The Price of Money – a Lender Perspective.

Bag-of-MoneyMoney is not a commodity. By definition, a commodity is a generic product that is bought and sold on price alone. Money, Canadian bills for example, look the same, smell somewhat the same, and are available country wide. But, when you want to borrow money, rent the money in fact, the price for that money is not at all consistent.

Why does the price of money fluctuate from person to person? Why do some people borrow at prime minus rates and some at 18%? It is because, in part, that your lender does a risk assessment of you and your circumstances that affects what they will charge. Let’s look at this from the point of view of a mortgage for your home.

The first consideration is location. If your home is 100 kilometres from the nearest small town of  4000 people, you might not get a mortgage at all, but if you do, the lender will add risk factors. If you default, will anybody buy the property and redeem the mortgage? Your Shangri-La is perhaps too unique to attract a buyer.

Then there is the home price bracket to consider. A home priced to sell in a hot price bracket is easier to mortgage than a million dollar home. There are simply more buyers who equate to an easier exit from the loan in the event of default.

Then there is the loan to value calculation. A high ratio means only that you do not have enough “skin” in the game and if things get overwhelming it is too easy for you to walk away, leaving the lender with your house. A higher loan to value ratio simply means you will pay a higher interest rate or have to give up your first born child.

Then there is your employment. Self-employed or just started a new job? You will pay more for your money. That is because the risk of not being employed or having too little money coming in to service the mortgage is higher than having a nice steady government job.

Then there is your credit report. Credit is something to be managed. Keeping your record clean and current shows that you are fastidious about paying your obligations. Having a low score means you are a deadbeat.

All of the above explains why some people pay 2.5% and some 15% on their mortgages. It is, in part, a reflection of the supply and demand function.

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

IBM predicts the return of local brick-and-mortar retail to prominence over e-retailers

IBM’s “5 in 5″ series presents ideas about how life will be affected by technology over the next half decade. A video series provides the highlights, including this one that predicts the return of local brick-and-mortar retail to prominence over e-retailers that have been “spanking” them for years.

watch video at http://www.profitguide.com/industry-focus/retail/will-brick-and-mortar-retail-prevail-in-the-end-60600?

IBM’s release says:

“This year’s 5 in 5 explores the idea that smart machines will learn, reason and engage with us in more natural ways–helping to amplify human abilities, assist us in making good choices–big and small, and help us navigate through life.

Within five years, we predict buying local will beat online. Savvy retailers will use the immediacy of the physical store to create experiences that simply can’t be replicated by online-only retail. Watson-like technologies and augmented reality will allow physical stores to turn the tables and magnify the digital experience by bringing the web right to where the shopper can physically touch it.

Brick-and-mortar retailers may still drive a significant majority of retail sales, but online sales are growing faster. Physical stores, once seen as a negative, will become a big positive. Their proximity to the customer will give them the advantage of integrating the immediacy of physical shopping with a magnified digital experience inside the store.”

It’s true that Watson’s offspring could drastically change a physical store’s shopping experience, but presumably any digital tool that a sales associate could use in-store could also be used by the shoppers themselves while they’re sitting on their couch. IBM says augmented reality, for example, could enhance the retail experience. Why not put that tool online and make it accessible from home? Virtual tools aren’t tied to physical locations.

For every company like IBM that offers tools to draw you back to the store, there will be a dozen online startups using the same tools (plus a few innovations of their own) to drive their own business that isn’t hampered by overhead costs like staff, rent and building insurance.

Originally appeared at marketingmag.ca

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.

 

Exiting your Business with a Barrelful of Money

 

How to Super-Size the Cheque the Buyer will give you.

With the baby boomers reaching retirement age, a large number of companies will likely change hands in the coming years. Right now, 20% of small businesses are for sale. Within 10 years that percentage will double to 40% and within 15 years that number will rise again to 70%. Kelowna and the Okanagan, being an older demographic are at least 5 years ahead of that supply curve.

soldWhat will be the fate of small businesses when the owners retire?

According to TD Waterhouse’s early October Business Succession Poll of 609 small business owners, only 24 per cent of small business owners surveyed said they had a succession plan worked out for retirement.

Of those polled, whether they had a formal plan or not, 23 per cent said they would simply close their business when it came time to retire; 20 per cent planned to sell their business to a third party; 18 per cent expected to transfer it to a family member; 12 per cent said they’d sell to a partner or employee; and 27 per cent said they were not yet sure what they’d do with their business.

td waterhouse survey

 

 

 

 

And what will be the likely impact on personal wealth?

When you sell to a family member or employee, there are typically fewer dollars on the table, because the company will be heavily discounted.

Closing the doors means zero return for years of business building.

The people answering “not sure” are likely faced with a Freedom 85 Plan, wherein the owner works until he/she can no longer work- and not by choice.

Of course, if the owners salted money away and used the cash flow diligently to build personal assets, then the owners may have enough for a comfortable retirement, allowing them simply to close the doors.

This article, however, is about those who are relying on the sale of their business to fund their retirement and how to find the retirement money they need.

Simple economics dictate that in forthcoming years, supply will exceed demand and many companies will just be left on the shelf as buyers cherry pick the best. But since the beginning of the recession in 2008 many businesses have faced falling sales and increasing debt. This situation has eroded value in many businesses.

So how can an owner stand out from the rest in a crowded bidding war for a buyer? What will buyers pay top dollar for? Investors look for a return on their investment and will not buy indebted companies with falling market share and paper thin margins. Most of all, they will not buy a business that depends entirely upon the owner to make it work.

  1. Is there good return on equity – today, not some hypothetical future?
  2. Does the company have high profit margins?
  3. What fixable factors mean that the business will be purchased at a significant discount to its value?
  4. Are there systems in place for the owner not to have to work 12 hours per day?
  5. What factors will help a buyer get financing from his financial Institution?

If an owner answers NO to any of these questions, then something needs to be done, starting today.

What to do?

  1. Pay for a third party valuation and ask what factors are holding back the value.
  2. Pay down debt, starting with the most dangerous debts
  3. Build tangible assets that hold their value and are essential to the business
  4. Increase profits and cash flow with a better pricing strategy
  5. Increase sales with a modern marketing plan
  6. Create a credible exit plan that identifies to whom you will sell the company and at what price and when.
  7. Talk to a good accountant about the tax implications of your plan
  8. Build a solid 3 year plan to make this happen
  9. Work the plan
  10. Do something, do anything. Remember that even a dead fish can float downstream.

By Andrew Gregson, Senior Partner at Floodlight Business Solutions LLP, a consultancy focusing on rebuilding sales, rebuilding finances and creating value. call today if you need a guest speaker on this topic www.floodlight.ca.

Email: agregson@floodlight.ca                        Ph: 888-959-0752

Innovate, Don’t Ape – How to Survive the Recession

Aside

apeThirty years ago, according to a recent article in the Economist, the bosses of America’s car industry were shocked to discover that Japan had overtaken them to become the largest car manufacturers on the planet. The bosses blamed this success on cheap labour and government subsidies.

But the progressive bosses went to Japan and discovered that Honda and Toyota had raced ahead of them by virtue of a combination of innovation and inspiration. The American manufacturers quickly dubbed the methods of production “lean manufacturing”. This approach to manufacturing was in fact an American idea that was fully developed in Japan and ignored in America. The inspiration was to listen to customers who – echoing today’s demands- were looking for cars that were cheap on gas but still a quality product.

The moral of the story is that if Japan had merely aped American car manufacturers, their car industry would not have thrived. Today’s emerging economies are growing in part on cheap labour but mostly because they have innovated faster than rich countries. Kenya, for example, is the world leader in money-transfer by cell phone. Frugal innovation in the emerging world has created the $3000 car and the $300 laptop. These products were re-designed to eliminate costly steps in the manufacturing process.

The lesson for today’s businesses is an old one. Innovate don’t ape. If everyone else is offering sale priced goods on senior’s Tuesdays, and they are not making any money, why would you want to copy them? If everyone else offers the same burgers, the same landscaping service, the same financial solutions, the same furniture, then, to compete you must drop your prices in order to gain customers.

 In a conversation last week with a manufacturer in Vancouver, the owner told me that his approach during this recession had been a total reversal of the approach in the recession 10 years ago. A decade ago, the company chose to ride the storm and drop prices. This time they cut costs and left prices intact. The result: fewer sales but more cash in the bank.

 So, the question is how to innovate. Can you make your product or service better in some way than is currently offered? Will the change be a gimmick and easily copied by your competitors or can you offer something your competitors cannot?

 Overwhelmed by the thought of what to do? Do you think your business has no room to innovate? Consider this. Water and flour are commodities traded on the world markets on price alone. When mixed together, they ought to produce another commodity. However, this product has over 1000 market niches with prices that reflect not the cost of materials or the taste of this food product, but the shape of the food. I am speaking, of course, about pasta.

This is brilliant marketing to create a market based upon the shape of a food product while everyone else focused on flavour or fast food.

5 keys to profitability – part 1

keysA profitable business is a saleable business. A profitable business is easier to manage and to operate. Everyone loves to do business with probable businesses because they all know the invoices will get paid. The best employees want to work for profitable companies because they know their paycheques will not bounce or get delayed.

Profit is the reason entrepreneurs get into business in the first instance; but how to keep a company profitable is sometimes a trial. Here is how, with the first of our 5 keys to profitability.

Attention to cash flow

Most business owners focus on price and margins forgetting an important element in running a successful business – cash flow. What does this mean and how does it work?

Let us consider for a moment that you are selling loose tea. You pay 1 dollar per kilo for the tea. You sell the tea for $1.50 per kilo giving you a margin of 33%. Monthly you can sell 100 kilos to 100 different customers. So every time you sell one kilo of tea you profit by 50 cents.

At $1.50 per kilo you can sell 100 kilos per month but experiments have shown that by dropping the price to $1.29 per kilo you sell 150 kilos per month to 150 different customers. That generates a margin of 22%.  So every time you sell one kilo of tea you profit by 29 cents.

Most business owners will focus on sales and price believing that dropping the price will increase sales and the sun will shine. But will that reasoning help your profits?

In the first example the cash flow is $50 per month. In the second the cash flow is $43.50. So dropping the price and selling even more tea has damaged the bottom line. In terms of cash flow, increasing the sales with a lower price has not been a good decision.

But if you focus on the cash flow figure, you can also improve profits, as follows. Suppose that you are now selling tea for the sale price of $1.29 per kilo. But instead of selling one kilo at a time, now the buyer must buy a minimum  of 2 kilos. As before, 150 customers come in and buy tea and the margin remains the same at 29 cents per kilo. But this time the contribution to the bottom line is $87. And you did not have to work any harder for that profit.

What this example tells us, is to focus on the dollar contribution and not margins or even the price. Dollars pay the rent, employees and taxes.

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.