Category Archives: Finance

Managing risk

 

Some time ago I hosted an event for the Oxfordshire International Business Club where we were talking about doing business – or trying to do business – in China and Asia.

It is a massive subject, with a tremendous opportunity matched by high levels of risk. Not something to consider for anyone whose resources are already stretched!

One topic that almost always comes up is how do we manage the money – how do I get paid for the goods I have sold, or how do I pay for the goods that are being shipped.

There are quite a few ways of managing those risks, using the banking system so that you are not releasing payment for the goods until you have inspected them, or if you are selling only doing so against a letter of credit – a promise to pay – where you will get the money if you meet the conditions in the LC.

Often overlooked in the planning stage is the currency risk.

Currencies move against each other all the time, and a RMB today is not worth in GBP what it was yesterday – or even last second. It could be worth more, or less.

The usual way of managing that risk is to use a derivative (before you panic about banking crises they are not all bad) to fix the exchange rate. You know that in 3 months you will have to pay 10,000 of a particular currency, so you can go to your bank and buy the 10,000 now so that you’ve secured the funds at today’s exchange rate. It is a little more complicated – you don’t actually buy the 10,000, you buy a derivative – the right to buy the 10,000 at today’s rate in 3 months time. You will pay for the derivative but you have reduced your currency exposure.

A different way of managing exchange risk is to reduce it.

I was responsible for a business that had part of its revenues in EUR. We operated in GBP so that we had an exchange risk on the Euro sales. Before my time, we’d agreed some supply arrangements with another business in the Eurozone, and eliminated the exchange risk to us by agreeing a price in GBP. Changing that agreement so that we bought in EUR rather than GDP reduced our overall risk – and we were able to reduce the price per unit from the supplier as we were taking on his currency risk.

If you are trading in more than one currency, don’t just hedge everything. Look for opportunities to balance your supply side and sales side currency exposure.

I call that Natural Hedging

 

Make it easy for your customers to pay you

 

One thing that I often see in businesses of all shapes and sizes is a focus on the profit and loss account, or income statement, with not enough attention paid to the balance sheet. There may be hidden money in your balance sheet that you can use!

Do you pride yourself on paying all your suppliers on time, but find your customers don’t pay you on time? You are not alone!

** Make it easy for your customer to pay you
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One business I advised had succeeded in winning business in the Ukraine, and this was turning into a significant opportunity. The sales team were getting very excited!

The finance team were getting worried – payments were erratic, and very slow.

The Ukrainian government had imposed currency controls – you could not pay in “hryvnia” outside the Ukraine, and to pay in US Dollars you needed to get finance ministry approval for each payment.

That wasn’t easy for our customers, and was hampering our business growth. We established a subsidiary company in the Ukraine, so our local customers could pay us in the local currency. Business boomed and the customers were paying much more frequently.

Now, that’s an extreme example, but how easy do you make it for your customers to do business with you, and how easy do you make it for them to pay you? I’m just asking!

 

Newsnight & the Flowers interview – where were the regulators?

Watching Paul Flowers, the ex-chairman of the Co-Op bank, being grilled by Paxman on Newsnight last night, I wondered again how on earth he was ever approved to chair a bank.

 

It is bad enough that the co-op groups internal appointment process unanimously selected Mr Flowers (just how unqualified were the other candidates?) but then he was interviewed by the regulators and approved by them as well.

I’m reminded that amongst all the fury at the banking industry and the vilification of anyone even remotely connected to the banks, the regulators seem to have escaped all consequences and most of the blame. How is this possible?

Where were the regulators?

Perhaps this is unconnected, but I noted that the past chairman of the FSA, Hector Sants, took up a post in Jan 2013 with Barclays as Head of Compliance and Government and Regulatory Relations. By October 2013 he was suffering from “exhaustion and stress” and in November 2103 he resigned.

Do you have any faith in the regulators ability to prevent future crises?

 

 

 

Peer to Peer lending in the news – do you have a hook?

There’s been quite a bit of news this week around Peer to Peer funding and the most recent success stories. In case you missed it, a property developer has raised something over £4m for a project in Croydon – you can read more here.

Peer to peer funding or crowd funding are a real change from the traditional financing models, but they may not be appropriate for your business financing needs.

The fundamental change is that in P2P or Crowd funding, it is a many to one relationship and your project is competing with many others to be visible and to attract investors.

If your project is something that is easily understood, or has name recognition, or is quirky enough, then you may be able to get funding through the peer to peer route.

If that’s not the case, getting funding through the traditional routes may be more appropriate.

Think how you could market your project or business to investors; is there a “hook” you could use?

 

So you want to buy the business you work for?

Many people dream of running their own business and sometimes you’ll be in a position to think about buying the business you work in.

There’s a whole raft of things to think about along the way but here are a few to consider.

If you are successful in buying the business, that’s just the start. What are you going to do with it, and do you have the skills, knowledge and experience to successfully run the business? One way to think about that is to write down all the functions, then assign names to them from your team. You might want to get the existing owner to do the same thing; there may be some surprises for you!

Do a SWOT analysis on your team; be prepared to hire the skills you don’t have in-house

As an employee, working for the owner, you have an established relationship.  If you are going to make an approach to buy the business, you will change that relationship. There’s a risk that if you make an approach, and it does not work out (for whatever reason) you will not be able to continue in your role.

To minimise this risk, make the approach very carefully and be as subtle as you can. Be prepared to take your time and give the owner time to adapt to your suggestion.

Money matters. The chances are that you cannot pay as much for the business as a third party, with deeper pockets, can afford. Be open with the owner about your finances, and be prepared to go “all-in”. That may mean putting your house on the line, risking your pension…is your partner or family prepared to take the risk?

For the existing owner, there are a number of benefits to selling to the team and you’ll need to emphasise them. You probably cannot compete on price, so compete on the emotional appeal of looking after the business and the team. There’s also the avoidance of a protracted sale process involved in the sale to a trade buyer.

Get help early on to advise you; there may be more sources of funds available than you realise, and the conversations with the owner may be more fruitful if both sides can express opinions untainted by the (probably many years) experience of working together.

Is it Christmas yet?

Every year all the children get excited because Christmas is coming, but all the retailers get stressed because Christmas is their busiest time of the year.

In the US their busy period is from Black Friday (the day after Thanksgiving) through to Christmas.

Wikipedia tells me the name comes from the appearance of the crowds that thronged the streets of Philadelphia but the popular myth is that it is when the retail chains move into the black (into profit) for the first time since January. Don’t tell anyone, but the smart retailers make money all year round, not just in the last few weeks of the year. The dumber ones go broke in January & February when the rent bill falls due.

Is your business seasonal? Is there a distinct pattern to your sales, so that you know that some part of the year will be quieter than another? Do you look for the pattern?

Seasonality is common in many business sectors, with summer holidays and the Christmas break affecting many, but if your business is seasonal you have three choices:

A.      Match your resources and investment to the pattern of your sales. Some businesses do this through the use of temporary staff (Retailers at Christmas is a classic example of this)

B.      Use the quiet period to do jobs that have been put off from the busy period (common in the agricultural sector, and in some parts of the building trade)

C.      Find something else to fill in the gaps

One of my clients is a florist, and their seasonality is weekly, or rather at the weekends. Everyone wants to get married at the weekend!
We’ve made a deliberate decision to target other markets, moving away from weekend work to jobs that can be done between Monday and Friday, balancing out the workload across the week. It will never be perfect, but where doubling the size of the wedding floristry would require a doubling of the team, we can double the size of the business during the week just by utilising the existing team & giving them a few more hours.

Big swings in sales lead to big swings in cash flow, big swings in cash flow stress the business (and the owner) sometimes to breaking point. If your business is very seasonal, that’s not a good place to be. Remember that more businesses fail from cash flow problems than anything else.

Find another market, or another product to sell to smooth out that seasonality.

A colleague helped a client whose business was entirely winter seasonal; they bought a business that equally seasonal, but in the summer.

The same is true of orders and projects. If all you do is very large projects, sooner or later one will go wrong or be delayed & deferred. Lots of little project to fill in the gaps are a really good idea.

The best sales graph is one that has a smooth upward curve – how can you smooth out your sales?

Strategy or Tactics?

Many business advisors bandy around the words “strategic” and “tactical” but for me, the only real difference is the timeframe.

There will be times when you have to take a decision to solve today’s problem, but it comes back to haunt you at a later date.

It’s a bit like buying something you can’t really afford on a credit card. If you are not careful, you end up paying for it twice over (or more) by the time you’ve paid the interest.

A client of mine has been approached to sell his business, and I am helping him through the process and we are providing information to the buyer.

One piece of (quite important) information is the share structure and ownership of the business.  The MD and his wife are the majority owners, but two key employees (Nick & Bob) were given a small shareholding many years ago.

When the MD declared the shareholding, he included Nick & Bob as owning 5% of the business each, but when I looked at the accounts there were far more shares that he had declared.

Several years ago, when bidding for a large contract, a director’s loan was converted into share capital so that the business could obtain finance. 

The MD had forgotten all about that transaction. It had to be done at the time, his money was already committed to the business, and it didn’t matter to him.

But Nick & Bob don’t own 5% of the company each, they own 0.05%.

This business will sell for about 5 million pounds; Nick & Bob will receive a few thousand pounds instead of the £250k they would be entitled if they still owned the 5%.

If my client wants to do the honourable thing and give Nick & Bob the difference (I am sure he will) then taking into account the various tax implications he will be about 500k worse off.*

If, after taking the undoubtedly short term decision to convert that loan to share capital, the MD had thought through the implications for Bob & Nick in the longer term, there would have been a way to make sure they still had the 5% he had promised them.

So when the answer to the short term problem is obvious, and you just get on and do it, try to take a step back every so often & ask yourself the question

 “How will that affect me / us / the business in 3 years’ time?

*(Now I think I have a solution for this problem – I just need the corporate lawyer to check)

Business Valuation

Valuing a business is much more of an art form than a science, simply because value, like beauty is in the eye of the beholder.

A business that has immense value to one potential buyer may have very little value, or attraction, to another.

Your business manufactures and sells blue widgets. Your competition only has yellow widgets.

If the prospective buyer doesn’t care what colour the widget is, the two businesses can be directly compared, but if the buyer only wants blue widgets, your business is worth far more than the manufacturer of yellow widgets!

The over-riding principle is that in 90% of cases a business is bought for the future profits it will make, and the valuation calculation is an attempt to place a value on those future profits.

The other 10% of business purchases are for bought for lifestyle choices, a passion or an interest (think football clubs) or for egotistical purposes.

There are many different technical tools and calculations used to try and estimate value, but the real challenge is to identify the right strategic buyer and see the business from their perspective.

 

How easy is it for your customer to pay you?

One business I advised had succeeded in winning business in the Ukraine, and this was turning into a significant opportunity. The sales team were getting very excited!
The finance team were getting worried – payments were erratic, and very slow.

The Ukrainian government had imposed currency controls – you could not pay in “hryvnia” outside the Ukraine, and to pay in US Dollars you needed to get finance ministry approval for each payment.
That wasn’t easy for our customers, and was hampering our business growth. We established a subsidiary company in the Ukraine, so our local customers could pay us in the local currency. Business boomed and the customers were paying much more frequently.
Have you ever tried to buy something on-line, and noticed that your preferred payment method isn’t available? I’ve certainly gone elsewhere when that has happened to me.

Another client was having trouble collecting money from his US customers. We worked with the banks, and setup a special account, in the US, to take wire transfers from US customers. They didn’t have to make international payments….

How easy do you make it for your customers to do business with you, and how easy do you make it for them to pay you?