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.

 Have you ever noticed those little street vendors that seem to pop up along busy roads? 

You see it wherever the taxis gather, and even on the pavements outside shops that attract lots of people.  Driving back from the Cape just before New Year, I noticed this just outside a little town called Paul Roux in the Free State.  The N5 between Bloemfontein and Bethlehem is undergoing some major revamps (still!) and there are sections where drivers may have to wait for up to twenty minutes because of construction work.  Right there, at the waiting point, a number of people were weaving between the stopped cars, offering cold drinks, snacks and fruit to weary drivers.  I thought it was great and what’s more, it occurred to me that we’re probably never really going to see an African communist – they’re far too enterprising a people to be tied down like that!

Enterprising people from all works of life see an opportunity and take it – sometimes without ever thinking about whether they’ve structured the business right, whether they have enough capital, or even whether the business is going to succeed.  They’re driven by the need of the moment, and when that moment is over, they move on to the next one.   In South Africa, there is a vast, unregulated, informal economy – just like in most other parts of Africa – which turns over billions of Rand every year in business.  Sadly for the taxman, not much of it reaches his coffers – either by way of VAT, income tax or employees’ tax.  But it sustains millions of people – every day. 

And there are amazing business ideas in that informal economy.  I remember reading one of Clem Sunter’s books about fifteen years ago, – when the cell phone industry was in its infancy, and recall the story of one innovative gent from Soweto who had chained (somehow) a number of cell phones up, and then charged people for making calls on them.  Nowadays, everyone pretty much has a cell phone, so his business would have had to adapt, or it would have died.  No doubt, he’s moved on to better things since then!

The key difference between the success of some of these tiny ventures and the failure of other larger ones is in the view of the entrepreneur involved.  On the one hand, you get the person who is only interested in making his daily bread – he has no thought for tomorrow, other than when tomorrow comes, he will assess the situation and adapt.  Today he may be selling cell phone time – tomorrow he may be selling cell phones.  But, in between times, he works hard at it. 

On the other hand, you get the person who has the view that his business is going to make him rich – quickly!  He needs to borrow lots of money to get started, and wants all the bells and whistles that go with it.  He, quite often, also works hard but often not very smart!  He makes more money in a shorter time, but history also proves that invariably he tends to lose it all – and other people’s money too – in a short time. (Within the first two years in fact).

How then can we harness the innovation and initiative in our informal economy, and stimulate it to greater heights?  How can we make a simple street vendor into a wealthy entrepreneur, an employer of people and a contributor to the state coffers?  There are two aspects to this:  firstly, there is the attitude of government towards business; and secondly, there are the actions of the entrepreneur himself.

R.Glenn Hubbard and William Duggan, in their article for “Strategy & Business” entitled “Roots of Prosperity” have this to say about the role of government:

“In the history of economic success, no two countries have ever followed identical paths. But there is a universal pattern nonetheless: Nations rise out of poverty when elements of a thriving business sector replace the previous economic system.

The factors necessary for this transition are known. Since 2004, the World Bank has tracked them each year in countries around the world for its “Doing Business” report. The report specifies 10 forms of government regulation that affect the various phases of a company’s life cycle: starting a business, obtaining licenses (such as construction permits), employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. The fewer impediments that government places before entrepreneurs in any of these areas, and the less time it takes (for example, to stand in line) and the less money is required (for fees or bribes), the more business-friendly the country is — and the more prosperous. …Although the 10 criteria listed by “Doing Business” provide a road map for governments, governments alone cannot be effective in creating a healthy climate for business.”

It needs the efforts of entrepreneurs.  And, as for them – I think the success of their ventures requires two things – leverage and management.  Simply summarised – this could include leveraging one’s time through others, and leveraging one’s physical resources through the perceived value of goods and services; and then managing those resources in such a way as to allow not only for enough income to live on, but to allow for enough income to be ploughed back into future growth.  Manage your time, and manage your money! (not just how much you spend, but what you spend it on).

To make this simpler to understand, let’s use the cell phone entrepreneur as an example.

To start with he buys himself one cell phone, chains it to a block of granite near a taxi rank, and then sits there himself to manage the process.  He deals only in cash.  The phone records the amount of time the caller used, and at the end of each call, he multiplies the time by a fixed rate per minute.  He has secured a specific rate from the service supplier, and he now adds a markup on to the rate for his profit.  The only leverage he has at this stage is the difference between what the service provider charges him and the rates he charges his customers.  Given the fact that there are only so many minutes in a day, and the fact that he has to take time off to go to the toilet, eat, drink and rest, the amount of business he can do is limited.  There are constraints to growth – at first!

However, at the end of each day, he adds up his takings, separates an amount which he knows must be used to pay the service provider, takes an amount for himself to meet his daily needs, and saves the rest. (managing his money!)  After a time, he has saved enough money to purchase another cell phone, which he duly chains to the same block of granite.  He still manages the process himself each day.  But, he has now managed to leverage his time – he can now sell twice as much time per hour as he used to.  His service-provider cost has doubled to cater for the extra cell phone, but he still has the same personal financial needs each day.  This means he can now save more money each day.  It’s not long before he is able to buy two extra cell phones – giving him a total of four – all of which he alone continues to manage on his own.  His savings amount each day starts to go exponential.  He then decides to employ his younger brother at another taxi rank, kits him out with four cell phones – and his business really starts to grow.

After a couple years, he is employing ten people, all with four cell phones – and his business attracts the attention of his service provider.  They like what they see and they offer him a cell phone franchise.  He goes for it, and it’s not long before he ends up owning twenty similar cell phone franchises around the country.  It may have taken him anything between ten and twenty years to get there, but when he does – he notices that he no longer needs to do much work himself.  His time is now leveraged through over one hundred employees, and his management skills are leveraged through a well-designed system that is replicated from one shop to another.  His personal income has grown significantly, but he manages to ensure that he never takes out too much that it will put his business under pressure.

And it all started with one cell phone chained to a stone!

This may be a fairy story, but I have no doubt that it’s close to the truth for many – only the details may be different.  All it needs is commitment, hard work and patience.  The bottom line is – you don’t need a lot of money to start a business.  Just don’t be too proud to do the basics right, and don’t be in a hurry!

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!

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.

The previous two newsletters have been on this somewhat subjective issue of business and ethics, trying to answer the question – "do they go together?" Interestingly enough, I had no sooner published the newsletters on the web site, than I was tested in my own resolve to ‘do things right!’

On Tuesday this week, we were robbed! In broad daylight, in the suburbs! It was quite obviously a professional ‘hit’, since the thieves knew exactly what to do, and when and how to do it; and exactly what they were looking for. This was no incident of people stealing because they were hungry. This was just another way of doing some pre-Christmas shopping, and at my expense! No clothes or food were stolen (that we’ve noticed yet) apart from a new pair of hiking shoes – only high value items. The thieves were very neat, not trashing the place, but clearly also looking for money and weapons as well. Unfortunately for us, we keep some emergency cash with our passports, so when the cash was taken, so were our passports. The thought of having to go through the Home Affairs process – again (I’ve only just had my passport renewed) – is probably the greatest insult to injury; and on that alone, the thieves should be sentenced to life in prison with hard labour!
At the same time, I am eternally grateful that my wife was not at home when it happened; otherwise this story would no doubt have been very different.

However, I digress! We are insured so the goods stolen can be replaced. I was concerned though, that the burglar alarm had not been activated when my wife went out at midday, and that the insurer would not pay out on the policy. I wasn’t sure whether the insurance policy had an alarm clause. So, suddenly I was faced with a huge challenge because the sum involved was significant!

Certain well-meaning friends suggested that I don’t mention the fact that it hadn’t been activated; and some even suggested that I consider claiming for goods that either hadn’t been stolen, or over claiming on those that had! After all, they said, everyone does it! (Heard this somewhere before?). And besides, they added, the insurance companies rip us off anyway – you pay for years and years and never claim, and then when you do have a claim, they just try to get out of it.

Well, – the temptation was out there! In my face!

On the one hand, much of what they said was probably true – and I have only claimed once on my householders insurance in over 30 years of marriage. On the other hand, though, what I had just written in the past few weeks, reared up in front of me (thank God!), and I knew that I couldn’t possibly fabricate anything when I submitted my claim, and maintain any form of creibility!

The outcome of all this? Well, it turns out that my policy did not have an alarm clause, and the insurer (through my broker of many years) has already paid out in full, and on the basis that the claim seemed more than reasonable.
On the one hand, amazing service in this day and age, – and on the other, serving to prove my belief that if we do things right, ultimately, we will win out!

It reminded me of a poem written by someone (whose name I can’t remember, so hopefully will forgive me for publishing it without permission!), and it’s very relevant to this theme:

The Man in the Glass

When you get what you want in your struggle for self
And the world makes you King for a day,
Just go to a mirror and look at yourself
And see what that man has to say.

For it isn’t your father or mother or wife
Whose judgment upon you must pass;
The fellow whose verdict counts most in your life
Is the one staring back from the glass.

Some people may think you a straight-shootin’ chum
And call you a wonderful guy
But the man in the glass says you’re only a bum
If you can’t look him straight in the eye.

He’s the fellow to please, never mind all the rest
For he’s with you clear up to the end
And you’ve passed your most dangerous, difficult test
If the man in the glass is your friend.

You may fool the whole world down the pathway of life
And get pats on your back as you pass
But your final reward will be heartaches and tears
If you’ve cheated the man in the glass.

Let me end this with the following ethics check, courtesy of Norman Vincent Peale and Ken Blanchard, from their little book, "The Power of Ethical management".

May I suggest then, especially if this series on ethics and business has challenged you (as it has me just in writing it), that you print the following questions out, frame them, and hang the frame up somewhere conspicuous, so that it slaps you in the face every time you get tempted to push the ethical envelope in business?

• Is it legal? Will I be violating either civil law or company policy?
• Is it balanced? Is it fair to all concerned in the short term as well as the long term? Does it promote win-win relationships?
• How will it make me feel about myself? Will it make me feel proud? Would I feel good if my decision was published in a newspaper? Would I feel good if my family knew about it?

I would also like to take this opportunity to wish all my subscribers and clients a very blessed holiday season, and a prosperous and meaningful new year.

I once heard John Maxwell say that there is no such thing as ‘business ethics’ – there’s just ‘ethics’!

I think he’s right. We can’t compartmentalize our lives and separate our private lives from that of business, even though many try. Ultimately, the way you conduct yourself in everyday life, including all your business dealings, will be seen as who you are.

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This newsletter is the first in a series I’m going to do on business and ethics. It’s not intended to be some academic paper on what comprises ‘ethics’ – just a statement of what I believe good business habits should be. See if you can agree with me!

I feel very strongly that unless we begin to make some changes to the present general culture of doing business, we are going to descend into the chaos so prevalent in much of the rest of Africa. And although the odds are stacked against good ethics in this day and age, I’m not willing to give in without a fight!

Business today is tough! Achieving targets and preserving those elusive margins is becoming more difficult by the day, for business owners and for their employees. Its even more difficult when you know your competition are not charging VAT, or they’re bribing government officials, or they’re not even registered with the tax authorities, for anything!

Sometimes the difference between making it in business, and closing the doors comes down to what can be slipped ‘under the radar’ of good business ethics, or even what’s legal.
Opportunities to skirt the edge of the law abound. And then there are those ethical issues; they’re not illegal, but easily justified for expediency sake. There are a number of them around too!

In South Africa, we are faced with burgeoning corruption at almost every level of government. And let’s not kid ourselves; it exists in business too. Some business people have simply said that if they want to do business with government they have to pay bribes. So, who is to blame – the chicken or the egg? And how can we stop this?

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The title of this article is also the title of a book by Eric Spiegel and Neil McArthur, senior partners of the managing consulting firm, Booz & Company. I’ve ordered it because I believe I need to have a handle on the effects that the world’s need for energy will have on business, in the years to come.

It’s not something we have to think too hard about, but I’m willing to guess that there will be many in business – especially in the sectors of the economy that use large amounts of energy (like manufacturing and mining) – that haven’t thought about what will happen if they suddenly run out of electricity!
Transportation fuel and electric power prices, energy security, and climate change should be on every business leader’s mind. Recent shifts in scientific knowledge, public awareness, and political will are causing governments to take meaningful regulatory and legislative action. This has been borne out here in South Africa, through a number of conferences held around the country recently, and which have been well supported by the Department of Energy.

And, - multinational corporations are factoring new realities and uncertainties into their strategies and operations. But what, if anything, is small business doing about it?

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