higher the MIFROG. And the higher the margins - Gross and Net, again, the higher the MIFROG.
Is the number for MIFROG itself useful? If your client is telling you he/ she plans to say, double revenues over the next 12 months, have a look at the key numbers discussed above. In our example (not uncommon), the limits to self funded growth (or MIFROG) is 28.7% P.A. 100% is not achievable without serious work on the key MIFROG drivers - or without access to external funding.
So, a useful number to know, and a good exercise to go through to look at what trade-offs might be required in order to drive MIFROG closer to planned growth.
MIFROG is essentially determined by two sets of factors. The first is the length of the "Operating Cash Cycle". The second is profitability - including both gross and net margin.
The "Operating Cash Cycle" measures the length of time cash is locked up in a business, and is calculated by adding the number of average days stock and the number of average days debtors (the Trade Cycle), and deducting the average days payables.
At this point, let me say that if numbers frighten you, you should skip the next three paragraphs and start again at the paragraph starting with the words "Welcome back...".
A business holding stock for an average of 60 days and collecting its debtors on an average of 45 days has a trade cycle of 105 days. If it is paying its suppliers on an average of 30 days, it has an OCC of 75 days (105 less 30).
Lets assume it has a gross margin of 40%, overheads of 35% and a net margin before depreciation and tax of 5%. For every dollar in revenue it earns, it generates 5 cents in cash. How much cash does it need to make that dollar? Cost of sales is 60 cents, but only 75/105ths of this is required every trade cycle - in our example, 43 cents. Overheads are 35 cents, but assuming these are incurred evenly throughout the period, only 50% of this is required in cash - 17.5 cents.
So, using our example, to generate $1 in sales, we require 60.5 cents. Given we only generate 5 cents per cycle, the most we can grow per cycle is 8.26% - 5/60.5. To convert this to an annual growth rate, we multiply by 365 and divide by the length of the Trade Cycle - in this case 8.26/105 x 365 = 28.7%.
Welcome back numero-phobes! The main points are that there are two key drivers of limits to self funded growth. The quicker the business turns over stock and debtors, the higher the MIFROG. And the higher the margins - Gross and Net, again, the higher the MIFROG.
Is the number for MIFROG itself useful? If your client is telling you he/ she plans to say, double revenues over the next 12 months, have a look at the key numbers discussed above. In our example (not uncommon), the limits to self funded growth (or MIFROG) is 28.7% P.A. 100% is not achievable without serious work on the key MIFROG drivers - or without access to external funding.
So, a useful number to know, and a good exercise to go through to look at what trade-offs might be required in order to drive MIFROG closer to planned growth.
Credit Crunch?
So now all the media pundits are talking about "the credit crunch" as though it is already a reality. It may be, but to what extent? And what is a "credit crunch", how has it come about, and what will it mean for small businesses looking to raise funds to grow?
A "credit crunch" happens when lenders stop lending. The banking system, and financial markets rely on lenders lending to other lenders. When lenders stop trusting their "counterparts" (what banks call other banks), the funds stop circulating at the wholesale level ("bank" to "bank" and in the capital markets), and then they dry up at the retail level. And then you have a "credit crunch".
Why is this happening? In the USA, some mortgage lenders, specialising in lending to high risk ("sub-prime") borrowers, have come unstuck as a result of declining property prices. When the property bubble burst, many of these loans sank "under water" (when the value of the debt exceeds the value of the asset). So with loan books full of loans that were "underwater" and no longer performing, the sub-prime lenders found their own cash flow streams dried up, and some of them defaulted on their own debt obligations. This becomes a "contagion" when the lenders to these lenders (superfunds and banks) have over-lent.
What happens next is that lenders stop trusting each other. Not knowing how much exposure a financial institution counterpart has to "sub-prime" loans, other financial institutions turn off the flow of funds.
In Australia, non-bank lenders have become a prominent feature of the mortgage landscape, and an important source of capital for small businesses borrowing on "low-doc" and "no-doc" terms. If the financial markets stop trusting these lenders altogether, then this flow of funds may be interrupted, causing head-aches for many small businesses.
There are mitigating factors. For years now there has been a large surplus of funds looking for investments. Here in Australia, compulsory super has contributed to very large institutional funds becoming desperate for places to park all the money. I can't see this drying up overnight.
And APRA (the regulator) in its most recent reports on the mortgage industry, says that default rates are a fraction of 1% - well under the high double digit figures experienced in the USA by sub-prime lenders.
There is a credit squeeze - whether or not its a crunch is open to debate at this point. I am not seeing banks closing their small business loan desks at the moment. But even with a credit "squeeze" interest rates will be impacted. The market for money is just like the market for bananas: when there is a shortage, the price goes up. The flow of funds to non-bank lenders will become impeded (how much so is the question), and the banks will become tougher to deal with. Without the non-bank mortgagees applying the competitive pressure we have seen in recent years, the banks will be able to increase their own margins, and to become much more choosy about who they lend money to.
The big questions are: will there be a "contagion" and if so, can it be "quarantined"? My feeling is that given the robustness of our economy, and the points made above, the answer will be "yes", but if you disagree, let me know!
A "credit crunch" happens when lenders stop lending. The banking system, and financial markets rely on lenders lending to other lenders. When lenders stop trusting their "counterparts" (what banks call other banks), the funds stop circulating at the wholesale level ("bank" to "bank" and in the capital markets), and then they dry up at the retail level. And then you have a "credit crunch".
Why is this happening? In the USA, some mortgage lenders, specialising in lending to high risk ("sub-prime") borrowers, have come unstuck as a result of declining property prices. When the property bubble burst, many of these loans sank "under water" (when the value of the debt exceeds the value of the asset). So with loan books full of loans that were "underwater" and no longer performing, the sub-prime lenders found their own cash flow streams dried up, and some of them defaulted on their own debt obligations. This becomes a "contagion" when the lenders to these lenders (superfunds and banks) have over-lent.
What happens next is that lenders stop trusting each other. Not knowing how much exposure a financial institution counterpart has to "sub-prime" loans, other financial institutions turn off the flow of funds.
In Australia, non-bank lenders have become a prominent feature of the mortgage landscape, and an important source of capital for small businesses borrowing on "low-doc" and "no-doc" terms. If the financial markets stop trusting these lenders altogether, then this flow of funds may be interrupted, causing head-aches for many small businesses.
There are mitigating factors. For years now there has been a large surplus of funds looking for investments. Here in Australia, compulsory super has contributed to very large institutional funds becoming desperate for places to park all the money. I can't see this drying up overnight.
And APRA (the regulator) in its most recent reports on the mortgage industry, says that default rates are a fraction of 1% - well under the high double digit figures experienced in the USA by sub-prime lenders.
There is a credit squeeze - whether or not its a crunch is open to debate at this point. I am not seeing banks closing their small business loan desks at the moment. But even with a credit "squeeze" interest rates will be impacted. The market for money is just like the market for bananas: when there is a shortage, the price goes up. The flow of funds to non-bank lenders will become impeded (how much so is the question), and the banks will become tougher to deal with. Without the non-bank mortgagees applying the competitive pressure we have seen in recent years, the banks will be able to increase their own margins, and to become much more choosy about who they lend money to.
The big questions are: will there be a "contagion" and if so, can it be "quarantined"? My feeling is that given the robustness of our economy, and the points made above, the answer will be "yes", but if you disagree, let me know!
What business are you in?
How a small business owner answers the question "what business are you in?" can be very instructive in at least two ways.
Firstly, a business owner needs to be able to clearly and succinctly articulate their business model so that almost anyone can understand it. The term "business model" came into vogue in the dot-com era, and simply refers to the firms' basic value proposition, including how it creates and delivers value to the market place. The business model for a supermarket for example, is to assemble a variety of grocery items at a convenient location, in a way that delivers value to its customers through both saved time (they can buy all their grocery needs under the one roof) and saved money (by passing on to its customers the discounts it achieves by bulk buying).
If a small business owner can't neatly describe his or her business model to prospective bankers or business partners, there is a real risk that the target market won't "get it" either, and the business may struggle.
Secondly, how the question "what business are you in" is answered indicates the "space" the owner of the business wants to play in, in terms of potential customers, product offerings and, importantly, competition. The example of the former Australian transport business icon, Cobb & Co, will help to illustrate the importance of this facet of "business definition" (a recent book tells the story of Cobb & Co - Wild Ride: The Rise and Fall of Cobb & Co).
Ninjas of my vintage may recall learning at school that Cobb & Co coaches were at one time to be found transporting mail, cargo and passengers down every highway and dirt trail in colonial Australia. We were told that the need for Cobb & Co's services - which relied upon horse drawn coaches, had come to an end once the horse was superseded by the car.
Cobb & Co is said to have been the Qantas of its day. At school the lesson was one of history, and Cobb & Co were given as an example of the way things used to be. However there is a much more powerful business lesson to be learned. How come Cobb & Co today is little more than a tourist museum, whilst the American company that its founders modeled it upon became American Express?
On the surface this would seem to be a classic example of "marketing myopia" - that is the trap many businesses fall into when they define their businesses too narrowly. Cobb & Co used to ship people and gold around the Australian colony - remember Australia's gold fields fuelled much of the country's expansion at one stage. And in some senses, is that not what American Express does internationally today? The two businesses could be said to have the same (very) broad business definition. But the more narrowly defined business failed to recognise opportunities (to evolve from transporting people and gold into a global travel and financial services business) and threats (to horse drawn travel).
"What business are you in?" appears to be such a simple and innocuous question. Yet to the well trained ninja, it can be a powerful diagnostic tool for gaining deep insight into a business.
Firstly, a business owner needs to be able to clearly and succinctly articulate their business model so that almost anyone can understand it. The term "business model" came into vogue in the dot-com era, and simply refers to the firms' basic value proposition, including how it creates and delivers value to the market place. The business model for a supermarket for example, is to assemble a variety of grocery items at a convenient location, in a way that delivers value to its customers through both saved time (they can buy all their grocery needs under the one roof) and saved money (by passing on to its customers the discounts it achieves by bulk buying).
If a small business owner can't neatly describe his or her business model to prospective bankers or business partners, there is a real risk that the target market won't "get it" either, and the business may struggle.
Secondly, how the question "what business are you in" is answered indicates the "space" the owner of the business wants to play in, in terms of potential customers, product offerings and, importantly, competition. The example of the former Australian transport business icon, Cobb & Co, will help to illustrate the importance of this facet of "business definition" (a recent book tells the story of Cobb & Co - Wild Ride: The Rise and Fall of Cobb & Co).
Ninjas of my vintage may recall learning at school that Cobb & Co coaches were at one time to be found transporting mail, cargo and passengers down every highway and dirt trail in colonial Australia. We were told that the need for Cobb & Co's services - which relied upon horse drawn coaches, had come to an end once the horse was superseded by the car.
Cobb & Co is said to have been the Qantas of its day. At school the lesson was one of history, and Cobb & Co were given as an example of the way things used to be. However there is a much more powerful business lesson to be learned. How come Cobb & Co today is little more than a tourist museum, whilst the American company that its founders modeled it upon became American Express?
On the surface this would seem to be a classic example of "marketing myopia" - that is the trap many businesses fall into when they define their businesses too narrowly. Cobb & Co used to ship people and gold around the Australian colony - remember Australia's gold fields fuelled much of the country's expansion at one stage. And in some senses, is that not what American Express does internationally today? The two businesses could be said to have the same (very) broad business definition. But the more narrowly defined business failed to recognise opportunities (to evolve from transporting people and gold into a global travel and financial services business) and threats (to horse drawn travel).
"What business are you in?" appears to be such a simple and innocuous question. Yet to the well trained ninja, it can be a powerful diagnostic tool for gaining deep insight into a business.
A business in "denial" is a crisis already underway
"If only they'd come to us sooner". I have often heard these words from accountants, lawyers and insolvency professionals when talking about a hopeless business case. A business crisis rarely evolves overnight. But most business owners usually "stick their heads in the sand" rather than take heed of the warning symptoms that always present early on, and are always obvious in hindsight.
In this post I am going to cite a very recent example, plus give some theory around "business crisis" that might help the business advisor deal with clients approaching crisis.
Last week I met with the owner of a business who had a large cash flow crisis indeed. He owes his bank around $1,700,000 - a number that exceeds the value of his securities by at least $300,000. His securities include his home, plus stock and debtors in the business.
His problems became serious when he approached his bank for an additional $200,000 to "land" a shipment of stock. His bankers, having taken the opportunity to review his business and their risk position, responded by calling up his loans (to be fair to the bank, this is the very simple version of a slightly more complicated story). As at last Tuesday, he had until the end of this week to refinance (pay them out in full). Or else. They are likely to appoint receivers and he is likely to end up personally bankrupt.
The bank (one of the majors) is upset because their lending ratios are way out of kilter (loan to asset value). Further, the business has been growing very rapidly, but it is yet to hit monthly "break even volumes" with consistency - so its other financial ratios (profitability, gearing, debt servicing etc) raised red flags on the banks financial analysis software.
How could have this crisis been avoided? According to Stuart Slatter*, the business crisis has four stages of development. A look at these will help answer that question.
Stage 1 is "the hidden crisis". Early warning signs are simply not detected due to poor administration and record keeping, and poor management processes. Business advisors need to help their clients establish systems that ensure that the clients accounting system produces meaningful information (reports etc) and that this information is regularly reviewed with a critical eye.
Stage 2 is "crisis denial". This is where crisis symptoms are explained away. "Its because of the low/ high Australian dollar", "its the economy", "all our competitors are having the same problem", "its anything/ anyone we can blame but ourselves". Hockey-stick forecasts are made (the ones forecasting a slight dip before a huge turnaround). This is where the advisor needs a solid relationship with the client built on honesty and trust so that the advisor can hold up the mirror to the client and make the client see the true situation and the true causes of the problem. A tip here is that if you ever catch yourself or your client blaming externalities for poor performance, the client is/ you are probably "in denial".
Stage 3 is "disintegration begins". The business starts to fall apart and too little is done too late. Drastic action is required here, more than just the papering over of cracks. Often a refinance is called for to raise additional capital, but it should always be used to fund a well thought out turnaround action plan, not simply to delay the inevitable.
Stage 4 is "organisation collapse". The administrator/ receiver is appointed, and only a formal restructure will breath life back into the business - but only after creditors have been compromised and the personal wealth of the owners (usually) seriously diminished.
What does this mean for the business owner I met last week? My guess is that the crisis was "hidden" during the early stage of rapid expansion and he has been "in denial" for some time.
I love the old saying "the difficult we do immediately, but the impossible takes a little longer". But the only response I had for the referring broker in this case I am afraid was "if only he had come to me sooner!" Often (in concert with brokers and advisors) we are able to perform miracles, but this one was beyond help.
Small business owners have heavy emotional investments in their businesses, which is why they often overlook the early stages of crisis. Its up to their advisors to be courageous and and point out the early symptoms as they arise.
As always, I look forward to any thoughts or feedback.
*Corporate Recovery: A Guide to Turnaround Management by Stuart Slatter. Published by Penguin, 1984.
In this post I am going to cite a very recent example, plus give some theory around "business crisis" that might help the business advisor deal with clients approaching crisis.
Last week I met with the owner of a business who had a large cash flow crisis indeed. He owes his bank around $1,700,000 - a number that exceeds the value of his securities by at least $300,000. His securities include his home, plus stock and debtors in the business.
His problems became serious when he approached his bank for an additional $200,000 to "land" a shipment of stock. His bankers, having taken the opportunity to review his business and their risk position, responded by calling up his loans (to be fair to the bank, this is the very simple version of a slightly more complicated story). As at last Tuesday, he had until the end of this week to refinance (pay them out in full). Or else. They are likely to appoint receivers and he is likely to end up personally bankrupt.
The bank (one of the majors) is upset because their lending ratios are way out of kilter (loan to asset value). Further, the business has been growing very rapidly, but it is yet to hit monthly "break even volumes" with consistency - so its other financial ratios (profitability, gearing, debt servicing etc) raised red flags on the banks financial analysis software.
How could have this crisis been avoided? According to Stuart Slatter*, the business crisis has four stages of development. A look at these will help answer that question.
Stage 1 is "the hidden crisis". Early warning signs are simply not detected due to poor administration and record keeping, and poor management processes. Business advisors need to help their clients establish systems that ensure that the clients accounting system produces meaningful information (reports etc) and that this information is regularly reviewed with a critical eye.
Stage 2 is "crisis denial". This is where crisis symptoms are explained away. "Its because of the low/ high Australian dollar", "its the economy", "all our competitors are having the same problem", "its anything/ anyone we can blame but ourselves". Hockey-stick forecasts are made (the ones forecasting a slight dip before a huge turnaround). This is where the advisor needs a solid relationship with the client built on honesty and trust so that the advisor can hold up the mirror to the client and make the client see the true situation and the true causes of the problem. A tip here is that if you ever catch yourself or your client blaming externalities for poor performance, the client is/ you are probably "in denial".
Stage 3 is "disintegration begins". The business starts to fall apart and too little is done too late. Drastic action is required here, more than just the papering over of cracks. Often a refinance is called for to raise additional capital, but it should always be used to fund a well thought out turnaround action plan, not simply to delay the inevitable.
Stage 4 is "organisation collapse". The administrator/ receiver is appointed, and only a formal restructure will breath life back into the business - but only after creditors have been compromised and the personal wealth of the owners (usually) seriously diminished.
What does this mean for the business owner I met last week? My guess is that the crisis was "hidden" during the early stage of rapid expansion and he has been "in denial" for some time.
I love the old saying "the difficult we do immediately, but the impossible takes a little longer". But the only response I had for the referring broker in this case I am afraid was "if only he had come to me sooner!" Often (in concert with brokers and advisors) we are able to perform miracles, but this one was beyond help.
Small business owners have heavy emotional investments in their businesses, which is why they often overlook the early stages of crisis. Its up to their advisors to be courageous and and point out the early symptoms as they arise.
As always, I look forward to any thoughts or feedback.
*Corporate Recovery: A Guide to Turnaround Management by Stuart Slatter. Published by Penguin, 1984.
A simple tool for diagnosing cash flow problems
We have developed a simple tool - "The Cash Flow Diagnostic" to help the business owner consider which aspects of the business should be worked on to deliver a more robust cash flow. It is outlined briefly here, and in subsequent posts we will go into detail for each of the five alternative points of action suggested.
In the first instance, a poor cash flow can be attributed to either the timing of payments and receipts or on the actual level of cash generated by the business. Cash timing issues can be relieved by either extending terms with suppliers, reviewing and enforcing customer payment terms, tight cash budgeting and through the use of debtor finance to accelerate cash receipts.
If the timing of cash flows is acceptable but the business is failing to generate sufficient cash, this can be attributed either to a lack of revenue or high cost levels. Revenue growth is constrained by either marketing factors or the amount of working capital available to the business. A refinance may be needed if working capital is your constraint. If your growth issues are more marketing related, review your “four p’s” of marketing (pricing, product, place and promotion). Many good blogs and web-sites offer helpful marketing hints. You could start by visiting Microsoft - http://office.microsoft.com/templates/ - here you will find marketing plan templates that will help you step through the marketing planning process.
High costs also fall into two categories – high fixed costs (overheads) or high input/ variable costs that result in resulting in low margins. A third party cash injection can improve your bargaining power with your suppliers to drive down the cost of your purchases, thereby improving your margins. If fixed costs are an issue, you made need to consider restructuring your business – and again, you may need funding to help you through that process. But additional finance or formal restructures do not by themselves solve problems – they are simply mechanisms for buying time and negotiation leverage.
All of the above is fairly intuitive – but even the simplest of tools are often effective in helping business managers to prioritise their actions and thereby maximize the effectiveness of their efforts.Stay tuned in upcoming weeks when we tackle the detail.
Feel free to comment!
In the first instance, a poor cash flow can be attributed to either the timing of payments and receipts or on the actual level of cash generated by the business. Cash timing issues can be relieved by either extending terms with suppliers, reviewing and enforcing customer payment terms, tight cash budgeting and through the use of debtor finance to accelerate cash receipts.
If the timing of cash flows is acceptable but the business is failing to generate sufficient cash, this can be attributed either to a lack of revenue or high cost levels. Revenue growth is constrained by either marketing factors or the amount of working capital available to the business. A refinance may be needed if working capital is your constraint. If your growth issues are more marketing related, review your “four p’s” of marketing (pricing, product, place and promotion). Many good blogs and web-sites offer helpful marketing hints. You could start by visiting Microsoft - http://office.microsoft.com/templates/ - here you will find marketing plan templates that will help you step through the marketing planning process.
High costs also fall into two categories – high fixed costs (overheads) or high input/ variable costs that result in resulting in low margins. A third party cash injection can improve your bargaining power with your suppliers to drive down the cost of your purchases, thereby improving your margins. If fixed costs are an issue, you made need to consider restructuring your business – and again, you may need funding to help you through that process. But additional finance or formal restructures do not by themselves solve problems – they are simply mechanisms for buying time and negotiation leverage.
All of the above is fairly intuitive – but even the simplest of tools are often effective in helping business managers to prioritise their actions and thereby maximize the effectiveness of their efforts.Stay tuned in upcoming weeks when we tackle the detail.
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