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.

 

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

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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.