In the first quarterly magazine from the Institute of Directors of South Africa, there was an article on some of the implications of the new Companies Act, which I felt was very relevant for many of our Company clients.

I’ve taken the liberty of copying some of them for your information, since I believe you should consider consulting your attorney or registered auditor about any changes you may need to make.

• It appears that the new act will take effect on 1 July this year.
• Your existing Memorandum and Articles of Association will, on the date the Act comes into effect, be automatically converted into a single document known as the Memorandum of Incorporation. (MIC)
• You will be allowed to update this new MIC over the ensuing two years, but many provisions in conflict with the new act will be void with immediate effect, and others after the two year period.
• The new act contains a number of default provisions that will apply to matters not specifically addressed by the old Memorandum of Articles, and which will be effective from the commencement of the new act.
• Existing shareholders agreements require urgent attention, as they will immediately be invalid to the extent that they conflict with either the Act or the MIC
• Certain categories of company have been done away with, whilst others have been introduced. Each category has slightly different requirements in terms of the Act. There are also implications for some Close Corporations as a result of the new act.
• Individual directors can take comfort from the fact that a number of procedural matters in the current act are decriminalized under the new act. However, where criminal sanctions are provided for, these are onerous.
• The Act makes provision for civil claims against directors who breach their duty of care and skill and the fiduciary duty they owe the company.
• Directors who have done their jobs properly, however, and who have no conflicts of interest, will find it easier to defend themselves.

The standard of directors conduct defined in the Act includes the following duties:

• To act in good faith, for a proper purpose and in the best interests of the company.
• Directors must not use their position as director, or any information obtained while acting in the capacity of a director, to gain an advantage for any person other than the company, or to knowingly cause harm to the company.
• To communicate to the company any information (or opportunity) which could be of benefit to the company unless under an obligation of confidentiality not to disclose it.

Shareholders and fellow board members will expect a heightened level of care, skill and diligence to be displayed by all directors. Areas requiring specific attention include:

• The solvency and liquidity test in relation to, amongst other transactions, distributions to shareholders, share buy-backs or buy-ins, mergers or amalgamations, and the provision of financial assistance;
• The duty to be reasonably informed before taking a decision, which is also one of the key factors affecting the directors potential personal liability.
• ‘Reckless trading" and trading insolvent circumstances, where the existing statute and common law are largely retained.
• Matters requiring a special resolution, including director’s remuneration and certain related party transactions.
• Schemes of arrangement
• Business rescue, particularly as many of the contracts we are entering into today will extend beyond July and may be exposed to being altered or cancelled of the contracting party undergoes business rescue.
• Duties owed by a director to the subsidiaries of a company of which he is a director
• Management buy-outs.

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!

I recently copied this extract from an edition of Business Day:

"November 2009 marked the centenary of Peter Drucker’s birth – he died in 2005 just short of his 96th birthday – and the anniversary was celebrated in a series of events held round the world. He is widely regarded as the father of modern management thought, and debate centered on his views and legacy. What would he be advising us to do now? And what would be his response to the great financial and economic crisis the world is facing?
In fact, Drucker’s greatest virtues were his plain-spoken insights and practicality. If one word was mentioned more than any other at the conference, it was "purpose".
Drucker’s "five most important questions you will ever ask" should help any manager ensure that he or she leads a purpose-driven enterprise. Those questions are: What is our business (or mission)? Who is our customer? What does the customer value? What are our results? What is our plan? "

In reading through the article again, I was struck by those words: "The five most important questions you will ever ask", and by what they are:

• What is our business (or mission)?
• Who is our customer?
• What does the customer value?
• What are our results?
• What is our plan? "

As we launch into 2010 – and most of January is already over – I believe most small business owners need to take some quiet time aside, and answer these questions, about their own businesses.

Many of us will have grown stale. It may be business as usual, but it may also be that we shouldn’t have business as usual – because it wasn’t that great anyway! If we think that we’re going to make money in the same way we’ve always done, selling the same old products or services, with the same old technology – and sometimes the same old people, we really need to think again. Don’t just fade back into your business with a sigh! Grab it by the scruff of the neck and give it a good shake.

In an article entitled "Rethink Your Strategy: An Urgent Memo to the CEO" by Branstad, Jackson, and Banerji, they say this:

"As of October 2008, your job has changed. (The article was written a few months after the 2008 meltdown.) You need to readjust your mind-set for a future that looks very different than it did just a few months ago. These are extraordinary times to be in business. It is human nature to wait and hope that your company will emerge relatively unscathed from the downturn. But waiting is not an option. Nor is hoping! Instead, you must look objectively at your business and decide: Can you survive? Then swiftly and decisively pursue the course of action determined by the answer.
The weaker players should be scared. If your company is positioned poorly right now, it is time to face the facts. You are probably going to the wall – or, at best, your business will be much reduced. The most precious thing you have is time – and you may not have much. Figure out how to best position your assets and your people to give every piece of your company its best chance to succeed, even if under different ownership."

I have recently seen a few clients of ours "go to the wall"! And it has really saddened me. Most of my business focus is on helping businesses to grow from strength to strength, not in seeing them go down the proverbial slippery slope. What is worse is that I do not believe it was necessary for that to happen. Steps could have been taken to prevent it. So, why did it happen? Well, Captain Hindsight never lost a battle, but if we’re prepared to confront reality, the issue was one of poor management – in a variety of forms. Not making decisions when they needed to be made; not making decisions at all; making wrong decisions and then blaming someone else for them when they failed – all of these and more. In many ways, though, they did not go back to basics when they needed to.

Whenever I’ve been faced with making some tough business decisions, I always go "back to basics" first. And for me, those basics have been enshrined, if you like, in Drucker’s five questions. So, let’s unpack these a bit more:

• WHAT IS OUR BUSINESS?

Face up to it! Who are we? What do we sell? Do we need to change any of it? Is our product or service good? Is there a need in the market for it? Are we better than our competition? Is there another way we can do it? Does the market know us? This question is really at the heart of purpose, and right now, we need to be very clear on what the purpose or mission of our business is.

And now is not the time to come up with some boring, trite mission statement about your business – it needs to be bold, compelling – even passionate. If you’re an athletic shoes company like NIKE, there is very little purpose in a statement like: "To make and sell athletics shoes on a worldwide basis." That’s boring – and about as passionate as a piece of steak! Come up with something like they actually did – "Crush Reebok!" It may not sound very ‘nice’ but man, it certainly does have purpose!

This kind of corporate reflection is good for the business soul. It will help you to see what your business should be and could be. Then, once you’ve got that picture in mind, line it up with what you’ve got. The difference between the two pictures is what you’re going to have to pay attention to in the weeks ahead.

For my money – our businesses need to be relevant to the time and the place. There’s no point in trying to sell grandfather clocks and other collectables in an informal settlement – you need to be selling basic food and clothing.
And, be sure the focus is right! One client of mine has just made the discovery that it isn’t the product he sells, but the solutions he provides that’s important. His customers would buy any product from him, because they trust him. This changes his entire marketing strategy, even though the product he sells is unlikely to change too much.

• WHO IS OUR CUSTOMER?

Are they the ones who place small variable orders and expect you to jump for them? And do you? Are they the ones who make you wait for payment, – even if it’s only ten days over term – and then still expect their settlement discount? And is he your customer, or your salesman’s customer? Do you know him personally? If not, if your salesman leaves, your customer could leave with him. Where is this customer? Is he nearby or is the cost of transporting goods to him ravaging your profits? And there are a host of other questions which spring to mind under this heading.

Do some statistical research from your business data base. Analyze your sales per customer over the past two years? Analyze your profit per customer over the same period. What are the trends? If sales have been dropping off, it’s possible that two scenarios could be developing – the customer is buying elsewhere, or he’s going out of business. Either option needs your attention.

• WHAT DOES THE CUSTOMER VALUE?

In answering this question, I think sometimes we need to ask ourselves this: "How would I feel about buying from my business?" Would it be a pleasing experience? Would the products be of a suitably high quality and reasonably priced enough to keep me coming back? Would I be willing to refer the business to my best friends?

• WHAT ARE OUR RESULTS?

This is probably the most important question to answer in these days. You will be surprised how few small business owners actually know how well they are doing? Inevitably, a business is only as good as its cash flow, never mind the profit. If your cash flow is positive – and growing – you’re making a profit. If its negative, you’re not only making a loss but its likely you’re in debt and that’s growing.
It never ceases to amaze me how many small business owners think they can continue indefinitely trading at a loss, and still take the same personal drawings every month. Losses have to be funded. They’re either funded by the owner or by his creditors .

It’s also good to know your results so that you can find ways to improve on them. Just because you’re making a profit, doesn’t mean you’re doing well – you could be doing a hell of a lot better!

• WHAT IS OUR PLAN?

Once you’ve answered the other four questions, it will become obvious that you need a new plan – your business plan! Without getting into a whole lot of detail about who you are and what you’ve accomplished, make sure the plan simply states what your intent is, and how you expect to achieve it. I like to follow the pattern used by Jim Collins in his book "Beyond Entrepreneurship" because it keeps things simple. It should cover the following:

• An overview of where you’ll be heading.
• Comments on the products/services you will be providing.
• The kind of customer you will be supplying.
• The cash you’re going to need to fund this ‘new’ business.
• The people and organisation you’re going to need.

When this is all done, you’ll likely find that you’re feeling more motivated and energized about your business, and it will really take off.