Strange is it may seem you do not always have to just consider your own companies health but the companies you depend on both up the chain and down the chain. I have seen several excellent companies run into extreme levels of distress due to key suppliers and major customers becoming insolvent forcing the once healthy business to be in a bind they didn't see coming.
If your business is dependent on any business relationship for the continued its well being you owe it to yourself and other stakeholders to take a good look at them. To find out about the companies you are dealing with can be as simple as purchasing a Dunn & Bradstreet credit report. If your business wields significant sway and your company constitutes a large portion of their business you may be in a position to request accounting information and confirm that they are in fact healthy and will be around to continue trading with them.
Keep your business going by continuously monitoring and managing the level of risk your company is exposed to. Where possible always have a contingency plan in place to source supplies elsewhere at short notice. Try diversify your client base and attain letters of credit from them if they are purchasing significant levels of inventory. You can minimise your risk by watching how others are affected.
Take care of your business and it will take care of you.
24 September 2008
23 September 2008
Traps of Acquisitions
Acquisitions are an important topic that needs a great deal of attention, at the moment I would like to share just a few general thoughts about making an acquisition.
When acquiring key things to think about before going ahead with the acquisition are:
Successful businesses fail after making acquisitions for what I believe are two main reasons:
When this happens the leadership of the organisation is unable to focus on operational issues in the existing business that require their attention. This then results in the existing business beginning to fall apart and customers leaving, their cash too.
Cash burn happens for a variety of reasons partly from the added interest to pay for the acquisition, burning through cash to fix issues in the newly acquired business and delays in integrating the acquisition.
Acquisitions can enhance your business and take it in a new direction but if you do not plan properly it may well kill your business. Take the time to understand what you are doing, read some books about how to integrate an acquisition or hire external consultants to help you integrate the acquisition.
These two books may help you optimise the integration of your next acquisition,Reaping the Benefits of Mergers and Acquisitions, In Search of the Golden Fleece
and Harvard Business Review on Strategies for Growth.
Take care of your business and your business will take care of you.
When acquiring key things to think about before going ahead with the acquisition are:
- Why do we want to acquire this business?
- How does the acquisition benefit the existing business?
- What does the acquisition do to the risk profile of the existing business?
- How are we going to manage the additional initial cash drain?
- How are we going to integrate the new business into the existing business?
- How will I fund the acquisition?
- What will the acquisition do to our existing debt obligations and covenants?
Successful businesses fail after making acquisitions for what I believe are two main reasons:
- Failure to understand the impact of acquiring the target business
- Biting off more than they can chew
When this happens the leadership of the organisation is unable to focus on operational issues in the existing business that require their attention. This then results in the existing business beginning to fall apart and customers leaving, their cash too.
Cash burn happens for a variety of reasons partly from the added interest to pay for the acquisition, burning through cash to fix issues in the newly acquired business and delays in integrating the acquisition.
Acquisitions can enhance your business and take it in a new direction but if you do not plan properly it may well kill your business. Take the time to understand what you are doing, read some books about how to integrate an acquisition or hire external consultants to help you integrate the acquisition.
These two books may help you optimise the integration of your next acquisition,Reaping the Benefits of Mergers and Acquisitions, In Search of the Golden Fleece
and Harvard Business Review on Strategies for Growth.Take care of your business and your business will take care of you.
22 September 2008
Cash Cash Cash
Cash is what makes your business run, run out of it and you are technically insolvent and will be out of business very quickly. Failure to manage cash is probably the number one reason companies fail. Work out how to manage your cash balances and you will be on the road to success and keep your business heading for success.
Cash is the life blood of any company its importance can not be understated, when it stops flowing and you don't have access to it the whole company grinds to a halt. Being asset rich and cash poor is a severe problem and can happen to any businesses. Two points in time where cash flow issues are most likely to occur are at start up and during expansionary phases. It is during these times that cash burn occurs quicker than other times as management are often focused on sales and other performance indicators. The one performance indicator they fail to check is cash on hand, if cash is not coming in and not available the business will grind to a halt very quickly.
To avoid cash flow issues you need to be preparing cash flow budgets and forecasts. These can be as detailed as day to day cash receipts and disbursements by individual debtor and creditor all the way out to monthly cash flow budgets for the year.
Preparing at a day by day level will help to focus your attention on what is happening at the most basic level. It will also cause you to reconsider where the companies money is going and is it a necessity; can receipts be brought in sooner and can creditors be delayed. Getting down to this level of detail can reap many rewards by way of improved working capital opening up opportunities for cash to be put to work better elsewhere in your business.
If you are already preparing cash flow budgets it is good to get in the habit of checking cash flows through the company's bank accounts weekly if not daily. You should know that your company has a sufficient cash to see out the next day, week and month. If you can see that it is not going to make it to the next week or month take action today. Organise short term financing, see if you can bring forward your debtors, postpone creditors, turn excess inventory in to cash.
Cash flow budgeting and cash management is important and the following books may help you begin putting in a cash flow management strategy in your company:
Cash is like keeping the blood flowing through your veins when it stops you stop. Keep your cash flowing so your company will live a long and prosperous life.
Cash is the life blood of any company its importance can not be understated, when it stops flowing and you don't have access to it the whole company grinds to a halt. Being asset rich and cash poor is a severe problem and can happen to any businesses. Two points in time where cash flow issues are most likely to occur are at start up and during expansionary phases. It is during these times that cash burn occurs quicker than other times as management are often focused on sales and other performance indicators. The one performance indicator they fail to check is cash on hand, if cash is not coming in and not available the business will grind to a halt very quickly.
To avoid cash flow issues you need to be preparing cash flow budgets and forecasts. These can be as detailed as day to day cash receipts and disbursements by individual debtor and creditor all the way out to monthly cash flow budgets for the year.
Preparing at a day by day level will help to focus your attention on what is happening at the most basic level. It will also cause you to reconsider where the companies money is going and is it a necessity; can receipts be brought in sooner and can creditors be delayed. Getting down to this level of detail can reap many rewards by way of improved working capital opening up opportunities for cash to be put to work better elsewhere in your business.
If you are already preparing cash flow budgets it is good to get in the habit of checking cash flows through the company's bank accounts weekly if not daily. You should know that your company has a sufficient cash to see out the next day, week and month. If you can see that it is not going to make it to the next week or month take action today. Organise short term financing, see if you can bring forward your debtors, postpone creditors, turn excess inventory in to cash.
Cash flow budgeting and cash management is important and the following books may help you begin putting in a cash flow management strategy in your company:
Cash is like keeping the blood flowing through your veins when it stops you stop. Keep your cash flowing so your company will live a long and prosperous life.
21 September 2008
Company Growth and Information Requirements
Information about your company is vital to knowing what is happening inside your business. As your company grows from being a small company to a medium company or from a medium to a large one the information you need to make good decisions changes. Limiting the information you have available limits your ability to make good choices and implement positive changes.
Experience has shown me that as a company grows the amount of information required for good quality decisions grows too. All too often the accounting department is seen as a cost centre and not as area that can add value. This attitude severely impacts the ability to implement more efficient and appropriate accounting systems that empower management to make good quality decisions that improve the bottom line.
I have seen companies with turnovers of several million dollars and several product lines using accounting software intended for small businesses that are designed simply to keep track of receipts and payments. The result of this has been that the businesses spends far too long preparing reports that contain the information they require to make decisions, do not have access to information in a timely manner and the quality of the reports formed is questionable. Upgrading their accounting systems to software intended for a company of their size and complexity would add a new level of control and flexibility to make quality decisions that they currently do not have.
The benefits of upgrading to an excellent accounting system designed to handle a growing medium to large size business is that it can allow you to track different areas of your business by product, service and even by individual sales staff. One of the other most important features included is the ability to set budgets within the software. The budgets can then be compared to actual performance at any time.
Access to the wide variety of information provided by larger accounting packages and systems described above allow for performance tracking, showing areas where your company excels and fall short. Knowing this allows you to refocus your attention where it most needed and can bring you opportunities to take what you are doing well in one area of the business and implement it in another part of the business where performance is sub par.
Make an effort to keep your accounting systems suitable for the size of your company. When your company grows take the time to see if your accounting systems are still suitable. Upgrading them will allow you to keep your business growing and meet new challenges.
Look after your business and it will look after you.
Experience has shown me that as a company grows the amount of information required for good quality decisions grows too. All too often the accounting department is seen as a cost centre and not as area that can add value. This attitude severely impacts the ability to implement more efficient and appropriate accounting systems that empower management to make good quality decisions that improve the bottom line.
I have seen companies with turnovers of several million dollars and several product lines using accounting software intended for small businesses that are designed simply to keep track of receipts and payments. The result of this has been that the businesses spends far too long preparing reports that contain the information they require to make decisions, do not have access to information in a timely manner and the quality of the reports formed is questionable. Upgrading their accounting systems to software intended for a company of their size and complexity would add a new level of control and flexibility to make quality decisions that they currently do not have.
The benefits of upgrading to an excellent accounting system designed to handle a growing medium to large size business is that it can allow you to track different areas of your business by product, service and even by individual sales staff. One of the other most important features included is the ability to set budgets within the software. The budgets can then be compared to actual performance at any time.
Access to the wide variety of information provided by larger accounting packages and systems described above allow for performance tracking, showing areas where your company excels and fall short. Knowing this allows you to refocus your attention where it most needed and can bring you opportunities to take what you are doing well in one area of the business and implement it in another part of the business where performance is sub par.
Make an effort to keep your accounting systems suitable for the size of your company. When your company grows take the time to see if your accounting systems are still suitable. Upgrading them will allow you to keep your business growing and meet new challenges.
Look after your business and it will look after you.
19 September 2008
Is there a right credit facility for my business?
Recently I have been working with two large companies with turnover in the hundreds of millions range. These businesses have had a fair amount of success and possess knowledgeable management teams yet they still make choices that limit their ability to run their business and maximise returns. What these two companies have in common is that both of them are using the wrong banking facilities (loan type).
If your wondering what is the big deal about not using the "right" banking facility is it is that each product the bank sells has different fees, levels of interest and restrictions on how you can use the facility. Using a facility for something it was not intended for costs you extra money in fees, in time dealing with your bank to explain what your doing and most importantly opportunity cost. The wrong bank facility impairs your ability to pay for things your company needs when you need them.
Using the example of the two companies you will see how wrong you can get your use of credit facilities and the impact it could have on your company. Company A has a working capital facility with $10-$20 million. The working capital facility is meant to be used for paying creditors and used day to day to manage cash flow variances. Company B also has a working capital facility but it is only for around $5 million. Both companies are around the same size.
Now what each company is doing with their facility will show you why it is important to have the right facility.
Company A has used their facility on capital expansion, the purchase of fixed assets. This is not really what this facility is intended for and these purchases would have been better off being financed via a lease or through a specific loan secured over the assets. Financing the assets with the working facility is costing them an added premium for the flexibility this type of facility provides and it is secured over the fixed and floating assets of the company. This has exposed the rest of the company to unnecessary risk and risks using up the facility for when it will be needed for its intended use.
Company B requires their working capital facility for paying trade creditors and other day to day costs. The size of the facility is clearly quite small compared to the revenue turnover of the company (several hundred million) and smaller than Company A's facility. They are in a bit of a squeeze now as a key debtor is unable to pay for a period of a few months. This has left them with a loan facility too small for their business. Company B failed to plan ahead and organise contingent lines of credit with their bank in case of an event like this.
As you can quite clearly see selecting the right type of financing is vital to keeping your business healthy by isolating risk, reducing costs and allowing for unexpected surprises.
Take time to look at your facilities and consider if they are best suited to the way you use them or is there a better facility for you. Using the right product today may well help you cope when a surprise comes your way and you need to fall back on your debt facilities.
As your business changes so too should your debt facilities and debt structure. Talk with your bankers if you think you need to change your facilities you never know what savings you may make.
If your wondering what is the big deal about not using the "right" banking facility is it is that each product the bank sells has different fees, levels of interest and restrictions on how you can use the facility. Using a facility for something it was not intended for costs you extra money in fees, in time dealing with your bank to explain what your doing and most importantly opportunity cost. The wrong bank facility impairs your ability to pay for things your company needs when you need them.
Using the example of the two companies you will see how wrong you can get your use of credit facilities and the impact it could have on your company. Company A has a working capital facility with $10-$20 million. The working capital facility is meant to be used for paying creditors and used day to day to manage cash flow variances. Company B also has a working capital facility but it is only for around $5 million. Both companies are around the same size.
Now what each company is doing with their facility will show you why it is important to have the right facility.
Company A has used their facility on capital expansion, the purchase of fixed assets. This is not really what this facility is intended for and these purchases would have been better off being financed via a lease or through a specific loan secured over the assets. Financing the assets with the working facility is costing them an added premium for the flexibility this type of facility provides and it is secured over the fixed and floating assets of the company. This has exposed the rest of the company to unnecessary risk and risks using up the facility for when it will be needed for its intended use.
Company B requires their working capital facility for paying trade creditors and other day to day costs. The size of the facility is clearly quite small compared to the revenue turnover of the company (several hundred million) and smaller than Company A's facility. They are in a bit of a squeeze now as a key debtor is unable to pay for a period of a few months. This has left them with a loan facility too small for their business. Company B failed to plan ahead and organise contingent lines of credit with their bank in case of an event like this.
As you can quite clearly see selecting the right type of financing is vital to keeping your business healthy by isolating risk, reducing costs and allowing for unexpected surprises.
Take time to look at your facilities and consider if they are best suited to the way you use them or is there a better facility for you. Using the right product today may well help you cope when a surprise comes your way and you need to fall back on your debt facilities.
As your business changes so too should your debt facilities and debt structure. Talk with your bankers if you think you need to change your facilities you never know what savings you may make.
18 September 2008
Is My Company Solvent
I previously wrote about preforming a company health check and the value you can get out of it. I would like to now focus your attention on the solvency of your company and how to tell if your company is insolvent.
Firstly what is the definition of being insolvent, quite simply it is not being able to pay your debts as and when they fall due.
The time insolvency occurs may be very clear cut or it may be a general progression but you will be very aware when you began experiencing trouble paying your creditors. If you are at this point I strongly suggest you see an insolvency practitioner as trading whilst insolvent is against the law and attracts harsh penalties if you continue to trade whilst insolvent.
Factors that indicate your company may be insolvent
When you see the practitioner they will present to you several options. If the practioner determines you are insolvent they will recommend that you the company into external administration. From here the administrator will run the affairs of the company for a short period after which the company can either be returned to the directors because it has returned to being solvent or it can be placed into a scheme where an arrangement is reached with creditors to repay them over a defined period of time with a set of conditions which if breached will result in the liquidation of the company and the final option you will be presented with is to place the company into liquidation and wound up in an orderly manner to maximise returns to all stakeholders.
From my experience the sooner you come to see an insolvency professional the greater the probability of a return to health and saving your company. Leaving a company to slowly wither away through a weak to non-existent cash flow stream will burn away the assets of the company, increase the debts and greatly reduce the probability of a return to solvency.
Remember to look after your company so it can look after you.
Firstly what is the definition of being insolvent, quite simply it is not being able to pay your debts as and when they fall due.
The time insolvency occurs may be very clear cut or it may be a general progression but you will be very aware when you began experiencing trouble paying your creditors. If you are at this point I strongly suggest you see an insolvency practitioner as trading whilst insolvent is against the law and attracts harsh penalties if you continue to trade whilst insolvent.
Factors that indicate your company may be insolvent
- Poor to little cash flow
- Continuing loss making activities
- Difficulties collecting debtors
- Loans to related parties that are non-recoverable
- Exceeding your debt facilities
- Intervention in your company's affairs by your lender
- Being placed on COD terms
- Creditors outstanding for more than 90 days
- Being placed on instalment repayment plans with creditors
- Difficulties obtaining finance
When you see the practitioner they will present to you several options. If the practioner determines you are insolvent they will recommend that you the company into external administration. From here the administrator will run the affairs of the company for a short period after which the company can either be returned to the directors because it has returned to being solvent or it can be placed into a scheme where an arrangement is reached with creditors to repay them over a defined period of time with a set of conditions which if breached will result in the liquidation of the company and the final option you will be presented with is to place the company into liquidation and wound up in an orderly manner to maximise returns to all stakeholders.
From my experience the sooner you come to see an insolvency professional the greater the probability of a return to health and saving your company. Leaving a company to slowly wither away through a weak to non-existent cash flow stream will burn away the assets of the company, increase the debts and greatly reduce the probability of a return to solvency.
Remember to look after your company so it can look after you.
17 September 2008
Know your business
I would like to share a quick thought and tip with you. I have been working with a client for the past few weeks and it never ceases to amaze me that business owners who have their houses guaranteed their houses and their whole livelihood and their families security is tied in their business not know their business. They didn't know what assets they were holding their legal structure or what contracts they had. What made it more astonishing was that the contracts were the majority source of income, depending on how they were set up they would be entitled to different revenue, either fixed fee or a fixed fee plus a percentage of their revenue.
It is important you know your business, if you don't who do you expect to? Knowing your business will enable you to know where your revenue is coming from what drives it. When you don't know why your revenues are falling due to the simple fact you have no idea what causes significant variations beyond falling sales you are not in a position to turn your situation around.
Time and time again I see the same thing, take the time to look into your business understand how it works, it may have changed significantly since you started it. The time you invest now may well reap you greater rewards than you expect.
It is important you know your business, if you don't who do you expect to? Knowing your business will enable you to know where your revenue is coming from what drives it. When you don't know why your revenues are falling due to the simple fact you have no idea what causes significant variations beyond falling sales you are not in a position to turn your situation around.
Time and time again I see the same thing, take the time to look into your business understand how it works, it may have changed significantly since you started it. The time you invest now may well reap you greater rewards than you expect.
15 September 2008
Lessons From Corporate Collapses
I suppose by now you are aware that Wall Street is experiencing difficult times with more large, well known companies undergoing extreme financial stress and some looking like they will go into liquidation.
I do not want to focus on any one specific company nor will I examine or speculate as to the reason one company failed whilst another has, but I would like to share with you some thoughts about what we can take out of these collapses and how you can apply general concepts to your business and keep it afloat.
Background to current events
All the trouble on Wall Street goes back to an innovative product that allowed illiquid assets to be turned into a liquid asset, Collaterised Debt Obligations (CDOs). CDOs allowed any number of debts to be packaged up into bonds and sold to investors for cash today based on the expected future cash flows that the underlying debt held. The idea was fantastic and applied to a wide range of future cash flows including music concerts, credit card debts, utility bills and of course residential mortgages which had their own designation Residential Backed Mortgage Obligations (RBMO). The debts were packaged up and given a Rating from AAA all the way down to CCC. The rating indicated how likely it was to default, AAA the least likely and CCC likely to default.
Where it all went wrong was when the rating agencies failed to classify the risk of RBMOs properly, loans made to low income persons or unemployed people were given the same ratings as loans made to well to do employed persons. The theory behind it went along the lines of people will do anything to keep their home and traditionally there is a low rate of defaults on mortgages.
Lesson begins here
Where did the banks, brokers and insurance companies get it so wrong they face dissapearing leaving a trail of mess behind them? The are several aspects to the answer:
1. Improper risk management & Improper diversification
To understand risk management you first must define risk, risk is uncertainty and it is uncertainty in business that creates volatility in earnings and profits. It is good to take on some risk as this can lead to gains but you do not want so much of it that it can wipe you out. The job of risk management is assign the correct level of risk to your company so there is some upside risk but not a level that could wipe you out.
The level of collateralised debt obligations (CDOs) purchased were extremely high and disproportionate to other assets held. Though many of the CDOs held were of given a rating of investment grade (BBB) they were not actually as safe as they seemed. CDOs were not like other debt that was issued and could have been held. Risk management should have required proper diversification not only amongst credit ratings but the types of assets.
You are probably asking how does this apply to me and my business. The answer is every time you add a new line or enter into a new venture think about the risk you are taking on. Ask yourself does the venture offer more upside return than downside? Does entering into this new venture or taking on this new product have the potential to destroy my business if it fails? What and how much do I have to gain from this venture?
If you have answered that there is significant risk or it there is little upside but a great deal of risk it may be worth passing on. In the event that there is quite a lot of downside that could wipe out your business but the upside potential is so great your job is then to design a plan to isolate the risk and have a risk management plan on paper. Isolating the risk may involve legal structures, guarantees, binding agreement with the counterparty or implementing the deal in away that differs from how it was originally envisioned.
Make sure you control the risk, don't let it control you.
2. Failure to understand their products
A great deal of heart ache at present has been caused by the lack of understanding brokers, traders, asset managers and other players in the financial markets was caused by failure to understand the products they were dealing with. You may be saying to yourself in hindsight how could it be hard to understand simple loans resold to others. Unfortunately the way the loans were packaged is far more complex than how I described them above. The loans were packaged in a complex manner each had differing legal obligations associated with them.
All of this complexity gave rise to products that many intelligent people could not understand, did not take the time to understand or even convinced themselves that they understood the product. Once the ball started rolling and profits started to appear people stuck with what seemed to be working.
How does this apply to your business? Quite simply if there is a product or service you can add to your business but you don't understand it do not add it. If you are happy with your current business offering, think about why you want to change it and what it will add to your business. Your business in an investment you need to understand it and every part of your offering. Fads come and go maintaining your core business is more important than adding on aspects to your business you don't understand. Everyone else might be admiring the emperors new clothes but you don't have to be one. If it doesn't sound right to you let the opportunity pass and take up the next one you do.
3. Failure to understand their counterparties
Each bond had a counterparty, that is the person who issued it and owed the money to the bond holder. A large problem with CDOs was that it was not clear who the counterparty was. The complex packaging meant all to often you had to trace back through several parties to find out who actually held the asset that was going to produce the cash flows.
In your business know who you are dealing with; this will give you two clear advantages. Firstly you are able to tailor your offering to your client and adapt to changes as they require it. Second are able to access information about your counterparty. Information about your counterparty has far to many advantages to list but quite obviously you know who to contact to expand your offerings, who to issue legal proceedings against if you are required to do so and lastly you can atcually communicate with them without needing to go through intermediaries or volumes of legal documents.
As events unfold in the coming weeks and months more will be revealed and there will be more lessons to learn from these corporate failures. I look forward to sharing with you some thoughts to take away from this downturn and how you can improve your business during these turbulent times.
I do not want to focus on any one specific company nor will I examine or speculate as to the reason one company failed whilst another has, but I would like to share with you some thoughts about what we can take out of these collapses and how you can apply general concepts to your business and keep it afloat.
Background to current events
All the trouble on Wall Street goes back to an innovative product that allowed illiquid assets to be turned into a liquid asset, Collaterised Debt Obligations (CDOs). CDOs allowed any number of debts to be packaged up into bonds and sold to investors for cash today based on the expected future cash flows that the underlying debt held. The idea was fantastic and applied to a wide range of future cash flows including music concerts, credit card debts, utility bills and of course residential mortgages which had their own designation Residential Backed Mortgage Obligations (RBMO). The debts were packaged up and given a Rating from AAA all the way down to CCC. The rating indicated how likely it was to default, AAA the least likely and CCC likely to default.
Where it all went wrong was when the rating agencies failed to classify the risk of RBMOs properly, loans made to low income persons or unemployed people were given the same ratings as loans made to well to do employed persons. The theory behind it went along the lines of people will do anything to keep their home and traditionally there is a low rate of defaults on mortgages.
Lesson begins here
Where did the banks, brokers and insurance companies get it so wrong they face dissapearing leaving a trail of mess behind them? The are several aspects to the answer:
- Improper risk management & Improper diversification
- Failure to understand their products
- Failure to understand their counterparties
1. Improper risk management & Improper diversification
To understand risk management you first must define risk, risk is uncertainty and it is uncertainty in business that creates volatility in earnings and profits. It is good to take on some risk as this can lead to gains but you do not want so much of it that it can wipe you out. The job of risk management is assign the correct level of risk to your company so there is some upside risk but not a level that could wipe you out.
The level of collateralised debt obligations (CDOs) purchased were extremely high and disproportionate to other assets held. Though many of the CDOs held were of given a rating of investment grade (BBB) they were not actually as safe as they seemed. CDOs were not like other debt that was issued and could have been held. Risk management should have required proper diversification not only amongst credit ratings but the types of assets.
You are probably asking how does this apply to me and my business. The answer is every time you add a new line or enter into a new venture think about the risk you are taking on. Ask yourself does the venture offer more upside return than downside? Does entering into this new venture or taking on this new product have the potential to destroy my business if it fails? What and how much do I have to gain from this venture?
If you have answered that there is significant risk or it there is little upside but a great deal of risk it may be worth passing on. In the event that there is quite a lot of downside that could wipe out your business but the upside potential is so great your job is then to design a plan to isolate the risk and have a risk management plan on paper. Isolating the risk may involve legal structures, guarantees, binding agreement with the counterparty or implementing the deal in away that differs from how it was originally envisioned.
Make sure you control the risk, don't let it control you.
2. Failure to understand their products
A great deal of heart ache at present has been caused by the lack of understanding brokers, traders, asset managers and other players in the financial markets was caused by failure to understand the products they were dealing with. You may be saying to yourself in hindsight how could it be hard to understand simple loans resold to others. Unfortunately the way the loans were packaged is far more complex than how I described them above. The loans were packaged in a complex manner each had differing legal obligations associated with them.
All of this complexity gave rise to products that many intelligent people could not understand, did not take the time to understand or even convinced themselves that they understood the product. Once the ball started rolling and profits started to appear people stuck with what seemed to be working.
How does this apply to your business? Quite simply if there is a product or service you can add to your business but you don't understand it do not add it. If you are happy with your current business offering, think about why you want to change it and what it will add to your business. Your business in an investment you need to understand it and every part of your offering. Fads come and go maintaining your core business is more important than adding on aspects to your business you don't understand. Everyone else might be admiring the emperors new clothes but you don't have to be one. If it doesn't sound right to you let the opportunity pass and take up the next one you do.
3. Failure to understand their counterparties
Each bond had a counterparty, that is the person who issued it and owed the money to the bond holder. A large problem with CDOs was that it was not clear who the counterparty was. The complex packaging meant all to often you had to trace back through several parties to find out who actually held the asset that was going to produce the cash flows.
In your business know who you are dealing with; this will give you two clear advantages. Firstly you are able to tailor your offering to your client and adapt to changes as they require it. Second are able to access information about your counterparty. Information about your counterparty has far to many advantages to list but quite obviously you know who to contact to expand your offerings, who to issue legal proceedings against if you are required to do so and lastly you can atcually communicate with them without needing to go through intermediaries or volumes of legal documents.
As events unfold in the coming weeks and months more will be revealed and there will be more lessons to learn from these corporate failures. I look forward to sharing with you some thoughts to take away from this downturn and how you can improve your business during these turbulent times.
Company Health Check
You may have noticed there has been a general slow down in your businesses sales due to weakening in the economy and consumer confidence. This slow down may now be impacting your bottom line. Rather than ignore the impact it is having on your business take it as a timely reminder to take a better look at your accounts and check the impact it is currently having on your business and extrapolate the trend to see how it will look three, six, nine and twelve months from now.
Take a close look at your sales, inventory, gross margins, accounts receivable and payables.
Sales
Sales will tell you the story about how much your business is growing or slowing. Quantifying the change in sales will begin tell you where your business is going.
Inventory
Check the inventory and assess the ageing, if it is now moving significantly slower you may need to look at ways of decreasing your stock and reducing inventory purchases. Even if it has not slowed a great deal it is a good idea look at ways of improving your inventory turnover. Money tied up in inventory is cash that can be better deployed elsewhere in the business or earning you interest.
Gross Margins
Gross margins are going to tell you if you are making money and if you have cash for your expenses. If you are able to break this down by product line you will have a level of control and power to improve your business and keep it profitable. You may be expending a great deal of effort selling lines that are not bringing in the margins your require whilst another product you have been neglecting has fantastic margins that are worthy of your attention.
Accounts Receivable
The important thing to look at in your accounts receivable account is the balance and the ageing. As the economy slows accounts receivables collections slow too. Keeping check of outstanding debtors is extremely important especially where a single debtor constitutes a material amount of your business. If you are dependent on several key clients watch for changes in payment, if possible try diversify your client base. I have seen well run businesses with a good product fail when one client could no longer pay their debts, don't let this happen to your business.
If you are not having success in collecting a debt from a client and you are getting worried about collection consider either contacting your solicitor and issuing the debtor with a statutory demand (stat demand) or passing the debt to debt collector on a success fee basis. A stat demand can be issued where the value exceeds a set level which will vary depending in which country you reside. The stat demand requires the debtor to pay the debt, in the event they fail to pay they will come before the court and may be made bankrupt or put into liquidation.
Accounts Payable
Your accounts payable account will tell you a great deal about the health of your company even if you already have a feeling you are needing to stretch supplier terms. Prepare a creditor aging schedule and take a look at how long it is actually taking you to pay your creditors it may suprise you to see it quantified in terms of how many days creditors have been outstanding. If you notice you are having difficulty paying your debts and are having to stretch supplier terms it may be worth seeking professional assitance to improve your working capital.
If you revieve a stat demand DO NOT IGNORE IT speak to your solictor or accountant straight away. If you do not respond and take action to the stat demand a winding up appllication may be lodged and your company liquidated.
It is vital that you keep up to date with your statutory payments such as taxes and work place insurances. Failure to pay these may result in these organisations lodging and application to wind up your company as you are presumed to be insolvent. Keep up to date with them and seek external advice from a professional accountant if you are falling behind and unable to pay them. I have seen many companies fail as they assume they can pay other creditors ahead of the tax man with no repercussions; they were wrong.
Project your accounts
If you don't prepare budgets you should start. Budgeting will help you keep track of where you have been and how you are comparing to your projections. Most importantly preparing budgets will show you where are heading and should flag up times where you may experience difficulty paying debtors or collecting receivables.
If your budgets are showing you are going to experience trouble in a month or twos time take action now, do not wait for the date to come or fudge your projections to "make the numbers work". Create a plan of action, commit it to paper and put it into action as soon as you can. Inaction, failure to plan and address forthcoming challenges have taken down many companies.
I hope this has given you some ideas of what to look at in your company and inspired you to take action sooner rather than later. If things are looking like they are heading south and you can't see a way of improving your situation see a professional sooner rather than later. The small cost of seeing one today will be significantly less than letting the situation get worse or losing your livelihood through inaction.
Take a close look at your sales, inventory, gross margins, accounts receivable and payables.
Sales
Sales will tell you the story about how much your business is growing or slowing. Quantifying the change in sales will begin tell you where your business is going.
Inventory
Check the inventory and assess the ageing, if it is now moving significantly slower you may need to look at ways of decreasing your stock and reducing inventory purchases. Even if it has not slowed a great deal it is a good idea look at ways of improving your inventory turnover. Money tied up in inventory is cash that can be better deployed elsewhere in the business or earning you interest.
Gross Margins
Gross margins are going to tell you if you are making money and if you have cash for your expenses. If you are able to break this down by product line you will have a level of control and power to improve your business and keep it profitable. You may be expending a great deal of effort selling lines that are not bringing in the margins your require whilst another product you have been neglecting has fantastic margins that are worthy of your attention.
Accounts Receivable
The important thing to look at in your accounts receivable account is the balance and the ageing. As the economy slows accounts receivables collections slow too. Keeping check of outstanding debtors is extremely important especially where a single debtor constitutes a material amount of your business. If you are dependent on several key clients watch for changes in payment, if possible try diversify your client base. I have seen well run businesses with a good product fail when one client could no longer pay their debts, don't let this happen to your business.
If you are not having success in collecting a debt from a client and you are getting worried about collection consider either contacting your solicitor and issuing the debtor with a statutory demand (stat demand) or passing the debt to debt collector on a success fee basis. A stat demand can be issued where the value exceeds a set level which will vary depending in which country you reside. The stat demand requires the debtor to pay the debt, in the event they fail to pay they will come before the court and may be made bankrupt or put into liquidation.
Accounts Payable
Your accounts payable account will tell you a great deal about the health of your company even if you already have a feeling you are needing to stretch supplier terms. Prepare a creditor aging schedule and take a look at how long it is actually taking you to pay your creditors it may suprise you to see it quantified in terms of how many days creditors have been outstanding. If you notice you are having difficulty paying your debts and are having to stretch supplier terms it may be worth seeking professional assitance to improve your working capital.
If you revieve a stat demand DO NOT IGNORE IT speak to your solictor or accountant straight away. If you do not respond and take action to the stat demand a winding up appllication may be lodged and your company liquidated.
It is vital that you keep up to date with your statutory payments such as taxes and work place insurances. Failure to pay these may result in these organisations lodging and application to wind up your company as you are presumed to be insolvent. Keep up to date with them and seek external advice from a professional accountant if you are falling behind and unable to pay them. I have seen many companies fail as they assume they can pay other creditors ahead of the tax man with no repercussions; they were wrong.
Project your accounts
If you don't prepare budgets you should start. Budgeting will help you keep track of where you have been and how you are comparing to your projections. Most importantly preparing budgets will show you where are heading and should flag up times where you may experience difficulty paying debtors or collecting receivables.
If your budgets are showing you are going to experience trouble in a month or twos time take action now, do not wait for the date to come or fudge your projections to "make the numbers work". Create a plan of action, commit it to paper and put it into action as soon as you can. Inaction, failure to plan and address forthcoming challenges have taken down many companies.
I hope this has given you some ideas of what to look at in your company and inspired you to take action sooner rather than later. If things are looking like they are heading south and you can't see a way of improving your situation see a professional sooner rather than later. The small cost of seeing one today will be significantly less than letting the situation get worse or losing your livelihood through inaction.
14 September 2008
Welcome to Thoughts of a Corporate Undertaker
Corporate Undertakers more politely known as liquidators realise company assets once a company has entered into liquidation. I have been involved in restructuring and streamlining companies with turnovers of $50,000 through to tens of billions of dollars. In this blog I will share with you many lessons I have learnt from these liquidations and reorganisations that can help your business.
Liquidating companies is not as simple and as straight forward like the name would suggest. The part of the job that has given me insight to the causes of success and failure is that when we wind up the affairs of company we are required to investigate the causes of business failure.
The investigation shows why companies have failed and all to often how the directors of the company contributed to the companies failure. Their contribution to failure can be either through direct actions and misuse of company assets or caused by their inactions and failure to implement change as the company evolves.
I will be posting blogs that explore how to check your companies health, how to keep it health and what to do if its not looking healthy.
Liquidating companies is not as simple and as straight forward like the name would suggest. The part of the job that has given me insight to the causes of success and failure is that when we wind up the affairs of company we are required to investigate the causes of business failure.
The investigation shows why companies have failed and all to often how the directors of the company contributed to the companies failure. Their contribution to failure can be either through direct actions and misuse of company assets or caused by their inactions and failure to implement change as the company evolves.
I will be posting blogs that explore how to check your companies health, how to keep it health and what to do if its not looking healthy.
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