WHY DON’T SCHOOLS TEACH BUSINESS HOPEFULS TO USE CASH FLOW TOOLS?

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Imagine a business, if you would, that shows decent margins, low debt, and slowly growing sales. Bankers examine the financial statements declare that the company is in good shape. “Carry on and keep up the good work,” they say. But … Continue reading

6 easy steps to emptying your business wallet

In the early 1980’s, when I began operational work with businesses, there was a conventional attitude to inventory control. This wisdom measured inventory control by looking at the relative cost of money and the interest charged against having that inventory on the shelf. That attitude saw the creation of robust ERP systems to help managers like me.

Because the recent price of money is so cheap, that business calculation has taken a knock; but the curtain is now drawn back revealing another way to measure the effectiveness of inventory control.

Consider that you have $10,000 per year with which to purchase housewares inventory. And let us suppose that 90% of that inventory sells during the year. At the end of the year 10% of the original $10,000 is still on the shelf. $1000. Theoretically, that means that in the coming year, only $9000 is available to purchase inventory. At the end of that year, assuming 90% sells, the will be $1900 worth of unsold inventory on the shelves. It does not take long to realise that all the cash will shortly be locked up in unsold inventory. The table and chart show how that works.

The result will be, of course, that the company finds itself less and less able to purchase new goods. There may not even be the room on the shelves or in the warehouse to store more purchases. From the customer point of view, the company will be stuffed with dust covered inventory. The company has ground to a halt.

If the dead inventory is converted to cash at even 20 cents on the dollar, you can use that cash to buy goods that will sell and buildup the cash available for further purchases.

Does this ever happen in real life? Yes is the simple answer. A decade ago, the company I managed had $600,000 of inventory of which 30% had no sales in 6 years. This strapped the company for cash. There were items on the shelf due to ordering errors and for which there was not even a market for more than 150 miles.

Recently, an office furniture company called me about their cash problems. They badly needed $100,000. But in their showroom and warehouse they had inventory totalling almost double that. The solution was to have a huge sale and convert everything to cash.

Remember that cash is king and being without it leaves you at the mercy of creditors, suppliers, and landlords. With cash, you have a chance. Even selling goods below cost and converting those goods to cash is better than sitting on mountains of unsold inventory. 

Written by Andrew Gregson, Senior Partner at Floodlight Business Solutions and author of Pricing Strategies for Small Business (2008).  1-888-959-0752  www.floodlight.ca. Floodlight Business Solutions, where we help you drive profits.

 

Business for Sale – But is there enough money to retire?

In these troublesome economic times may businesses face the twin threats of falling sales and increasing debt. Is this the time to sell your business? Today, 20% of small businesses in Canada are for sale by owner or through a broker. In 5 years accountantinescapable demographics will push that percentage to 50%. With more sellers than buyers, prices will certainly fall. Choosey buyers will pay for the best and ignore the rest.

Will there be enough money to retire comfortably?

If that answer is no, what can be done to change that?

This article is all about business succession planning and how to do it profitably.

Step 1: Improve the balance sheet. That means reducing debt or at least changing the ratio between debt and assets so that the company has more value.

Step 2: Improve sales. Sell more but  be careful of selling to poor credit risks. This increases accounts receivable, an asset until it must be collected but then becomes a bad debt. You need more sales to better quality (blue chip) customers.

Step 3: Improve profits. This can be achieved by increasing prices, reducing costs and keeping more in the company.

Sound easy doesn’t it?

Well, how easy is it to increase sales today? Can you double your sales which will therefore double profits? These are tough times and your competitors are pushing back every day.

Marketing methods are changing. Yellow pages, the workhorse of advertising for decades is in its death throes. Customers now shop on line and the younger demographic chat on social media before opening their wallets. Have you got a strong presence in that virtual world? Have you got any presence at all or have you merely got a static website that is found on page 97 of a Google search?

Can you cut costs enough to make a big difference in profitability? This will not mean counting the paperclips but real and deep cost cutting. Cutting costs in any business is important. Cutting into fat is imperative; cutting into muscle regrettable; but cutting into bone, an amputation of ability to perform.

Can you increase prices and still sell more? Your customers may associate high prices with better quality, but can you deliver a better quality product or service? And how will you measure that better service and communicate that to your customers, in 25 words or less?

How can you reduce debt when every dollar earned is spoken for? You could manage your payments better and more purposefully to reduce debts, eliminating the highest cost debt first and planning to retire all the debt within 3 years.

soldBut please ask yourself how determined you are to accomplish all that this entails. Can you do this without help? Daily business pressures make it difficult. It takes character to create and implement a 3 year plan to improve the value of a business.

Andrew Gregson is  a Senior partner with Floodlight Business Solutions where we  help our clients to re-build their business. We focus on sales and the balance sheet so that value in the company is increased, letting the owner sell or retire.

HOW TO REDUCE BUSINESS DEBT – A PRACTICAL ACTION PLAN

Business debt can be a good thing. It can help you to establish your business, fund growth or invest for the future. However, if the level of borrowing becomes excessive it can lead to many problems, such as:

  • Servicing the debt drains away all the cash
  • no free cash to deal with unexpected costs
  • debt unbalances the balance sheet reducing the value the business
  • no cash to take advantage of opportunities
  • Reduced service/product quality
Crushed by Debt everyday?

Crushed by Debt everyday?

This article gives a framework and various practical ideas to help you reduce your business debt.

A framework for recovery

There are six basic strategies that can help a business get out of excessive debt:

  • Sell assets
  • Increase income
  • Restructure liabilities
  • Reduce costs
  • Raise more capital from investors or partners
  • Exit the business

The following examples in each area are not exhaustive, but may give the business owner some practical ideas.

1.        Sell Assets

Your business may be able to conduct business normally without that extra forklift or truck. You may have a mortgage on your building and selling the building will reduce the debt and cash flow requirements.

2.          Increase Your Income

There are various ways of increasing the amount of money flowing into your business, such as:

  • Increase sales
    eg: through increased marketing, cross-selling to existing customers, offering special deals to get additional or advance orders, getting referrals with other organisations/affiliates
  • Raise your prices. This is easier than it sounds but if a price rise is not accompanied by a hard look at value pricing, then it will frighten existing customers.
  • Find alternative sources of income
    eg: renting out unused office space, assessing your waste or unused products and seeing if it has any value., obtaining commissions from other organisations

3.          Restructure liabilities

Your ‘liabilities’ are all the amounts of money that you owe to other people. Restructuring your liabilities doesn’t necessarily reduce the overall amount you owe, but it can give you more cash, more disposable income and/or reduce the amount of debt you need to provide working capital.

Examples of ways that you can restructure your liabilities to reduce your debt include:

  • Negotiate temporary  longer or scheduled payment terms with suppliers
  • Replace existing loans with, for example:
    • loans that have a lower interest rate
    • guaranteed loans (guaranteed by shareholders) to reduce the interest rate
    • repayments over a longer period of time
    • consolidated loans
  • Defer tax liabilities (this requires specialist tax advice)

4.       Reduce Costs

There are two principle ways to reduce costs:

  • looking for big savings, or
  • make small reductions across the board

To find big costs savings, concentrate on large savings first. Can you reduce rent by moving? Or cutting staff hours? To make savings across the board, set a savings target (say, 10%) and reduce each budget by that amount. Then take small steps to reduce costs, eg: reduce communication costs by going to prepaid cell phone cards or opting for cheaper equipment when purchasing, for example

 

5.          Raise more capital

You can raise more capital by:

  • finding more investors, eg: venture capitalists
  • issuing more shares to current investors
  • obtaining grants

Also, take a look at your asset list and assess whether it can be converted into assets of greater value. For example, if you own land, can you build more offices or houses on that land?

6.           Exit the business

To exit the business, options include:

  • Selling the business as a going concern
  • Going into receivership
  • Selling off all the business assets (including the business goodwill, eg: the client base) and using the proceeds to pay off the liabilities.

Andrew Gregson is a Senior Partner with Floodlight Business Solutions (www.floodlight.ca), a turnaround company that supplies specialist advice on rebuilding sales and reducing debt.

THE BAILIFFS ARE COMING! THE BAILIFFS ARE COMING!

How to save a business in crisis!

We got a phone call from a manufacturing business on a Wednesday afternoon with the message – The bailiffs ARE COMING! By Monday afternoon, we had put court protection in place. The court protection stopped the bailiffs in their tracks and bought the company 30 days in which to demonstrate to their creditors that the business was viable and could paul reverepay the somewhat overwhelming debt.

This business was viable, our analysis showed, because it had purchase orders in the pipeline. The orders had been delayed however due to circumstances beyond the company’s control. This familiar story had created the cash crunch and hence the crisis.

But the reality was that the company had narrowly avoided their creditor crisis for over a year by juggling the cash and making last minute payments. Now all the problems crystalised into one crisis. This was the perfect debt storm.

First we created a debt restructuring plan. To satisfy the courts, in 30 days the company must produce a credible plan to convince creditors that it can pay its bills in full or in part.  The payment offered to creditors is based upon the ability to pay. But some creditors are fully secured with asset loans or leases. They expect to be paid as agreed or they can exercise their prerogative and repossess equipment. Canada Revenue Agency is a preferred and dangerous creditor especially with regard to payroll remittances.  They demand to be paid within the first year no matter what the terms offered to other creditors.

The hardship really falls on the unsecured creditors. This usually means suppliers and can mean bank loans that are not personally guaranteed.

The company, through its intermediaries and the court, made an offer to the creditors based upon ability to pay. In this instance it was 100 cents on the dollar but paid over 36 months. And, oh yes, interest charges stopped.  In many prior instances of this type of agreement with the creditors, the debt was negotiated down to levels that the company could tolerate. Many deals have been struck at 35 cents on the dollar.

But is this the right way to help a company? Faced with insurmountable debt, a company has no operating room, no credit and is in serious danger that any minor bump in the road will send it careening off the edge. Just think of General Motors. And many companies have accumulated huge amounts of debt during this recession – loans  from banks, loans from government, suppliers unpaid, Revenue Canada remittances, unpaid taxes. Far too many owners also borrowed heavily from their own resources (house and credit cards) to keep the company afloat.

So if the company gets no help, it disappears, taking jobs and family assets with it.

But a bout of debt relief is not a solution for long term problems. Typically the company has seen falling sales and has lost the art of managing the company. In order to make this succeed, the marketing and sales have to be completely re-worked, pricing and costs have to be addressed, and most of all, the manager or owner needs a set of metrics in order to know when the business is on track.

If you can’t fix sales, a financial turnaround just doesn’t work. If you only fix the sales and marketing, the finances can pull down a very busy and otherwise profitable company.

Insider Tips to Saving Your Business in Canada

Business debt worries!!!□   Are you worrying about where to find the money for the next payroll?

□   Considering filing for a business bankruptcy?

□   Afraid to answer the phone in case it’s a creditor?

□   Meeting soon with your unhappy banker to persuade him not to call your loan today

□   Searching the web for business turnaround, bankruptcy, receivership and insolvency information to help your company.

There are 3 vital factors that any person leading a failing company must consider. These are:

1. Stress And Worry May Keep You From Saving Your Company
2. Trustees, Lawyers and Accountants Don’t Have All The Answers
3. Innocent Mistakes Often Kill Troubled Companies

Factor #1: Stress and Worry May Stop You from Saving Your Company

Here are some common worries associated with a failing company:

  • You can’t pay the employees on time. What can you do about it?
  • Is bankruptcy the right answer? Will this save your company or kill it?
  • Should you pay your taxes? What happens when CRA or some other authority      padlocks your door?
  • Can you make your loan payment? Should you ask your banker for help? Will you      screw up talking to your banker causing the bank to foreclose?
  • You’ve made personal guarantees. What happens when the business fails? Will      you be working the rest of life to pay these debts? Could they take your      house?

Here’s the problem. Worrying is taking valuable time away from you… time that you should be using to save your company.

And it’s a vicious cycle. Because your worries are stopping you, your business declines further. And this causes even more worry and less action. You are the rabbit in the headlights.

Factor #2: Trustees, Lawyers and Accountants Don’t Have All the Answers

Trustees are experts at structuring settlements to the advantage of the creditors. But they have an accounting background and have no insight into how to salvage a falling business and return it to profitability.

Most lawyers have a passing acquaintance with the Bankruptcy and Insolvency Act. Unless they are working with the Act all the time, they are not aware of the changing politics of debt and what it takes to keep creditors happy.

Most accountants see burgeoning debt as a business killer and urge you to pay it down. They deal in ratios and cash flow but cannot help you rebuild a broken business.

 

Factor #3: Innocent Mistakes Often Kill Troubled Companies

Because you’re not an expert in business crisis management, you’re certain to make silly, but honest mistakes right now.

Do you know what to do when…

  • The bailiffs are at the door to seize your equipment?
  • The bank calls your loan?
  • You can’t make the rent payment?
  • The CRA padlocks your door?
  • Your biggest creditor threatens you for a payment but all the cash you have is for the payroll this week.
  • A creditor is asking you to make good on your personal guarantee?

The list could be much longer. You can just imagine all the problems for which you don’t have an answer. And when you decide wrong, you could be shutting your doors shortly and paying your creditors out of your own pocket.

Here’s How You Can Fix The Problems and Stop the Worries.

Call in a professional crisis manager. Why?

A turnaround specialist enters a company with a fresh eye, knowledge and skills and enjoys complete objectivity. The professional is able to spot problems and create new solutions that may not be visible even to company insiders simply because the latter are too close to the subject.

The turnaround manager has no political agenda or other obligations to colour the decision-making process, allowing him or her to take the unpopular yet necessary steps for survival.

Experience within a particular industry may mean little when a company is facing bankruptcy and a loss of revenue. A turnaround specialist brings experience in crisis situations. Like a paramedic, the talent lies in making critical decisions quickly in order for the patient to have the best chance at recovery.

Operating in the eye of the storm, the turnaround specialist must deal equitably with angry creditors, scared employees, and wary customers. With the highest stakes on the table, clearly this is no assignment for the faint-hearted.

When do you call in the professionals?

Most businesses can be salvaged, provided that the business idea is still intact and there are still customers willing to buy. It is not possible to turn around a buggy whip manufacturer, for example.

But the timing is important. Each day lost in not hiring the expertise translates into just two things – more cost and more pain.

Having a Business Turnaround Strategy can help you Build Your Business and create a more profitable company.

Article written by Andrew Gregson, Senior Partner at Floodlight Business Solutions  LLP

agregson@floodlight.ca

The Politics of Business Debt in Canada

Whether we like it or not, tax is part of life.

We pay taxes to pay for the delivery of public services like roads, harbours and airports and bridges. As employers, we remit payroll taxes; i.e.. we contribute to public and private pension plans, schemes to help workers hurt on the job, and unemployment insurance. But when these go unpaid, the taxation authority has huge and growing powers of enforcement. In this article, I will argue that not all debt is equal. Some debt is more dangerous than others and not even bankruptcy can save you from paying.

Simply put, some creditors have more power to enforce their claims than others. Although technically these creditors are unsecured and merely preferred they have the power to shut down your business, your life and everything in it. These creditors need to be paid first or negotiated with first. Why? Take this small, real life example. You may wish to pay $100,000 to a supplier first in order to keep materials flowing to the jobsite, but if a government agency scoops your bank account because you owe $6,000, then you are effectively out of business.

At the top of that list are government bodies. These are the tax collecting agencies like Canada Revenue Agency or Workman’s Compensation. They have the power, in only a few hours to get a judgment against you personally, and your company and freeze your bank accounts, padlock the doors, lien your home, and have all your receivables re-directed to the government. They can and will contact your customers to direct all monies owed to you to the government coffers.

And governing bodies, like Employment Standards, also enforce unpaid wage claims whether or not they are just unpaid or occurring as a result of a dispute. Even in a bankruptcy, unpaid wages get paid first and foremost ahead of any unpaid taxes.

Next on the list of dangerous creditors are enforcement bodies like Family Maintenance. They can, in British Columbia, enforce the payment of child support by putting a lien on your house making it impossible to re-mortgage. They can seize unemployment cheques, GST rebates and tax refunds.

Then finally there are property taxes which are enforced by a de facto lien on the property. Property can be seized and sold for back taxes. If instead you sell a property and the taxes are unpaid, then the taxes owing are taken from sale proceeds. Mortgages cannot be renewed with unpaid property taxes outstanding. And if outstanding a long time, the city or municipality has the right to seize the property and sell it. And even in a bankruptcy, the taxing authority has the right to claim two years of back taxes against the assets.

Just because it is the company that owes the money, by the way, does not always leave the owner clear of obligations. In some jurisdictions like British Columbia the old provincial sales tax became a personal obligation of the owners and directors if unpaid. Even in a bankruptcy, unpaid wages have a claim on the assets. In section 136 of the Bankruptcy Act;

(d) wages, salaries, commissions or compensation of any clerk, servant, travelling salesman, labourer or workman for services rendered during the six months immediately preceding the bankruptcy to the extent of two thousand dollars in each case, together with, in the case of a travelling salesman, disbursements properly incurred by that salesman …and.. commissions payable when goods are shipped, delivered or paid for..

Then there are secured creditors. These organisations have taken security against a loan to you. The security could be your house, the company building, equipment, and accounts receivable. Often this is registered as a General Security Agreement or GSA. The most common of course is a mortgage on real property. We are all aware that defaulting on a mortgage can lead to a protracted battle that culminates in seizure of the house and its sale to the highest bidder. What most people do not realize is that any shortfall in the sale proceeds net of mortgage payout, legal and realtor fees is immediately due and payable by the owner. That debt however is unsecured.

The second most common secured debt instrument in British Columbia is the Personal Property Security Act or simply the PPSA. This is the act that allows for repossession of equipment, vehicles and anything else pledged that is mobile, essentially. The act provides for right of seizure and for the shortfall on disposal of the asset to be a debt by the original owner.

And finally there are unsecured creditors. Typically these are credit card companies and your suppliers. The money you borrow from these people and companies, makes life simpler than trying to conduct business on a cash only basis, so of course, you have taken advantage of them. They can enforce their claims by closing your account and sending you to a collection agency. They report your travails to the credit agencies whose reports are then used to assess your further credit worthiness. Tumbling scores due to poor credit card management can restrict your ability to mortgage a house or get a car loan.

It must be obvious by now, that in programmes to restructure debt, due attention must first be paid to the danger quotient of the debt and its ability to hurt you and your business. This in turn, establishes the priority for attention, negotiation and repayment.

Finally, when the worry of debt is gone and cash is not totally dedicated to servicing that debt, you can Build Your Business. Remember that the people who worry least about money or a temporary downturn in business are debt free and have low fixed cost and you want to be there.

Contact Andrew to discuss your business debt and start a new business strategy:

Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
http://www.pricingstrategies.ca
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752
andrew@pricingstrategies.ca

Andrew Gregson has 15 years of experience as a business consultant to small and mid-size businesses in Canada, the United States and the Caribbean. To date, Andrew has analyzed and assisted over 130 businesses in the service, wholesale, distribution, manufacturing and logistics sectors ad is the author of Pricing Strategies for Small Business.

By Andrew Gregson