If at first you don’t succeed use a bigger hammer. The platitude of the office joker.
In our fast tracked consumer society, easily able to access information from the marketer who is better optimised for Google, so many people simply reach for the hammer first. This results in anything from ditching a car with a developed coolant leak in favour of a new car with new finance obligations at the suggestion of a braaivleis buddy, to global super powers invading regional holy areas at the whim of arms manufacturing sponsors.
Short term solutions for long term losses. When all is said and done, there comes a time when in retrospect we realise that a more measured, informed and calm approach would have been easier, cheaper and sustainable.
When a company begins to grow faster than its profits can sustain, its directors will make a call to a bank for the extension of an overdraft. When that finance has been used up in further growth, more advances will be begged, and souls sold. When there is simply no more blood available as collateral for banks and loan sharks in the face of continued growth, the shareholder finds himself going to the market for equity financing. That means giving up shares in exchange for help.
Often then, we get a call, asking if we know of anybody who would be interested in buying into a company with a zero net asset value, on track to make a business rescue requiring loss, and probably too late for anything except liquidation. It’s also at this stage that the directors are often prepared to give up their autonomy in order to keep salaried jobs as long as they relinquish the cash flow concerns. Just as long as they get their loan accounts paid out.
Here’s a tip: This hardly ever works out well for anybody. It might, in a fraction of a single percent of cases. But it doesn’t really.
There is another way… But some more background first.
Our business valuation report is very thorough in its descriptions, explanations and calculations. Sometimes it is read carefully, but mostly not. The business owner often simply scrolls down to the last page where the value number is presented.
Most small business owners are very good at providing their service, or getting their product to market, or doing whatever makes them their money. They start off as technicians, and along the way they learn how to get more customers, and how to make those customers so happy that they come back for more and more. It’s a simple recipe. They will refer to it as “scaling”.
But along with scaling comes some other interesting developments. The work force becomes bigger, the machines work harder, people get tired. Bigger orders are paid slower, but require larger inventory levels; albeit at bigger discount from the supplier. Things start to get complicated.
The old formula: Sales (less cost of sales) equals gross profit. Take out the (fixed expenses), and you’re left with the net profit.
In recent years for the scaled business, the old formula has become more of a blur. There are all sort of things which have been added into the mix. When the owner asks his accountant where this profit is, because it sure as hell ain’t in the bank account, he is told about it being in the assets, and the inventory and with his customers who are paying slowly, and the suppliers who have been paid big deposits in advance.
Many successful small business owners are very good at getting things to this level – the level at which the wheels start groaning and squeaking because of thinned out, and old grease in the bearings. Then directors’ holidays are cancelled, they get home late, they stop playing golf, they step down from the committee of the local community forum. All because of “work pressure”. And more pressure mounts.
So let’s rewind to the point of having to ask for that first overdraft. What if the small business owner had been shown BACK THEN, how to avoid this trap? What if the the overdraft advanced was based on a more measures discussion, and not on the maximum he could borrow, based on the sureties and collateral he and his family could scrape together?
- What if the business made more money on fewer sales?
- What if purchases cost more, but yielded high profits?
- What if small businessmen were not persuaded to borrow to the hilt in order to survive?
- What if businesses were built to sustain themselves, instead of becoming the slaves of banks?
- What if shareholders were able to watch share value grow, instead of their backs?
- What if a sustainable business could be used as a vehicle for financing retirement?
- What if you’ve actually read this far, and believe something could be done for your business?
- What if you have read The Goal by Eli Goldratt, but don’t really know how to implement it?
- What if you were able to turn your business into one which utilises its constraints to turn its cashflow on its head, and today’s sales number becomes the near future net profit?
- What if you got more sleep?
Want to know more? Send me an email.