A Life In Numbers

You may have seen the Sequoia Capital slides doing the rounds amongst CEOs and Investors in the Private Equity world. They start with the bold statement “RIP Good Times” and take things downhill from there.

The overall conclusion is that there are some tough times ahead (no kidding!) and there are some fundamental actions that should be taken by companies to prepare for leaner markets. What struck me most about these actions is that the sensible companies have been taking these steps all along, whether times were good or bad.

The list including activities such as “perform situation analysis”. If you’ve not been figuring out where you are and what’s going on then it’s clear you may find the future a challenge. Another item was “adapt quickly”. Anyone in the SME world knows that this is essential in the early stages but it’s often forgotten as companies grow.

Other’s included were “become cashflow positive as soon as possible” and “spend every dollar as if it were your last”. These have long been the mantras for many successful entreprenuers.

The parts that many investors have latched onto are “make cuts” and “review salaries” and it’s always worth stepping back and looking objectively at the possibility for these. The challenge in this market is making sure that you cut in the right places and don’t harm your business more in the future.

If you haven’t been applying the rules listed in the action plan, then it’s likely you’ve been getting away with it due to the growth markets we’ve seen over the last 8 years. What you may now realise is that what you really need is the expertise to help you understand what you’re seeing and create a plan to make it better.

For many entrepreneurs, the apparent recession and crunch are just business as usual, facing the daily challenge of trying to find new customers in competitive markets and managing their cashflow as closely as possible. There are even opportunities in this type of market, as often competition can fall away and if you’re prepared and flexible new opportunities open up. It’s also possible to find new ways of doing things more effectively and efficiently.

There may be talk of this being a bigger, harder recession or downturn than we’ve had for a while, but these things all run on cycles. They’ve happened before and they’ll happen again. If you have any doubt then find yourself a copy of The Fourth Turning and see how many similarities you can spot in the current social, economic and financial markets. Other good cheery books for this market include The Great Crash by J K Galbraith and Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. They help put everything in perspective.

It is easy to get sucked into the bad news that the tv shows and newspapers like to promote. That’s their job and they’re very good at it. The worse it looks the more you tune in or read. By all means watch and read but you don’t have to believe it’s all true.

The key thing to remember is to step back occasionally and ask what’s really going on. Look past the doom and gloom and the same stories that get repeated over and over again to make things seem worse and seek out the opportunities. They’re there if you look for them and now’s the time when everyone else could be looking the other way. Join the few who can really prosper in this market. And prepare yourself for the good times that will inevitably rise again. And perhaps sooner than you think.

It’s good to see that there’s some consolidation in the market for part-time FDs. The recent merger of FDUK and FD Centre shows that there is more interest than ever in the use of flexible finance resources by large and small companies.

As the credit crunch bites and companies come under more pressure to manage their cash, more and more CEOs and MDs are finding that they have more than enough to occupy their time without having to look after the company finances too. Operations that could be handled in a growth market now become much more challenging. And it doesn’t take much of a shift in the finances of a business to take it from healthy and prospering to wounded and struggling.

The continued growth of companies providing the services of a part time FD or CFO, shows how a good management team can make a great decision when they bring on an experienced finance professional. And there’s lots of choice, from the independent providers to the multiple franchise services. And between those two there are specialist organisations, like us, which bring a very focussed service to their clients.

A recent survey showed that the majority of Finance Directors in the top UK companies are now being paid over £1m a year. And most good FDs in both public and private companies are now commanding salaries of over £100,000 a year. And those are being paid because of the value that they can bring to the companies. Of course not every one brings an equivalent value, but if you have the right person in the role then the worth they can bring will be many times their salary in terms of value created and costs saved.

For an SME, £100k or £1m is most likely a step too far, unless they’re very cash rich or extremely well backed. This is why the flexible and part time FD is becoming more popular. When you consider that a full time FD on a salary of £120,000 is going to cost you at least another £90,000 in bonus, pension, employment costs, NI and recruitment fees. Not to mention share options and notice payments. And after all that, they may not even stay if they get a better offer elsewhere. Also, they won’t be working on your finances all the time you’re paying them once you take into account holidays, sick leave, training, general downtime and all the time they spend getting drawn into matters other than finance.

So is a good FD worth the money? My friend Tony told me a recent survey said that 9 out of 10 of companies believe it is. And 100% of the top performing companies think so. When you consider a good FD can bring at least 10 times their cost in added value to the company then the answer becomes very clear. The biggest challenge for a business owner is really going to come down to the commitment to the cost and the risk that they may not need all the time, all at once.

Will we see a part time FD being paid £1m, like the ones in the top UK companies? If they can bring £10m of value then it still seems like a good deal. Would you pay £100,000 for someone worth £1m? It would be hard to see why not, if you could afford it. What’s it worth to see your business protected from ruin? What’s it worth to see your business sustained during a period of economic crisis? What’s it worth to have your business prepared for the growth that can be achieved both during the current climate and in the future? When you look at it this way, you can see why companies are turning to FDs they can trust.

And that’s why I believe we’ll continue to see significant growth in the flexible and part-time FD market. Because smart CEOs and MDs can see the value they bring. And they like the flexibility and advantage of having an independent resource that can be called upon when its needed and dialed down during the quiet periods. And that’s definitely worth something.

It seems the government are digging themselves a deeper hole by intervening in the Lloyds/HBOS deal. As the HBOS shareprice falls the Lloyds offer could look less and less attractive for the Lloyds shareholders (and a 75% shareholder approval is needed) and there could become a point where the shareholders force the board to renegotiate or walk away.

And what does the Government do then? If it allows the deal to fail then what are the repercussions? If they give concessions to Lloyds to support the deal (which could be guarantees, underwritin of bad debt, future tax breaks) then what message does that give to the rest of the market. Don’t worry about taking on higher risk business because if you’re big enough the state will bail you out. The government has got itself into a very difficult position either way.

In an entrepreneurial market, investors and entreprenuers understand that there is risk in building and running a business. The extent of that risk is not always fully appreciated but most entrepreneurs understand that if they take too many risks in the business then they can lose their business, income and jobs. Unfortunately, directors and investors are not always fully aware of all the risks they are taking on but that’s another matter.

Until recently, the same was true for big business as well as the SME market. Now it seems the game may have changed.

So where’s the safest place to be?

I believe the SME market remains the more resilient, if it’s well managed and controlled. The challenge for large companies is that, especially in financial services, the devolved responsibility and increasing complexity of some transactions can have a massive impact on the business. In AIG, there was a solid, dependable, traditional business that had traded successfully in the same way for many years. They were ultimately undone by a small department set up to trade in derivatives, that brought only a small amount of overall income but exposed the business to massively disproportionate amount of risk.

The coming months may see many more SMEs and even large businesses fail. For large companies it will be those that have strayed into markets, industries and businesses that they don’t understand and those who are slow to adapt and change. In the SME sector it will be those who are carrying too high a fixed cost base and those who are not managing their cash. It will also be those who are too reliant on the cash flow from a few large customers who will be looking to reduce their spend and squeeze their suppliers. Ironically, due to much of the legislation supposedly in place to protect employees many companies may have to close due to the fact that they can’t afford to continue or bear the costs of undertaking a redundancy round, especially with all the costs and employment tribunal risks that now go with it.

Unfortunately, for many of these companies, they won’t be bailed out by the government and they will simply be allowed to fail.

With all the issues in the financial sector, many savers are relying on the £35k guarantee over their savings held in personal bank accounts.

Many businesses, however, have considerably more than £35k in the bank and it seems that not even that would be covered because the guarantee only covers personal bank accounts.

We called a bank for one of our clients, to be told “no one’s asked that before” and “I’m sure there would be some kind of compensation scheme you could apply for but don’t worry we’ve got lots of money”. Not the most comforting of responses.

How long could your business last if your bank went bust and you couldn’t get access to your cash?

So is it time to turn the tables on your business bank manager (sorry, “relationship manager”) and start asking them for security? I look forward to the day when we start saying “I’d be happy to deposit our funds with you but we’ll need personal guarantees and covenants over your property and assets”.

With all the talk of the credit crunch and recession in the news, it’s easy to start to feel nervous about the future. Here are a few tips to make sure your business can ride out any rough waves.

1. Watch your cash closely - make cash and cashflow the priority in all your deals. You might be about to win the deal of your lifetime but if it means commiting serious cash and relying on income streams from the future you may not be around to enjoy it. Think about how you maximise cash in, and minimise cash out in everything you do.

2. Create reliable cashflow forecasts - make sure you know if things are going to get tough in the next few months so that you can prepare for them.

3. Look at where you’re spending and consider the value. Many companies gather a lot of little recurring costs and expenses along the way and they’re forgotten about. You can save a lot just by reviewing where your cash is going in the business.

4. Look closely at your working capital. In tough times, your customers will try and stretch out their payment terms and your suppliers will push for early payment. Keep to the contract terms and try and negotiate for improvements.

5. Credit check your customers. You don’t want to be caught out by a customer going bust while still owing you a chunk of money. Keep close tabs on any poor payers.

6. Review your marketing. Are you still using marketing messages designed for a fast growth boom market? Perhaps you need to reconsider the current economic climate and take a leaf out of the recent M&S “a meal for 2 for under £10″ campaign.

7. Watch your fixed costs. The hardest thing in a recession is to manage your unavoidable fixed costs. The longer you’re tied in, the less flexibility you have. Look at where you can improve flexibility in your expenditure.

8. Watch out for fraud. With rising fuel and living costs the temptation for staff to take a little extra increases. It certainly won’t be everyone but internal fraud is still one of the most common factors impacting business. You need to have strong controls and robust procedures to prevent losses.

9. Broaden your customer base. With the potential for companies to go under or reduce their spending, reliance on one or two large customers could be fatal for you if one of them fails or cuts back their purchases.

10. Look at your financing. As the market contracts, you need to be careful about breaching your banking covenants or finding that the facilities you were relying upon are no longer there. You cannot wait until you need the money to arrange new facilities and you must make sure that you have a Plan B in the event that your current lines of credit are squeezed.

It’s not the first time things have been rough in the economy and it won’t be the last. There are many companies that thrive and survive in these kind of markets whilst others go to the wall, so just make sure you’re in the right crowd by following these tips.

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