IMPROVE THOSE COLLECTIONS FROM CUSTOMERS.

If you’re making a profit every month yet still battling with cash flow, there’s every likelihood your book debts – the amounts owed to you by your customers on credit – has got out of hand.  Now, it’s clear that if your business is growing then it’s likely that your customers’ ‘book’ is also growing; and one needs to take that into account when considering strains on cash flow – but, what is vital is that your ‘book’ is not growing out of proportion to your sales.  A key performance indicator to keep tabs on in this regard is what is known as the “debt collection period”.

Extending credit to customers can be very risky, especially in the retail sector these days, when job security is a thing of the past.  In fact, for most small retail business, I would suggest you don’t sell on credit at all.  It’s cheaper, in the long run, to let the Credit Card institutions carry the risk – even though the initial charges they levy are – in my humble opinion – nothing more than a legalised protection racket!  So, if you’re going to be buying raw materials to make something for a customer, make sure you take a deposit in advance to cover what you’ll be buying.

If you’re in the business of extending credit to the commercial sector, you need to be even more diligent.  In today’s business world, credit agreements are signed with gay abandon and often without thought of being honoured.  Investigate your commercial customers carefully – before they become customers.  Take into account the business sector they operate in – because some sectors are worse than others!  And, whatever you do, don’t allow too much leeway beyond your normal credit terms.  Customers will very quickly learn to take advantage of you.  Whatever you do, be consistent so that your customers know exactly what to expect from you, every time!

Nowadays, we have a highly mobile working population in South Africa, many of whom can be difficult to trace.  If customer expectations or the nature of your business compels you to sell on credit, you need to manage the risk with a great deal of diligence.   People today also tend to be shameless when it comes to honouring their debts.  In fact, quite often, they will deliberately close a business down today, to avoid having to meet their obligations, and open another one tomorrow, selling exactly the same product!

This is even more important nowadays (2009) after the introduction of the New Credit Act in South Africa. If you don’t screen potential credit customers well enough, you may find it almost impossible to recover your money from them through the courts!

Customers who pay late (or not at all) cost you money by reducing your cash flow and directing your time towards collections rather than making more sales.

The person you employ to do this collecting job should be experienced in the art of debt collection (because it is an art!).  I like to refer to them (fondly!) as “dragon ladies.”  This doesn’t mean they are completely unapproachable, (or that they breathe fire!) but they have learned, generally speaking, not to take ‘No!’ for an answer. 

The job function can best be described as that of Debtors Controller or Credit Manager.  Employ the best one you can, pay her well – she’ll be worth her weight in gold! (And please – I’m not inferring that men cannot do this job – it’s just that women seem to reign supreme here in most businesses!)

And don’t avoid getting involved in the collection process yourself!  In fact, it will probably be critical if your business is going to survive.

It may be worthwhile, particularly with those ‘sensitive’, large customer accounts that, though they tend to pay late, they buy a lot from you.  Get to know your customer’s business and his routines with regard to payment, and then use it to your benefit.  You may need to get in the car and go and collect the cheque yourself.  People find it very hard to say no to someone eye-balling them from across the desk!  Once you’re there, talk to his staff, have a good look around – and listen to other suppliers who sell to him.  You may pick up a disturbing trend – that his business is already on the slippery slope – and in this way you can negate any further losses.

STOCK MANAGEMENT

Some of you may ask, “What has stock management to do with cash flow?”

Well, every bit of stock on your premises, that remains unsold, ties up cash.  It is quite simply ‘cash on the shelf’.  And, the longer it stays on the shelf, the more it deteriorates and, of course, the longer it keeps cash out of the system.

It is vital therefore, that every item of stock is analysed on a regular basis.   Make sure you take time out to study your inventory list.  Your analysis should include some of the following

• The number of units of a particular stock item sold in an average month.  This often referred to as its ‘demand’ or ‘volume’.
• How profitable these units are.  This is sometimes referred to as the marginal profit per item.
• How long it takes to turn them over.  This often referred to as the ‘stock turn rate’ or the ‘stock holding period’ and is usually measured by the average number of times it turns over in sales in a year; or in the latter case, the average number of days it remains in stock. 

Unless you have a computerised stock management system, or you have very few items of stock, this analysis will be very difficult, if not impossible for most small businesses to do.   I would definitely advise having such a system in place, particularly if you carry a wide range of stock items for re-sale. 

When it comes to stock management, it is generally accepted that The Pareto principle will apply.    For those of you who haven’t heard of this principle, it is often known as the 80/20 Rule.  Richard Koch, who authored a book with this title, says this:

“The 80/20 Principle can and should be used by every intelligent person in their daily life, by every organisation, and by every social grouping and form of society.  It can help individuals and groups achieve much more, with much less effort.  The 80/20 Principle can raise personal effectiveness and happiness.  It can multiply the profitability of corporations and the effectiveness of any organisation.  It asserts that a minority of causes, or effort, usually lead to a majority of the results, outputs, or rewards.”

To look at this principle practically from a stock management point of view, it is quite likely then, that 80% of the number of stock items you carry will account for only 20% of the value of your stock.    Therefore, if you spend time just looking at those items which account for 80% of your stock value – and that will usually only be 20% of the items you carry – you will invest a great deal less time managing a great deal more of your investment.

It is also likely that the number of stock items which account for the greatest portion of your sales (say 80% by volume) will probably only account for about 20% of your gross contribution to overheads and profit, by value. 

It is important, therefore, to be able to identify where most of your risk lies, so that you can take steps to maximise your profits right down the line; and – enable you get rid of those slow-moving stock items, which tie up a lot of cash.

By managing your stock in this way, you will be able to identify the goods that generate a higher return, and you will be able to minimise the effects of the lower margin items on your overall profitability.   It also means that you will more than likely carry an optimum level of stock, minimising the amount of cash tied up in it.

There are a number of different stock management systems around, some of which are very sophisticated and will never be used by small business.  (This includes ‘Point-of-Sale’ (POS) systems).

However, I would recommend that most small business adopt the following view with regard to their stock on hand – and for ease of reference I will refer to it as the ABC system.  Quite frankly, you can call it whatever you like, as long as it means something to you and you’re consistent in your application of it.

 Businesses that use this system divide their stock into three different categories:

• The A group includes those items that account for the highest Rand-value investment and will more than likely be made up of goods which number 20% of the total number of items and 80% of total stock value.  These are also the highest ‘risk’ items, because losses are likely to cost you dearly.
• The B group are those items that account for the next largest share of the total investment.  They are more than likely to be those goods which have an average unit cost and account for about 80% of the 20% of stock value left.
• The C group are those goods that account for a small Rand investment.  These are very often, quite literally, the ‘nuts and bolts’ of your stock holdings, and in reality may only account for about 20% of 20% (or 4%) of the total stock value.

 A perpetual inventory control system (A computerised stock program) is essential for managing the A group items on a daily basis.   These are usually high-value, fairly fast-moving stock items.  These systems are readily available today in most general, proprietary accounting software, and are also generally inexpensive.  There is no excuse, if you’re trying to manage your stock efficiently, not to have one of these programs.

The B group can be managed through periodic (weekly or monthly) checking.   This group is comprised of usually fairly fast-moving items, but they may be smaller and of lower unit value.  They also need a computerised stock program to be well-managed, but in this case, I would recommend checking at least once a month.

The C group can be managed more simply through something called the Red-Line Method.   In this case, re-orders of goods are only placed when enough stock has been removed from a bin containing the inventory item, to expose a red line that has been drawn around the inside of the bin.  A typical C group stock item would be bolts and nuts.  In this case, you just want to have reasonable idea of their security – that they’re not being pilfered on a regular basis!

The point of having these control systems in place is to manage your cash investment in stock.  Stock that remains unsold ties up cash and does not generate a profit until it is sold at a profit. 

If it stays on the shelf too long, it will deteriorate – or simply go out of ‘fashion’.  (Try selling a carburettor for a car these days!)

Quite obviously though, it is important that ALL stock items are kept on a computerised stock system from an administrative point of view, but the MANAGEMENT of them (which takes time!) can be done differently.(if you would like some advice on how to set up a simple, yet effective stock management system, please contact us.)

In this second part of the series entitled "What do I HAVE to manage?" I address some of the specific ‘must-do’s’ about cash flow management.

SPREAD YOUR FIXED MONTHLY PAYMENTS.

Most small businesses I know pay very little attention to the date they commit to fixed, and regular, monthly payments.  As a result, a number of fairly substantial obligations can arise at a time when cash flow is at a premium, and all at the same time. 

For example, a business may have three instalment sale loan repayments of R3,000 each, rent of premises of R8,000, the telephone account of R2,000 and the cell phone account of a similar amount, all happening on the 1^st day of the month. 

It may be that most of the income for your business is only received on the 7^th day of the month (because although people tell you they’ll pay you on 30 days, they’re invariably a week or so late!), which means that for the six days preceding, you will be sorely stretched to meet your cash commitments.

Analyse all your fixed monthly payments in terms of the date on which they will normally have to be paid.  Then try to spread these dates for payment out across the month (as much as is possible), and especially after most of your income has generally been received. Most financial institutions will be amenable to re-scheduling your monthly instalment dates if you just ask them.

LOOK AFTER YOUR BANK ACCOUNT!

One thing I have noticed in my thirty-odd years of dealing with a number of South African banks is that they have an amazing corporate (technical) memory.  This is especially true nowadays with the advent of high-tech communication and computers.   Although people work in banks, in truth, the banks are run by systems!

One may think that only the ‘black’ marks are notched up on record, and this may well have been true in the days when your local Manager had authority to oversee your account, but today, the computer is all-powerful and all-seeing, and even the good things are noted!

Therefore, as long as you’re prepared to make sure that you NEVER (and I mean NEVER!) transgress the arrangements negotiated with the bank, then over time, you will build up a most enviable reputation for creditworthiness.  Your Banker will be only too happy to recommend you as a good credit risk to all and sundry!

And do you know why?

Well, – banks all over the world use a system known as ‘behavioural scoring" (BS.) It is based on the manner in which the customers, (you and I) operate our accounts.  The system is computer-based and picks up customers’ behaviour in relation to how they run their accounts. (Good, - or bad!).

These characteristics are weighted in terms of their capacity to predict future behaviour of the customer and are reviewed from time to time in the light of how the account is actually run.  Some of the information that is recorded is – the number of times the overdraft limit is breached and by how much, – the number of transactions moving through the account, – whether items have ever been dishonoured, – and how old the account is.  Talk about Big Brother watching you!

Being computer-based, the system is consistent and fair as it applies the same criteria to everyone.  Generally, I think it presently only applies to current accounts but will be extended to others.

Keeping your bank manager informed, IN ADVANCE, is imperative.  Just as imperative is ensuring that whatever you have told him will happen, happens. 

Don’t make promises you can’t keep.   He needs to know that you are reliable and that the information you supply him with is just as reliable.  With on-line access to Internet Banking, it is easy to keep ahead and with a simple daily cash flow forecast, on a spreadsheet, you can make sure that limits will never be exceeded.

And, be a little conservative when you do these forecasts! If you’re going to ask for a temporary extension to your overdraft facility, make sure you never use all you ask for.  And, – if you say you’re going to need it for two weeks, make sure you pay it back in ten days.   In that way you will build up a huge reserve of ‘brownie’ points with your bank.  This may come in very handy one day!

Now, I know that cash flow can get very tight from time to time, and managing the old bank account becomes increasingly more difficult. While I certainly wouldn’t recommend this as an alternative in anything but the most trying times, it is easier to fall back on the broad shoulders of creditors than it is to run afoul of the banks’ BS system.

Not only is it easier, but if it’s only for a short time, it can be whole lot cheaper too, as most creditors don’t start charging interest until you’re about 30 days overdue. (And the banks are charging a chunk of cash for a dishonoured cheque these days.)  So, rather than bounce a cheque on a creditor (which will tick him and your banker off!), talk to him, get him to wait a little while, and you’ll score hands down. But, talk to him first, - don’t just do it!

MANAGE YOUR CASH FLOW ON A MORE REGULAR BASIS (WEEKLY OR EVEN DAILY)

In distressed businesses, cash is vital.

 "You can’t talk about the future if you’re going to hit the wall tomorrow," I’ve heard it said. 

Start by drawing up daily, weekly and 13-week (three months) cash-flow projections.     Monitor all money flowing out and, on the flip side, press for faster collections, taking on the job yourself, if necessary.

Most small businessmen I know will visibly sag at this point!

 “I don’t know how to do a cash flow projection”, most of them will say.    Well, if you would like some help, I have put together a few simple spreadsheets, which make up an equally simple 13-week (three months) cash flow forecast, which I have called a Cash Flow Focus.  It’s not too complex to use if you’re comfortable around spreadsheets.  Just contact us, and we’ll gladly send the templates to you.

The key to its success is to keep it up to date every day.  It is comprised of:

• A schedule of fixed monthly payments reflecting the date on which they are normally paid. Just by allocating the payments into the weeks when they will occur will give you an idea of your cash commitments per week, for the next 13 weeks, and an indication of when your greatest cash requirement will occur.  I have found that just this schedule contributes very positively to your time management in terms of priorities!
• A current aged analysis for each of your suppliers and customers, including your estimate of when the amounts are likely to be paid/received, over the 13 week period. This will be determined by pre-arranged credit terms and limits, and how negotiable suppliers are to extended terms.  When you make your estimates, ensure that you are not too optimistic about your collections.  Sadly nowadays, people tend to make promises they can’t keep – and can let you down at the last minute; and may not even warn you about it either!  And if your customers don’t stick to their commitments, you won’t be able to meet yours to your suppliers.
• A forecast of future income and associated expenses.  This should be based on a soundly prepared budget, which is grounded in reality and erring on the conservative side. Don’t forecast income based on wishful thinking – be realistic, and take into account seasonal fluctuations as well.  This is very important – especially if you’re really in a hole right now.  You must be able to see some light at the end of the tunnel, and if you can’t forecast an improvement within the next year, you may have to consider pulling the plug!
• A summary of what your cash flow is likely to look like in relation to your banking facilities.  Playing with the figures on a daily basis within this forecast will enable you to keep ahead of any surprises, will relieve you of stress, and keep your suppliers and bankers happy.  One of the great things about computer spreadsheets these days is that you can introduce some ‘what-ifs’ into the equation; simply moving certain collections a week forward, and certain supplier payments a week back, can make a huge difference to the entire forecast!  Remember – make sure that your facility with your banker is never prejudiced – you may need this friend in the future!    -  In the next newsletter, I’ll cover the two most important  aspects of cash flow management – collections and stock management.

 WHAT IS THIS THING CALLED “CASH FLOW”?

Business stands or falls on its cash flow.  Let me emphasise this again: – Business stands or falls on its cash flow!   As a business owner you have to manage your cash flow!

So what is this thing called “cash flow”? And why is it something that gets so little attention, at least until its stretched to its limits? 

Well there are two types of cash flow: 

• inflows – usually represented by sales, and
• outflows  - usually represented by expenses. 

So, isn’t this just another way of talking about income and expenses?  Well, no, it isn’t! 

And one of the differences between the two is timing.    

I can sell something to somebody today and it’s referred to as a sale.  It only becomes an inflow, when I receive the money for it, which could be tomorrow, or next week or next month, depending on the terms of the sale. 

Conversely, I could purchase something today on credit, and even receive the goods, and it will be known as an expense of the business.  It only becomes a cash flow item – in this case, an outflow, – when I finally pay for it.

Another difference between the two is the nature of the transaction.  Cash flows can be both ‘trading’ and ‘capital’ in nature. 

I may decide to purchase a new machine for my factory.  It’s going to be used to manufacture products which I will be selling.  The cost of the machine is not a trading expense but a capital one.  I may also be paying for the machine over a period of years, so although it is a capital expense in the current period, it is a cash outflow each month over the term of the loan.  Sales are known as trading income, while the proceeds of a loan would be regarded as capital inflows.

IS IT EASY TO DO?

Surprisingly, even a number of experienced bookkeepers and accountants struggle to prepare cash flow forecasts.  This is simply because some businesses are very complex in nature, and their terms and conditions of trade are complex too.  At other times, its simply because the nature of cash flow is not fully understood. 

Paradoxically, it’s the most important function of financial management of a business and if not done well, can spell doom for any enterprise.

Most small businesses I know manage their cash on the basis of ‘what comes in, goes out – and what goes out, goes to the one who is making the most noise.’     

It’s called crisis management!  They are unaware of any potential cash flow crunches a few weeks down the line and any assault on their overdraft limit results in a frantic call to the bank manager for help! 

The cost to the business of this kind of cash flow management is enormous because everyone in the organisation gets involved. The salesman has to stop selling to collect outstanding receipts (which negatively affects sales), the bookkeeper stops keeping the books (which negatively affects the financial management of the business); and even the cleaner may have to stop cleaning to run down to a customer’s premises to collect a promised cheque.

So, there are a couple of key things to constantly bear in mind about managing your cash flow, if you want to keep control of it.  There are 8 of them:

• Make profits, not losses,
•  And if you’re trading at a loss?
• Make enough profit
•  Spread your fixed monthly payments
• Look after your bank account
• Manage you cash flow more regularly
• Improve your collections
• Manage your stock.

In this newsletter, we will deal with the first three, which is all about the effects of profits and losses on the cash in your business.

MAKE PROFITS, NOT LOSSES!

The first thing we must realise as business owners/managers/entrepreneurs is that unless we are making profits in the business, it is unlikely we will continue to have a positive cash flow.   

If you’re making money, you’ll feel it in your cash flow. And, – if you’re losing money, you’ll also feel it in the cash flow!

In the days when business was largely transacted on a cash basis, the business owner would know that as long as he had money in the bank, and that it was growing, he was making a profit.  It’s not quite so easy these days!    So, every attempt should be made to ensure that the business remains profitable, at all times.

HOW DOES THE CASH KEEP FLOWING IF YOU’RE TRADING AT A LOSS?

But – what if you are making a loss?

This is what I find usually happens: losses aren’t really known (the full extent of them anyway.) because of poor record keeping, so as soon as the cash runs out, many small business owners cover their shortfall by extending the payment due date to their suppliers.

I’ve even heard them tell an irate supplier, “well, I haven’t been paid yet, so you’ll have to wait!” 

The problem may have nothing to do with when you receive your money from your customers – it may have to do with recurring losses that you don’t know about! 

Losses have to be funded by someone, and if you’re not funding it by putting more money into the business, then it’s likely your suppliers will be doing so!  (And usually without their permission!) 

This creates a vicious circle because it initially disguises the extent of the problem. It later leads to other supplier-related problems, and inevitably, the eventual demise of the business.  In the wild, animals that become sick or are wounded eventually get hunted down by wolves or hyenas.  Its not too different in the business environment – if you’re struggling with your cash flow (you business lifeblood) and you’re financially wounded, it won’t be long before the supplier ‘wolves’ will close in for the kill!

MAKE ENOUGH PROFIT!

Even if you are making a profit every month, that profit should be enough to pay you a salary and to cover the capital portion of any loan repayments you have to make. 

Profits, remember, are calculated only after the interest portion of a loan instalment is accounted for.  This is particularly important as you near the end of the life span of a loan agreement because the capital portion of the instalment will account for most of that instalment. (Everyone generally knows that the first months of an instalment loan are usually made up mostly of interest!) 

If you’re only just breaking even every month, and your interest costs are low, then you may be in for a “cash” surprise because you won’t have enough cash to meet the capital portion of your loan instalments.

It is also important if you, as the business owner, are in the habit of drawing additional amounts out of the business “on loan account”.  These withdrawals have nothing to do with profits or losses, but are very definitely cash outflows. 

Don’t – and let me stress this again, – DON’T – take out more money than your business is generating in profits each month!  Far too often, business owners tend to regard their drawings in the same way an employee regards his or her salary – as a right and a business obligation.  You have to get it into your head that when you start up a business, you lose those rights.  At the same time, if the business is highly profitable, and cash-flush – you are at liberty to help yourself!

WHAT DO I HAVE TO MANAGE? 

Most small business owners find it difficult to manage every aspect of their businesses, just because of the time it takes. 

There’s so much to do, and so little time – usually!  However, there are a few basics that simply have to be done – and regularly – if you want your business to succeed.

Before we look at what is included under the heading of “management”, we need to be clear on exactly what “management” really is. 

I like the way Stephen Covey draws the distinction between ‘management’ and ‘leadership’ because I believe it helps us to understand more clearly what those terms actually mean.  Covey says this:

“To differentiate, Peter Drucker has this to say: “Management is doing things right; leadership is doing the right things.”  So, Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall...” (Emphasis: mine!)

However, in most small businesses there is no clear distinction between management and leadership – the two functions are usually in the hands of one person; – in most small businesses, you have to be a bit of both. 

You have make sure you do the right things, and that you do them right as well.

In today’s economy, this is becoming more and more necessary, and this issue of management or leadership is blurred. The problem most small businesses face is that good leaders do not always make good managers (and vice versa) and this is something they will have to face up to. 

Good management skills are essential to the ongoing well-being of any business, so if your business is lacking in this area you will need to make some changes. 

Fortunately, certain management skills can be outsourced (and for a reasonable cost) so don’t put it off if you need it!  As the business owner you don’t need to do everything – and no doubt, you will not be competent at everything. 

The three key areas, which are easily outsourced, are

• financial,
• marketing and
• Human resources management. 

Doing it this way means that you can acquire highly professional skills at a fraction of the normal full-time cost.

Michael Gerber, in his acclaimed book, “The E-Myth”, says that most small businesses are started by one of three different types of business owner – the Technician, the Manager and the Entrepreneur.  He goes on to reveal that over 70% of small businesses in the USA are started by Technicians. This is probably true in South Africa as well.  

 This revelation tells us a lot about the problems many of us face in business.

 Technicians, according to him, are usually highly competent in their own particular field of expertise and fully capable of manufacturing a high quality product for sale into the marketplace.  Generally, however, they tend to make poor managers.  Technicians – generally – don’t like paperwork and structure.    All Technicians want to do is be left alone to make the product!  The Technician is one you will hear say, “if you want a job done properly, it’s best to do it yourself!”

As a result, when Technician-owned businesses get into trouble, the owners can’t even spend time doing what they love because their time is taken up putting out fires that break out because of poor management – and they’re usually not equipped to put them out!

Managers are, according to Gerber, also generally not very good entrepreneurs because they tend to spend too much time ‘managing’ and can even lack the technical  (technician) skills and vision (entrepreneurial) to grow the business. Give a good manager something to manage and he will spend all his time doing a great job of it, even if it produces nothing and goes nowhere!  I have come across excellent managers who would manage a business into oblivion and do a damn good job at it!

Entrepreneurs, says Gerber, are the visionaries, the ideas-men!  They too have limitations in that they can lack the management skills so necessary to take their newly formed businesses to sustainable levels. They can see the next challenge so clearly, but often have no desire to get involved in the process that will get the show on the road. Very often, they confuse management with control, being reluctant to release control.  They can also lack the technical skills necessary for the job.  However, Entrepreneurs are more likely to outsource those skills they lack, and in this way, are more likely to get the job done.

So what does it take?      Well, – the ideal situation would be to have a nice balance of all three but that would be a fairly unique individual, and highly unlikely.

Gerber suggests that the key lies in setting up a business management system that is simple yet efficient, and which will enable the business to operate even if the owner wasn’t there.   As Gerber puts it, spend time working ON your business and not just IN it!      

Almost without exception, whenever I have been called in to help someone who is in trouble, I have discovered that the single most common complaint they have is – “I can never leave the business for a moment, I’m working myself to a standstill, and all I ever seem to do is put out fires!”    This paints an entirely different picture to the one Gerber envisages doesn’t it?

At the same time, let me say this: Business is all about people! 

No matter how good your systems are, if your people lack capacity, or vision, or are poorly led, even the best systems are going to struggle to cope.  I believe that every business owner should strive to have efficient systems in place, and then spend time leading their people!

There are hundreds and perhaps thousands of very good books written on the subject of management.  I am not going to even try and replicate them.  All I hope to achieve is get small business owners to focus on their core competencies – their strengths, – and outsource the skills they need in the areas where they are deficient.

Since Management is essential to the wellbeing of every business, I believe that there are seven key areas that small business owners – even if they’re not good managers – need to focus on: (and in no particular order of importance).  The first one – the most important one, I believe – is Cash Flow Management – and I’ll address that in the next newsletter.

If you had R100,000 to invest and I offered you a risk-free, 15% guaranteed per annum return on an investment option, you would be quite happy to hand over your money to me – wouldn’t you?

After all, you won’t have to work for the money and the capital is guaranteed. Most people who have the capital of their own would be relaxed about investing in something like that.

Why then, do so many people who don’t have the money, go out and borrow it, usually from friends and family, to invest in business ventures that provide no guarantees, either of getting their money back, or of providing them with an income?

And don’t laugh! The business world is full of people like this!

Well, there are a few reasons why someone would do this:

• He might have lost his job and starting up his "own" business means some form of employment security for him.
• He would rather make money for himself than for his former employers, believing he can probably do it better anyway.
• He is confident in his own abilities and technical expertise to make a go of it, or -
• He’s just desperate!

Quite often, then, – its just ‘a wish and a prayer’ thinking that gets them started!

The number of people I have met who sincerely believe that their dreams are reality is staggering.

One lady came in to register a Close Corporation for her new business. When I asked her what her business was, she said that she hadn’t started it yet. (To start with, you don’t go registering corporate entities, at great cost, without first establishing which one is right for your business.) Then she told me that her friends and family had told her that because she was such a great cook, she should start up her own restaurant. That was the basis on which she willing to float her new business!

Many of these sincere dreamers have actually lost touch with reality, and once we unpack all that goes into a business start-up, they come back to earth with a bump!

Now, I don’t want to rain on everyone’s parade, and its certainly not my intention to blow every business idea out of the water, but based on my own experience, and what I have observed over the past 35 years, I believe I have a responsibility to point out some of the problems I see from time to time.

So, – how do we go about it – the right way?

THE FIRST THING!

The first thing we must do is look at the potential venture from an investment point of view. So, using the example I started this chapter with, the question every would-be entrepreneur should ask is this -

- Is this new business I want to start likely to be a good investment? Would I invest in it? Would others?

In other words, I need to be reasonably sure that the return is commensurate with the risk.

In business there are no guarantees – right? So, if the risk is high we will then want a return that is also high – wouldn’t we? What, after all, would be the point of going into a risky business venture where the potential returns are small?

As a general guide therefore, I believe that the potential return on such an investment, before interest on borrowings, and tax, should be equal to at least three times what we would get from a risk-free, interest-bearing investment.

And, – that is after paying ourselves a salary for the work we will do in this business. I say this because very often, business owners don’t bother to separate their investment in the business, from their employment in the business. If you’re going to be working hard, you need to be paid a salary that is commensurate with your skills and the work you produce.

So, – if we could get a 10% per annum return on a risk-free investment, we would expect to generate a return from our business of 30% per annum, or more, on the amount of money we originally invested in it.

Another reasonable test would be to see that the business has the capacity to generate sufficient income to repay your investment within a period of 18 to 36 months. This is called the Payback Period.

These guides are not cast in stone, and not always applicable, but are a simple and quick way of helping you to make a decision.

THE SECOND THING

Once we’ve settled on that yardstick, the second thing to do is put together a well-researched, professional business plan. It is important that we participate fully in the plan ourselves – because it’s our plan!

I do believe, however, that once we have collated all the information we need for the plan, we should use the services of a professional to put it together in a way that we will be able to use on a daily basis.

It needs to be used rather like an instruction manual. The cost will be well worthwhile in the long run and may even save us the loss of all our capital in a venture that may be doomed from the outset! I often tell people that I would rather spend R10,000 on a good business plan, – and never start the business as a result – than lose R300,000 (which I might have borrowed!) on a poorly-planned business venture.

The plan will be used, -

• firstly, – to convince ourselves that we’re on the right track.
• Secondly, it will be invaluable if we decide to borrow funds to buy equipment, and for working capital.
• Thirdly, it will give us an operating budget for at least the first year of trading, that we can monitor against our actual income and expenses, on a regular basis.

It must include absolutely everything we can think about in respect of our potential business – things like,

• where are we going to operate from?
• What are we going to sell?
• Who are we going to sell it to?
• Who is our competition?
• How much labour will we need?
• Is it readily available and sufficiently skilled?
• Where will we get our major supplies?
• What terms will we get? – And many more!

(At Finserv, the coaching and financial management practice that I run, we facilitate workshops to design these Business Plans. We find it’s helpful to have someone who can facilitate this: gather all the thoughts into a meaningful summary of where the business should be headed.)

Even businesses that have been established for a number of years need an updated business plan each year. If for nothing else, it shows that you have been thinking about your business and where it is going. If you’ve never done one, now is the time!

THE THIRD THING!

Once the plan is complete, and we assume that the financial component of the plan tells us that the business is viable, the third thing we must do is determine whether we have access to sufficient capital to get it started.

There are essentially two types of capital in a business -

• own capital and
• borrowed capital.

The ratio of the one type to the other is referred to as ‘gearing’. A business that has borrowed a lot of money; much more than what the owners have invested, is referred to as a highly geared business.

Financial institutions generally do not like to lend more money to a business than the owner is prepared to do. So, – in spite of our sentiments that we can make the business work, we should be guided by the fact that if lenders are not willing to risk the necessary capital, the venture probably has little chance of success. Self-belief sometimes simply will not carry the day, on its own.

Strangely enough, I have also heard a number of business owners complain that the reason their businesses struggle is because the bank won’t advance them any more money! While that is true to a certain extent, it is more than likely that the business started off with insufficient own capital and has never managed to catch up. In addition, it probably means that unless something drastic is done, and soon, the business may not survive anyway. Remember, – banks do have access to all sorts of information which enables them to make reasonably sound lending decisions!

In all honesty, would you be prepared to lend money to someone for an investment, if he is not prepared to match it with a similar amount? After all, if you believe in your business enough – and you’re prepared to back yourself in running it – you should be willing to give everything you’ve got to make it work!

So, if your current business is suffering from under-capitalisation, you need to urgently take steps to improve that situation, preferably using own capital to avoid the increased cost of borrowing. Before you do that, however, you will definitely need to review your operation to make sure you’re not chucking good money after bad!

Some handy tips are explained under the heading of ‘excessive spending’ further on in the book about managing costs. Otherwise, get some wise counsel from a professional!

Paddling upstream against the current all the time, you will soon notice two things – you’re going nowhere, and you’re getting tired. Spending some money on the right counsel could well save you the journey and the exhaustion – and your investment to date as well!

IF I DON’T HAVE ENOUGH CAPITAL OF MY OWN, WHERE CAN I GET SOME?

Well, there are lots of informational web sites which will help you. In South Africa there are also lending institutions like "Business Partners", who specialise in venture capital, even though it does come at a cost. Some links worth investigating are at:

http://www.ventureworthy.com/Grants-for-starting-a-small-business.asp
http://www.southafrica.info/business/trends/newbusiness/credit-060307.htm
http://www.businessowner.co.za/Article.aspx?Page=23&type=30&Item=1850

The last link may prove to be the most helpful, but in case you cant access it, I have copied the pertinent details of "Where to get Finance" in APPENDIX 1, and their "Comprehensive Directory of national small business services" in APPENDIX 2 at the end of this book.

What you must constantly bear in mind though is that lenders will need to be convinced that your business idea is worth backing. If the business plan has been professionally prepared, and the numbers work, they’ll back you!

If you find that the recognized lending institutions are reluctant to fund your new venture, try and avoid going to more dubious sources. It may be that you need to shelve the idea for a time – at least until you have been able to raise some capital of your own.

Whatever you do, DON’T launch your new business without sufficient capital! It will be like trying to run the Comrades Marathon with just a few days training. You won’t make it!

IF I CAN’T RAISE THE CAPITAL, DOES THIS MEAN I’LL NEVER HAVE MY OWN BUSINESS?

Absolutely not!  Some of you might have seen an advert on TV some time back – Rand Merchant Bank – I think it was!  Their aim was to show how like to employ innovative people, so the one they used was a young black who came across a disabled old man in the street, busking for a living.  Starting small, he starts trading various items like apples, cups of coffee and eventually works up towards a wheel chair, which he then presents to the old man.  The ‘moral’ of the story is ‘use what you’ve got’!  The small fruit vendor on the side of the road could eventually own a string of fruit and vegetable shops.

2010 has only just begun and already I’ve noticed that the number of businesses in trouble seems to be on the increase.  Although the world economy is supposedly on the rebound, it’s clear that South Africa is lagging behind. I’m in the process of completing a book on the subject called "Business Blues- Why youve got them and what to do about them" and I’m hoping to release this in published form and as an e-book shortly.  However, I’ve had a number of requests from clients to help out recently and I thought I would start the process by releasing parts of it as regular newsletters, entitled "Is your Business in trouble?"  I’ll start with the introduction to the book to give you a taste…..

INTRODUCTION

This book is not meant to be yet another book on ‘management’ or ‘business leadership’. It is not meant to support one form of business structure over another. Its also not a "how-to" kind of book, offering some sort of recipe for success in the diverse world of business.

My fervent hope is that those who read the book will be helped, first of all, to get out there and start something worth doing because they want to do it; secondly, to make a success of it, and lastly, that whatever they do will leave a legacy for all those they worked with and for.

I believe that everything we do should have some sort of purpose to it, otherwise why do it at all?

Let’s not kid ourselves; we generally go into business to make money. Making a profit is the goal of all business – that’s a given, since no one is going to go into business aiming to lose money, are they?

The issue for all of us, however, is how we go about doing this. I’m not going to try and tell you, the reader, what kind of business you should set up!

I am, however, going to say that whatever the kind of business, there is a right way to do it, and a wrong way to do it. And I’m not just talking about ethics here!

The book is also for everyone who believes they can start and run a business – for everyone with an entrepreneurial spirit. I’m not going get into detail on complex administrative structures, or sophisticated computerised systems. I’m also not going to fill this book with fancy business terminology and "accounting-speak" – much of which today even confuses accountants. I just want to get down to the basics – where the rubber hits the road, in the trenches! I’m hoping it will be read by business owners who will witness with some of the real-life stories; and I’m also hoping its going to create a lot of ‘Aha!’ moments at the same time.

It will probably be glossed over by high power execs in large corporations who think it’s not relevant to big business. But, it is and it will be! Because the principles in the book are relevant to people who make decisions, no matter how big those decisions will be in terms of the amount of money or people they involve. Because when you drill it down, business is all about people! Nothing else!

Larger businesses usually have access to highly qualified employees who can guide them through some of the troubled waters businesses face from time to time. Small-to-medium sized businesses don’t usually have that luxury. Its my hope that this book will help to fill that gap.

So, what is a "Small-to-medium-sized" business?

Well, it could be……….

• A business owned by an individual!
• A business owned by a number of people.
• Business with small and large volumes of sales.
• Best defined as one that is managed, or owned by a single person (or a partnership) who is actively involved in the day-to-day running of the operation.
• The privately owned business in which the owner or owners have the responsibility for its direction and destiny.

They may be manufacturers, wholesalers, distributors, contractors, retailers and even professional service firms.

They may be involved in the food industry, transport, engineering, construction, fashion and even advertising. (or any one of a host of others)

Small businesses make up a substantial portion of the world’s economy and employ more people, in total, than any other type of business. Therefore, it is important that they be healthy and profitable!

A large number of them are not!

In fact, as much as eighty percent of all new small business start-ups will fail within the first two years!

All of my working life has been in the small-to-medium business environment. I have worked for smaller businesses, as an employee. I have owned smaller businesses. I have also been in partnership with others in small and medium-sized business ventures. The businesses have ranged in size from the typical ‘one-man-show’ to a private company employing over 400 people and turning over in excess of R500 million (in today’s terms) in sales in a year.

When the economy is pumping, firms of every size (including tiny privately held concerns), and in every industry, tend to borrow money to expand. For some, growing their businesses means bigger capital expenditures in both staff and technology. It’s exciting stuff, and the promises of success can easily carry us away.

Today, with sales down and the banks tougher on credit, debt burdens are crushing many firms–especially small businesses. Many of them are in distress – to put it mildly! And, they don’t know what to do about it much of the time – going through the motions, waiting, and hoping that somehow, someone is going to step in and help – that a miracle is just around the corner. Much of the time it’s not, and the inevitable happens.

If you’ve never been there, it’s important to understand that when this happens, everything becomes a problem. Nothing seems to go right! The light at the end of the tunnel just seems to be the train bearing down on you from the other end.

But I do have good news for all those in business who feel they’re never going to come right. You can change, and what seems like imminent failure can be turned around. But, it’s going to require a lot from you.

The first thing it’s going to require is a firm commitment to change, and the first thing that will have to change is YOU!  

If you don’t change the ways you run your business, don’t expect it to get better.  It’s like trying to lose wieght by sticking to the same diet.  Guess what – you’ll stay fat!  In the same way that we make lifestyle changes to reduce our weight and get fitter, we need to make business lifestyle changes – to get more efficient and more profitable!

It will mean changing some of your old management/leadership habits and introducing new, more effective ones. And, it will mean adopting these changes in a new business lifestyle. Many of you fail to see just how important this is. I hope to change that kind of thinking in this book.

The last twelve years, for me, have been spent building up a Business Coaching practice, by direct consultation and indirectly through our web-based e-service.

In this time, I have come to agree with the general view that the reasons over 80% of small businesses fail within the first two years of their existence is one or more, or a combination of, the following:

• Insufficient start-up capital
• Poor management
• Inadequate or non-existent financial control.
• Excessive spending
• Inadequate marketing
• Major "project" failure.

It is also generally accepted that 90% of small businesses fail because of a lack of knowledge. This "lack" of knowledge is in the area of business and financial management, not within their chosen field of expertise.
You may be the most amazing cabinetmaker in the world, but if you don’t know how to manage the financial side of your business, it will fail! A great plumber doesn’t necessarily run a great plumbing business.

I also know that most small business owners have very little time to read anything! They spend inordinate amounts of time trying to run their businesses and end up working so hard they don’t always work smart! Sadly, lot’s of the business books available to them out there are also not that easily applicable.

This book will, I hope, attempt to address each of these issues in the simplest way possible, providing some key ‘checks and balances’, that will introduce the ‘smarts’ into the operation.

If you’ve bought this book it’s either because you already recognise some of the shortcomings in your own business and you want to take steps to avoid disaster, or you’re about to embark on a new venture and you want to make sure you do the basics right.

It’s probably the cheapest, yet most effective insurance policy you’ll ever take out! I’m hoping it will prove to be one of the best decisions you will ever make too!