Monday, 23 December 2013

Billy's Christmas Law: Give yourself a gift this year.

Man does not live by bread alone.
Matthew 4:4
Merry Christmas!  For Christians, this is the season for remembering the birth of Jesus Christ hence this week's quote. So here is my Christmas message for all of you...for what it is worth.
Running a business is all consuming.  Long days and nights, working weekends are all 'a part of the territory;' especially when you are in those early stages. This level of 'workaholism' often becomes habitual.  Many entrepreneurs see high levels of workload and stress as normal, and while the evenings and weekends may no longer be necessary, the work-style (for it is hardly a life-style) remains the same.

There are commercial and personal ramifications from this behaviour. From a commercial perspective, I remain unconvinced that this level of work is effective.  Tired work is ineffective work and often lacks creativity or efficiency.  From a personal perspective, devotion to business may hurt your devotion to your family and even your devotion to yourself. 

So here is my Christmas wish for all of you.  Give yourself the gift of time.  Get away...get some exercise...go to a a book (preferably a non-business book).  In short - get a life away from your business. For those of you who spend time on the road, don’t forget your health…especially diet and exercise.

Make yourself and your family your priority for this year.  Not only might you enjoy your new lifestyle, I believe that your business will benefit greatly.  You will think more clearly, work more efficiently and your employees might even get the sense that you trust them to do things without them.  To put this into more commercial terms...take this year to make an investment in you. 

I wish all of you a Merry Christmas and a Happy New Year.  I hope you are prosperous in all the ways that matter for you and for your family, and that 2014 is a year for growth and development both for the enterprise and for the entrepreneur.

Monday, 16 December 2013

Billy's Tenth Law: Don't Buy the Porsche too soon

 Never confuse a tail wind with good management.

Jeff Immelt, CEO General Electric have started your business, survived the first year, did alright in the second year, and thrived in the third year. Congratulations, but beware...the fourth year is often one of the danger years in business development. (Watch for the seven year business cycle, coming up in this blog in early 2014.) 

Sometimes success breeds success, but sometimes success breeds complacency or even arrogance.  I have heard this story, or variations on the theme, dozens of times.  It usually goes like this. 

I started my business on a shoestring, and through hard work and determination, built it into a going concern.  In the early days, there was barely enough money for any extras for myself or for the business.  Now we are successful, and on an upward trajectory.  It's time for a treat so I went out and bought myself a…

You can fill in the blanks with anything you like.  My favourite is the Porsche.  It is a bit of a 'guy thing' but for some people, this is the iconic trapping of success.  The problem is that in any business, things ebb and flow.  There are successful times and there are slower times.  The problem is that we don't know if an upturn in sales & profits represents a long term trend, or a fluctuation in the natural flow of business. 
Entrepreneurs are nothing if not optimistic. When things are going up, then there is no place to go but up.  The problem is that one of two things happens.  Either the entrepreneur commits to higher monthly payments, (on the Porsche) or they deplete the business of cash to pay for the Porsche.  Either way, the business is now more vulnerable to a down turn.

I must confess that I am way too risk-averse to ever make one of those 'bet the company' moves.  (Boeing and 747 come to mind.)  It is one thing, however; to make the big bet with company resources for the company, and quite another to 'buy the Porsche' when you have some excess cash.  I have always been a big fan of retained earnings and contingency funds and I have never been big on borrowing money and increasing cash overheads with lease or loan payments. 

I knew two very successful entrepreneurs who made this kind of mistake.  They had a wildly successful business, and after about five years, started to draw heavily out of the business.  They got hit with two consecutive factors.  Firstly, ice storms in Quebec caused a disruption of supply for their manufacturing.  This cost them six weeks production.  Secondly, they were forced to write off some bad debts made to customers who their factor wouldn't finance. (You should have listened to your factors guys.)  They company had a great income statement, but a weak balance sheet.  They couldn't finance their working capital needs caused by the bad debt and the reduction of production, and as a result went bankrupt as a result.
I am not saying that their problems would have been solved, but, retained earnings, derived by taking less money out of the company, would have provided a cushion that would have helped them withstand the adversity.
So before you buy that Porsche, put away three months cash in a contingency fund. Retain earnings in order to strengthen your Balance Sheet.  It may not be nearly as cool as a Porsche, but it could save your business during a rough patch.  

Tuesday, 10 December 2013

Billy's Ninth Law: The Dangers of Settling

Hire Slow…Fire Fast

From Fortune Magazine’s Best Advice I ever received.

Now I am not so sure that this is always the best advice, however; in the world of business Human Resources is amongst the least understood and the poorly executed aspects in business.  Because people can ‘take care of themselves’, there is a tendency to focus first on Sales & Marketing, then on Production (or provision, if you are in a service industry), then on finance (see the law on cash flow) and finally on Human Resources.  Human Resources strategy is the last developed and Human Resources tactics are often the worst applied.
Human Resources, is often the least respected parts of enterprise.  When was the last time that a Human Resources Executive became the CEO of a major company?  In my experience addressing the needs of small and medium sized enterprises for over 25 years, most business owners claim to know the least about finance…in reality they know the least about Human Resources. 
When I work with business owners, executives and managers I ask this question, “Do you have anyone working here whom you know you should fire?” People look uncomfortable, and inevitably they admit to having “one or two.”  My next question is, “Why haven’t you fired them yet?”  People have ready excuses, but in their own hearts they know the answer… firing people is hard for most people.
Firing goes with the territory.  It is one of the unpleasant aspects of management and business ownership.  Firing for cause, or for downright incompetence is one thing, but firing someone for mediocrity is quite another.  As a business changes, especially when it is growing, there are changes needed to not only the staff levels, but to the staff composition. 
One client, in the financial services industry no less, had an employee who resisted any notion of productivity measures or expectations.  His attitude was that professionals were not subject to such pedestrian measures.  The problem for the company; he was generating fewer billable hours than his contemporaries.  His work was good, however he was insufferably slow.  His poor output was causing problems with respect to profitability and there was resentment amongst his peers.  The company and importantly the owner had settled for this level of performance.
In another case, again a growing company, growth caused the job to outgrow the employee.  A person may be able to fake one level, for example a bookkeeper working as an accountant, however; it is impossible to stretch two levels (i.e. the bookkeeper now having to stretch to a comptroller.)
These and other similar situations create challenges for the owners and managers.  Traditionally we only fire for incompetence; however you should always ask yourself, "Would I hire this person for this position if it were vacant?" The decision not to settle can have positive, unintended consequences.
I had a client who, on finally making and acting on the decision not to settle, found that everybody was on his side...and that the dismissal worked to improve rather than diminish morale. The most comment was "It's about time."  Often our worries about the negative impact of dismissals are overblown and exist only in our own minds.
Jack Walsh of General Electric used the formula that in any organization 20% of the people are stars, 70% are good and you should fire the remaining 10%.  When companies put this into practice, they found that the first two years were easy, but that by year three it became difficult.  Jim Pattison is alleged to fire the poorest performing sales person at his car dealerships. 
I wouldn't make hard and fast rules such as those previously mentioned, however when a company is growing, finding new challenges or are in a rapidly changing environment, it is useful to ask yourself, "When it comes to people, am I settling, and how does settling impact the company".  This is a tough but necessary question every owner and manager must ask him or herself on a regular basis.

Tuesday, 3 December 2013

Billy's Eighth Law: When it comes to the bank, they guy who writes the ads ain’t the guy that writes the loans.

Business owners, media, politicians and the public in general, are in the dark when it comes to business banking. I am not talking about complex derivatives, credit default swaps and currency futures. These are incomprehensible to most bankers, hence this little thing called the credit crisis!  (I actually know what those things are and they never help me in my dealings with small and medium sized enterprises.)  No, I am talking about good old fashioned borrowing and lending.
Banking, to quote the Canadian Bankers Association, is a low risk, low margin, high volume business.  Banks raise money two ways...debt and equity.  A bank incurs debt when it issues a bond or takes deposits from customers.  A bank finances through equity by issuing shares or retaining earnings in the business.  The government requires a certain ratio between debt and equity known as the reserve requirement.
But let's make this easy... we will start-up our own bank.  We'll call it the Entrepreneurship Bank and lend money to struggling entrepreneurs who want to start and expand their businesses. 
Step One:  Capitalize the Bank
To begin we capitalize the bank with $100,000. (It's a small bank for small business)  The rules allow us to raise $1,000,000 in debt.  This is a total of $1,100,000.  We keep side $100,000 in cash float, and have one-million dollars left.  We can now begin to lend money.

Step Two:  Borrowing and Lending
We can now look at the bank’s revenue & expenses under the following assumptions.

Our lending rate averages 6%.
  We pay, on average 2% on deposits
  We generate $20,000 in fees
  Our overhead costs are $30,000
We can look at the income statement:


Notice, we have a profit of $30,000 per year…not bad for an investment of $100,000.  However I have forgotten one small detail...bad loans.  Banks and other financial institutions must make reserves for those loans that will never be repaid.  When I ask participants in small business seminars for an estimate of the percentage of loan loss (sometimes known as PCL, provision for credit loss), they usually tell me, “I guess it’s around 10%” In this example, if the bank would lose $70,000, wiping out most of the capital in the bank and forcing it into insolvency. In our example, a loan loss of 3% would leave the bank without a profit and 4% would create a loss!
In real life, the numbers are much larger, the Net Interest Income is a bit higher and the loan loss provision is between .5% and 1%. Regardless, if a bank makes a net profit of 2% on loan assets after loan loss, they are doing well.  Banks are lenders, not investors. If your bank seems to be somewhat conservative, then it is another reminder that banking is a low risk, low margin high volume business.  
Understanding your bank, and how bank financing works, is essential if you want to be successfully apply for bank financing.  Unfortunately, most bank lending to Small and Medium under $250,000 are written by personal and not commercial lenders,  The implications of this fundamental flaw in the banking system is a topic for another law. 

So the next time you apply for bank financing remember, your banker must be right 99% of the time in order to preserve his or her bank.