Wednesday, May 6, 2009

Federal Government Bank “Stress Test”; How will this affect small business?

We continue to hear about all the news surrounding the Federal Government stress test results that are due out tomorrow afternoon with a tremendous amount of speculation. In reading the preliminary news articles surrounding the release of information, I was surprised to find one of the banks a client deals with, 5th Third Bank, is likely one of the companies that will require additional capitalization. In reading that article, I forwarded a copy to the owners of the company to let them know that 5th Third was one of the banks. This news has created concerns and raised several questions in my mind. My concerns have created several unanswered questions; how will the bank raise capital? Could they re-call loans to raise capital? Will the banking relationship remain the same with small business or will this be the final straw that will put several small businesses out of business?

That has raised some concerns and questions with my client as they go through the process of renewing their line of credit for 2009 and 2010. I believe we have only begun to feel the effects of the "stress test" and I think we will be seeing additional efforts to pass the stress test down the line and will extend to the individual small businesses. Although I am not sure how the banks will raise additional capital I am confident that passing the same requirements on to business will be even more disastrous to our economy and we have yet to see the real impact of this recession on our economy.

Small business is the backbone of our economy, yet there are no government bailouts for small business. What will happen if a business fails a "stress test" and the bank says they need to raise more capital? Most businesses are forced to choose a banking relationship with one bank. So, if the company fails the stress test, where will they go to get more capital? Other banks are not going to be willing to hand out money to a business who has failed the stress test. Most businesses require loans to operate their business whether it is tied to an asset such as a vehicle or a line of credit tied to accounts receivable accounts. The reality in this day in age is the fact that trade credit forces companies to become the banker.

My client is financially strong, in business for more than 30 years, pays their bills in 30-45 days, but due to their client base have accounts receivable in excess of $1,000,000. This is a reality of business today. One customer, the most profitable, takes up to 120 days to pay. Some may suggest getting rid of that customer. But we are talking about Construction. We are talking about Construction activity in the state of Michigan. Not a lot to choose from. My client has even grown considerably over the past two years; but that growth has pushed the company to rely more on a line of credit than they ever have in the past. They are confident that payment will come through, but without a line of credit or a recall of a line of credit could put them out of business almost immediately.

So imagine how this "stress test" affects business. This company is growing in Michigan, top of the unemployment rolls, home of the automobile (you know, those guys filing for bankruptcy), employ about 75 people year round and have been in business for over 30 years. The business has experienced these cycles before, some years better than others, but the perfect credit storm is brewing. Even if a company is long standing, successful, doing well and providing jobs, the government stress test will surely have a ripple effect down to the backbone of our economy, small business. Those companies who manage their finances loosely and don't understand their business finances will surely feel the impact. The reality is the fact that banks will not be loaning money to those entities, and in effect put them out of business. We are talking about good, well established businesses. At a time when business needs credit the most, anxiety over what the impact of the stress test results is weighing heavily on my mind. How about you? What impact do you see? Where will we be without small business? BIG TROUBLE!!!

Wednesday, April 8, 2009

Part 1 - Can a profitable company go out of business? This was the very first question my instructor asked at the beginning of my first Finance class in my graduate program. He gave us a minute to think about it. The first answer that popped in my head is NO, a profitable company cannot go out of business. Well, I was wrong! The answer is YES, a profitable company CAN go out of business. It is simple business economics, but I guess the nerves had clouded my brain. If you don’t have any cash, but you are profitable on the books, then yes you can go out of business very quickly. Many businesses are unfortunately finding this out in real time with our economy is the way it is. In a way, I think this correction is good. We have taken for granted the good times that many of us have experienced over the past 30 years and the majority of business owners have failed to understand the basics of Finance. Many feel it is too hard. I sure thought that too. What turned out to be the most difficult subject of my graduate program, also turned out to be one of my specialties 4 years later. I love Finance. I really do. Some of you may think I am crazy, but that is okay, I have been accused of worse. Many of you may say, “But my Accountant told me this and I am okay”. Over 60% of business owners rely on their Accountants for Financial advice. But what are the Accountants using for their data when you get the financial advice? The information YOU GAVE THEM! The information is typically what you have already done. Accounting is really a historical representation of the status of your business in a space of time. So you fed your Accountant the information from the past month, they get back to you with a set of Financials and then you discuss how you are doing. This is the traditional approach to business. The major problem here is that by the time you get this information, your business has conducted another 60 days of business. What if a problem popped up along the way? How do you correct when it is something you did 60 days ago? You can’t. If it is a recurring problem, you likely just did it for another 60 days and the hole could be much deeper than it was. So if your books show that you were profitable, but didn’t collect the cash that you had assumed you had, you could be in trouble with no where to go. So how do you fix something like that?
Drinking a glass of energy drink that is actually good for you; take a look, I am not selling it, just sharing something that is good;http://ping.fm/9PIRU

Monday, April 6, 2009

Part 2 - Can a profitable company go out of business?

So how do you find out what your financial position will be in the future? How do you know you will have enough cash to survive? How do I know when I have to borrow money?

It is difficult to have answers to these questions, especially if you are operating more than a week behind today or even yesterday. But, you can change that!

All owners need to understand Finance. It doesn’t have to be complicated. You are putting yourself at risk if you don’t understand where your numbers come from because people may take advantage of you, employees, accountants anyone. You just don’t know who it could be because you don’t understand what you are looking for.

Finance people spend most of their time looking ahead

In Finance, we look ahead utilizing the history of your company for at least the past 3 years or longer if you have an unusually good or bad year in your averages. You are the owner, you are going to have a good feeling on what your costs are. Take the time, study them, and understand them. How do I study? When do I have time? How do I do it? I have more to come. See Part 3.
Part 1 - Can a profitable company go out of business?

This was the very first question my instructor asked at the beginning of my first Finance class in my graduate program. He gave us a minute to think about it. The first answer that popped in my head is NO, a profitable company cannot go out of business.

Well, I was wrong!

The answer is YES, a profitable company CAN go out of business. It is simple business economics, but I guess the nerves had clouded my brain. If you don’t have any cash, but you are profitable on the books, then yes you can go out of business very quickly.

Many businesses are unfortunately finding this out in real time with our economy is the way it is. In a way, I think this correction is good. We have taken for granted the good times that many of us have experienced over the past 30 years and the majority of business owners have failed to understand the basics of Finance. Many feel it is too hard. I sure thought that too. What turned out to be the most difficult subject of my graduate program, also turned out to be one of my specialties 4 years later. I love Finance. I really do. Some of you may think I am crazy, but that is okay, I have been accused of worse.

Many of you may say, “But my Accountant told me this and I am okay”. Over 60% of business owners rely on their Accountants for Financial advice. But what are the Accountants using for their data when you get the financial advice?

The information YOU GAVE THEM! The information is typically what you have already done. Accounting is really a historical representation of the status of your business in a space of time.

So you fed your Accountant the information from the past month, they get back to you with a set of Financials and then you discuss how you are doing. This is the traditional approach to business. The major problem here is that by the time you get this information, your business has conducted another 60 days of business.

What if a problem popped up along the way? How do you correct when it is something you did 60 days ago? You can’t. If it is a recurring problem, you likely just did it for another 60 days and the hole could be much deeper than it was. So if your books show that you were profitable, but didn’t collect the cash that you had assumed you had, you could be in trouble with no where to go. So how do you fix something like that?

Monday, March 30, 2009

Final Four, National Champions and Successful Businesses. What do they have in common?

The Final Four is coming to Michigan. I had no idea until today as I am not a very big follower of College basketball or any basketball for that matter, but it is my home state so I should have known. This will be a big boost for Detroit.

For me, the event is a reminder of the parallels between sports and business. Most people who follow sports or any team for that matter, recognizes the level of work it takes to run a team let alone the hardwork and determination to make it to the Final 4. Those who have made it to the Final 4 are the best at what they do. Some may say luck, but llooking deeper, I am sure you will find that preparations started last year at the end of the season.

The term systems in relation to business can be confusing to some. Most business owners in small to mid-sized businesses really don’t think of the team concept as a model for running their own business or draw any parallels to their favorite teams and bring the parallel back to their own business. If an owner did this, they would soon realize that the only way a coach can manage to get a team to the Final 4 is with the following;

Best people (players, coaches, support staff) + systems (the playbook) = National Championship.

According to Dictionary.com, one of the many definitions of a system is any formulated, regular, or special method or plan of procedure: a system of marking, numbering, or measuring; a winning system at bridge.

There is no way a coach of a team could book travel, arrange game schedules, scout, practice and play all five positions on the floor, yell at the refs and be National Champions, it is just physically not possible.

If you are a business owner, think of yourself as the Coach. Is it possible to be at the top of your game, doing things yourself, making all the arrangements and playing all of the positions? Many try it. I have, but the reality is if you are without the support staff and players in your business, at some point, you will fail. It may be your health, finances, a customer or something that you missed because you are trying to play all of the positions.

Systemizing your company is the playbook. Every Company should have a playbook for each of the 4 core functions of a business; Marketing, Finance, Operations and Management. It is possible to function as a coach by integrating systems in your business. You as the Owner can rely on others to perform even if you currently do everything yourself. Take the time to create your business playbook in these four areas. Your business and personal life will excel at a rate that you likely never thought possible.

Do you want your business to be the best, the Champions of your market? Consider systemizing your business, you won’t regret it. GO MICHIGAN STATE!
 

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