Listening to the radio today, I was struck by the speaker’s complaint about how “the credit crunch” was still causing problems to his business.

It got me thinking. What was really at the heart of his problem?

The Credit Crunch refers to a bank’s unwillingness to lend money. Was he looking for a loan? If so, what for? To invest in greater capacity? To launch a new line of products or services? To help with poor cashflow?

If it was the last reason, I can understand the bank’s reluctance to lend, and crunch his credit.

Banks have not helped themselves in recent months, but their core purpose remains the same: to lend money to businesses. In return they expect a profit on their investment.

If you are having difficulties convincing your bank to lend money to you, maybe it’s because of something you need to do, or say.

If you need help talking to your bank, let me know. I might be able to help.

What is working capital?  When accountants use it they are referring to “Net Current Assets” which are your companies short term assets less your short term liabilities.

To make this easy let’s assume that you have £1,000 of stock, you are owed £500 by your customers and you have £200 in the till.  This means that your short term assets are £1,700, unfortunately at the same time you have £1,000 of bills to pay, which are described as your Short Term Liabilities.

Therefore your working capital, or your Net Current Assets, are £1,700 less £1,000 = £700.

Naturally, you would assume that the more working capital you have in your company the safer your company is, but this is not always true. If too much of that working capital is in stock, it is dead money; which comes alive when sold and then can be used to buy new stock. 

Recently a large furniture retailer went into liquidation even though it had no major debts, because all its money was in furniture and no one was buying their furniture, this led to a major cash flow crisis and its eventual demise.

So you must look where your cash is and whether it is working for you. This is why before Christmas all the major retail chains were giving such big discounts, as it is no good having money in stock, if you don’t have cash to pay your staff and your regular bills.

The message is, if your stock isn’t selling, sell it at any price and use that money to buy stock that will sell.

A good management accountant is worth their weight in gold. Not because they will generate sales, or improve your PR, but because they will keep you focused on what is really important to the long term survival of your business.

It doesn’t matter whether you are a sole trader, have a turnover of £100k, £100M, or are the Chancellor of the Exchequer, the same principles apply:

• Create Key Performance Indicators that are relevant to, and understood by, all those involved – and don’t just focus on the financial KPI’s. Take advice on KPI’s, you need to be objective.
• Identify what KPI’s are leading indicators, and which are lagging indicators.
• Use qualitative and quantitative measures. Ask for suggestions, and not just from those within your organisation.
• Be aware of how KPI’s affect people, and how change makes them feel.
• Know the difference between making an investment, and incurring an expense.

When the world around you appears to be losing its way, make sure you have someone who is prepared to talk to you about the reality of your financial priorities.

We have much to thank Donald Rumsfeld for. Although mocked for his listing of “what he knew he knew”, “what he knew he didn’t know”, etc, this analysis of your situation can often distinguish perception from reality.

Compiling a list of things that you know you know about your business might seem like a waste of time, but put it beside a list of things you don’t know about your business, and you might surprise yourself just how many things you suspect, but aren’t sure about.

If you aren’t sure about it, then you don’t know it.

And then ask yourself, what are you doing to find out?

I found myself despairing today, about the lack of interest in the Balance Sheet by some businesses. I believe it is the single most important piece of information every business needs. Why?

Look at it this way, as an individual, we tend to know how much we owe other people, how much we own, even how much we are owed. It’s nice to have sense of how much we are earning, but the bit that gives us the warm fuzzy feeling of stability – or the cold shivers of concern – is the detail of where we are financially right now.

That’s what the Balance Sheet is. It’s a snapshot of who owes you, who you owe, and what you own.

As a barometer of your organisation’s health, check out the Balance Sheet. And if you want an idea of what shape you are going to be in, then ask to see the Balance Sheet’s forecast position. It’s not rocket science, and could save you from some very unpleasant surprises.

Recently my son appeared in a community production of Joseph And The Amazing Technicolor Dreamcoat. It was a great show, with all the drama and fun that being part of an amateur musical entails.

As I was reading HSBC’s January Economic Outlook report this morning, it struck me that leaders have an incredible capacity to forget the lessons taught to us by experiences in the past. Over the last few years we have all read, and talked, about bubbles bursting, and such levels of growth being unsustainable.

Joseph told Pharaoh how important it was to save during the years of plenty, as reserves would be needed when times turned rough. Pharaoh listened (and no doubt received conflicting advice from other experts), and decided to impose regulation that ensured his country would withstand the inevitable downturn in fortune.

Are today’s leaders willing to take the same kind of action as Pharaoh? They haven’t in the last few years…

I have been pondering a number of issues over the Christmas period to do with the power of positive thought. As I was starting to compose my own blog, I was pointed towards a great article by Jon Cooper (founder of JupiterDawn.com), published in the Birmingham Post on 1st January 2009. Serendipity strikes again…

Jon writes:
I’ve been isolating myself from pessimists for as long as I can remember. As soon as I feel a negative “vibe” from someone, I always make a mental note to be in a different room next time they’re around.
That particular skill is one I’m calling on more and more these days, as finding people without the doom-bug can be quite tough.
One thing which hasn’t changed with the economic climate is pretty much a fundamental law of the universe. Whether or not you believe some of the more spiritual stuff preached by Dale Carnegie, or in recent publications such as “The Secret”, it will always be an irrefutable fact that you get back what you put out.
If you think negatively, you will get negative results.
Even more obviously, if you say and do negative things at work, those around you will mirror those words and actions, producing a spiral of bad outcomes for your business.
The fact is, thriving in 2009 is far from impossible; here’s my 3-point plan to ensure that you keep your plans on track when others are falling off the rails.
1 – Review which of your goods or services are selling best, and focus on making those even more attractive.
Pricing, features and delivery can usually be tweaked if you look closely enough.
Conversely, consider dropping whatever isn’t selling well or making you a profit.
2 – Use PR to get your message to the market cheaply, and ahead of the competition.
Standing out from the crowd as a fashionable, desirable business can cost less than you imagine.
Newspapers, TV and BBC Radio offer great opportunities for entrepreneurs to broadcast interesting, recession-busting stories.
3 – Banish negativity from your business. If suppliers are talking doom and gloom, agree with them and get better prices and longer payment terms.
If customers are whining, find out what it would take to make them happy again.
If staff or colleagues are getting you down, re-arrange your office so you don’t have to listen!
In summary, identify the key success factors which made your business great in the past, promote them and focus on them, whilst eliminating waste and negativity.
I know 2009 is going to present some brilliant opportunities; make sure you are set up to grab them with both hands!

Change is happening, but are we aware of how fast life around us is changing? And is someone in control of change any more, or has Pandora’s Box been opened and no-one knows how to close it?

Interesting post here with a sobering message.:

http://www.tom-watson.co.uk/2008/12/a-goodbye-to-woolworths/

Who is willing to take action?

Recession. What is it? What does it mean? And most importantly, what does it mean to you?

The sales are in full swing, parties are loud and late, cars are travelling far and wide. Some days it feels like there are two worlds, the one we live in and the one we read about.

Losing a job is not fun – I know from personal experience – but take this out of the equation, and what else is happening? Food prices are down, fuel is just 86p a litre, variable mortgage rates are at an all time low. The spectre of recession might be based on little more than a perceived worsening of our world.

Perhaps the biggest thing we have to fear, is fear itself.

The root of the problem is that most small businesses are selling to companies larger than themselves, who have the advantage of a full-time finance director. These seasoned professionals know how to manage cash-flow, and therefore how to improve their companies’ bottom line instantly by quietly moving payments from thirty to ninety days.

You would do well to support your sales operation with a finance specialist. If you do not have a full-time finance person, then pay a little extra and get someone appropriate to help supervise the sales process.

They will put in some sensible precautions, such as credit controls on small and medium-sized businesses who might want to place orders. In my experience, it is rare for a company to turn down business from someone purely on the basis of a poor credit rating, but it does improve the negotiating power of the salesperson to ask for a substantial up-front deposit.

If the potential order is with a large organisation who have an excellent credit rating and who represents a substantial share of your revenue, there is still the problem of their moving the goal-posts on payment terms. The solution is to have an open channel of communication between your finance specialist and their finance director.

The reality is that few large organisations want to be seen to be bankrupting small companies by applying unreasonable payment terms. Problems usually arise because the salesperson does not have the knowledge and patience, or even vocabulary to discuss these issues with finance people at an early stage in the process.

Left to their own devices, finance professionals will usually come to a sensible conclusion which represents a win for both sides. The supplier might be happy with longer payment terms in exchange for a larger order, or you might offer a price discount in exchange for an up-front payment.

Late payment is a natural consequence of difficult economic conditions and has no easy solution other than to employ the services of a professional. This could be either a finance expert or a company who knows how the system works. It may be expensive in the short term, but represents an excellent return on investment over time, the same argument you should use to promote your own products and services.

If you want to talk this through in more detail, call me on 07913 895798.