What do you want from 2012 – and how are you going to get it?

I think it is fair to say that, for many businesses, 2011 has not been the best of years.

The recession has been long and hard.  The recovery stills seems as distant and intangible as it did three years ago.  In fact, the experts are saying that likelihood of a ‘double dip’ has increased and may well start when the fall-out from a slow Christmas hit the economy.

However, what is certain is that just as every boom is followed by a recession, and every recession is followed by a boom.  In fact, it is widely predicted that the situation will begin to ease by the autumn, and 2012 will close on a better note than this year.  Speculation, I agree, but one thing I can guarantee is that whatever you are doing now will have to change.  To quote Anthony Robbins:

If you do what you’ve always done, you’ll get what you’ve always gotten!

I don’t know about you, but I want to get something different out of 2012 so I’m going to embrace change.  So, with 2012 rapidly approaching, I have some questions:

• Are you fit enough to ride out the second dip?
• Are you ready for the recovery that will follow?
• What are you going to do differently?

I guess for many of you, the answer depends on what is happening, or going to happen, in the world around us.

Well, here at ACF Associates we run a Business Bootcamp Program to help answer those questions.  It  starts with a diagnostic phase – “The Five Questions” – and follows into three modules – the “Three Cs of Business”.  Of the five questions, one of them asks the business owner/manager to complete a PEST analysis.

PEST Analysis Diagram

A PEST analysis is a great tool for understanding the bigger picture of our Political, Economic, Social and Technological environment.  As a result, a business can ensure that what it is doing is aligned with the changes that are affecting world around it. By taking advantage of change – rather than keeping our heads in the sand – we are all much more likely to be successful and can minimise the risks of being overtaken by events beyond our control.  Resulting in less stress and more success

In the past, a lot of SME owners and managers have said that such an analysis was a waste of time.  Something fit only for students and big business.  Well, times have changed.  Just take a look around at the dramatic changes that are happening around us and the benefits of understanding your environment will soon become clear.

These dark nights are a great time to do that strategic thinking you’ve always put off in the past.  With the Business Bootcamp Program you get a simple to understand, very effective, modular transformation program that encourages understanding and participation.  The vital benefits being:

• You know where you are
• You know where you are going
• You know what results to expect

So, if you want to know more about the Business Bootcamp Program, or download the pdf information sheet, then simply click here to visit the dedicated product page.

The Double-dip Failure Shortlist

I couldn’t help but notice that Mothercare is in the news again with the BBC headline Mothercare reports loss after weak UK sales  This time the business has posted a half-year loss of £81.4m, a like-for-like sales drop of 7%, and are launching a review of their UK business.

Back in January of this year when Mothercare issued a profits warning and attempted to blame the drop on poor weather and I commented their excuse was delusional

With the inevitability of a double-dip becoming even clearer – to those who didn’t know it all along – we have to wonder if Mothercare will survive if the usual peak trading at Christmas fails to deliver any comfort and joy?  Just recently their Chief Executive, Ben Gordon, fell on his sword and agreed to leave the business.  However, it may be his focus on building the export side of the business that actually keeps Mothercare afloat?

Shares in Mothercare are 140 compared 52week high of 604.11

Mothercare is just one of three major retail businesses that are on my ‘Double-dip-failure’ shortlist.  The other two that I see being at risk are Argos and HMV.

Back in October Home Retail Group, the parent company, announced a 70pc slump in first-half profit, with profitability at its Argos business collapsing as its cash-strapped shoppers felt the pain of the economic downturn.

In the ‘online vs high-street’ battle, the key advantage of a costly high-street presence is the ability of the customer to obtain good advice whilst getting up-close to the product.  The on-line model carries less cost but the shopping experience is more distant and impersonal. The Argos model, in combining the worst aspects of both models must surely be a risk.

Shares in Home Retail Group are 71.5p compared 52week high of 212.79

I’ve mentioned HMV on a number of occasions and, to be honest, I’m surprised they are still around. Back in June the group, having already issued four profit warnings, said that it made a profit before tax of just £2.6m in the 53 weeks to the end of April (£28.9m including profits from sold-off Waterstone’s and HMV Canada), compared with £67.3m last year. Like-for-like sales fell 11pc.

Now, HMV are banking on live music events and new technology to help turnaround its fortunes, but have they left it too late or is the business a dog?

Shares in HMV are now 4p compared 52week high of 46.18

So, will a combination of poor Christmas trading combined with the inevitable double-dip result in one or more major retailers going to the wall?

If so, then do you think it will be Mothercare, Argos or HMV? Or do you have another prime candidate?

Do you really need the cost and commitment of a full time finance director?

There is something has been bothering me for years now and, going by recent experience, it is still an issue.  I’ve seen it on far too many occasions and I’ve seen how damaging it is to small-to-medium businesses across the country.  It is crazy but it keeps happening over and over again.

What I’m talking about is the SME obsession with employing full-time finance staff.

Take an everyday new and entrepreneurial business.  The business is growing steadily – or maybe rapidly – and the owner begins to realise that the finance and accounting side needs to be managed properly.  So what does he or she do?  They decide to get an accountant.  Seems like a rational and sensible decision?

So why is it a recipe for disaster? Let me explain.

The business owner realises that the activities and responsibilities are quite wide-ranging but the volumes are relatively small.  In his or her head, the following conversation is taking place:

If I was ten times the size I would have a small team to do this.  Someone to manage the cash-book and post invoices, someone to create my management accounts, and someone else to deal with the bank and auditors.  However, I’m not there yet, so I’ll get just one person to do the lot!

So they pull together a one-size-fits-all job description that is one-third accounts assistant at £25k, one-third management accountant at £50k, and one-third finance director at £75k.  They then label it as ‘finance director’ and put it to the market at £50k per year.

What they end up with is an ambitious but inexperienced accountant who jumped at the chance to be a ‘finance director’ but spends their whole time operating in one of three modes:

1. Spending too much time out of their comfort zone dealing with banks, investors and auditors
2. Spending too much time buried in the detail of cashbook postings that they thought they had left behind
3. Or most likely, both of the above!

The end result is invariably a disaster and the key signs that it is all going wrong are often the following:

• Badly maintained ledgers
• Over complex spreadsheets
• Poor communication
• Missed deadlines
• Stakeholders getting uncomfortable
• Bitterness, negativity
• In some cases, fraud.

The two-stage answer is incredibly simple:

1. Get a part-time finance director
2. Combine his or her talents with either a scalable out-sourced finance resource, or internal right-sized talent, or a combination of the two.

It really is that simple – so why does this same old mistake keep happening?

The answer, as with so much, lies with the vested interests in maintaining the status quo:

• The recruitment industry really wants all businesses to employ a full-time finance director.  If businesses don’t, then the recruitment companies will get a smaller fee for the same effort.
• The finance industry really wants all businesses to employ a full-time finance director.  If businesses don’t, then all those finance directors will have to go part-time and they’d hate to lose the security.

If you – or a business acquaintance – is thinking of getting a one-size-fits-all internal finance resource then please, for the sake of your business, think again!

Today, a hero passed away

On the night of the 16th – 17th of January 1991, under the cover of darkness the first wave of Tornadoes took off from Bahrain International Airport on what was undoubtedly the most dangerous of all the Gulf War missions – the destruction of Iraqi airfields by low-level bombing using JP223 runway denial systems.  That morning as the planes returned to their base the world woke up to the news that Operation Desert Storm had started.  With these Tornadoes suffering the highest loss to mission ratio the missions were pulled after just six days but that night, that first flight into the unknown, was caught on film.  Some two decades later I’d like to share with you that moving and original footage:

Among the crew on that first mission was a young RAF officer by the name of Tony McGlone. Tony lived for flying – There was nothing else he wanted to do and no other dream to follow. From his first days as a cadet flying gliders to his last days training the pilots of tomorrow Tony loved nothing more than to take to the air.

Today, after a long and brave battle with cancer and still an officer in the RAF, Tony McGlone slipped the surly bonds of Earth. He leaves behind two beautiful daughters and a devoted wife – my sister Ruth.

Oh! I have slipped the surly bonds of Earth
And danced the skies on laughter-silvered wings;
Sunward I’ve climbed, and joined the tumbling mirth
Of sun-split clouds, — and done a hundred things
You have not dreamed of — wheeled and soared and swung
High in the sunlit silence. Hov’ring there,
I’ve chased the shouting wind along, and flung
My eager craft through footless halls of air. . . .

Up, up the long, delirious burning blue
I’ve topped the wind-swept heights with easy grace
Where never lark, or ever eagle flew —
And, while with silent, lifting mind I’ve trod
The high untrespassed sanctity of space,
Put out my hand, and touched the face of God.

— John Gillespie Magee, Jr

What about the cash, Duncan!

Like most people reading this, I’m a bit of a fan of Dragon’s Den.  So I was pleased to see that last night (October 3^rd) the BBC was running one of the spin-off programs – “How to Win in the Den”.  This particular episode featured, amongst others, Ling of Ling Car Leasing fame.

As I watched, I was rather taken aback when Duncan Bannatyne said something surprising:

“Turnover is vanity, profit is sanity”

He then continued…

“It’s profit that pays your mortgage, it is profit that you live on, it is profit that builds up your pension”

Sorry Duncan, but you’re wrong – profit does not pay the mortgage – cash pays the mortgage.  Turnover is vanity, profit is (sometimes) sanity but cash is reality.

This simple mistake from Duncan came as such a surprise.  Surely, cash is what The Den is all about?  A growing company can make good profits but the available cash is so often soaked up in expanding the working capital base – sometimes resulting in overtrading and collapse.  If profit did pay the bills then The Den would be a very quiet place as all those small-but-profitable businesses would not need to pitch for the money.

Later on, Duncan met Ling and she shared with him some accounting figures that were supposed to show that he would have got back his investment.  This time, Duncan redeemed himself to a degree.  As Duncan pointed out, the profits would not have flowed back to the investor as the business would not have been able to pay the dividends.  At least this time he was recognising that he wouldn’t have got a return as the business would not have been able to convert it’s profits into cash.

However, Duncan could have gone further and explained that an investor’s return generally comes from the profit on the business, not the profit in the business.  For an investor, the real return comes at the end of the 3-5 year plan.  It isn’t the relativly small amount that can be extracted year-by-year that is of interest but the much larger lump sum that comes when the investment is liquidated upon exit.  Going back to the point about mortgages, it goes like this:

• Profit – Gets you a mortgage
• Cashflow – Pays your mortgage
• Business exit – Pays off your mortgage

So, the lesson for all entrepreneurs is this:

• Start with a business that makes a profit.
• Run it with a strict focus on cash.
• Develop your strategy around your exit valuation.

Come on Duncan, Cash is King – and the exit plan is the holy grail!

Managing Differed Consideration in Corporate Finance Transactions

I attended an interesting Corporate Finance Workshop yesterday (the 27th September) run by Roffe Swayne as part of a Surrey Chamber of Commerce monthly series.

The Title was ‘The Corporate Finance Transaction – Unplugged’ – a presentation and discussion around the various issues that arise before, during and after a corporate finance transaction, and was chaired by Kate Hart and Matt Katz.

One of the subjects that came up was the issue of differed consideration contingent of the future performance of the business. It is very common practice to have a large part of the sale proceeds deferred and it is usual for the sum to be based on the future business profits. The opinion of the room was that it is quite a challenge to ensure that the future business performance can be fairly defined and measured from the vendor’s perspective.

However, as any decent accountant will tell you, a P&L is easy to manipulate – particularly in a downward direction. Chuck in some restructuring costs one year, blend in some asset write-downs the next, apply a liberal sprinkling of provision accruals – next thing you know the deferred payment has all but disappeared.

Many delegates were of the opinion that the vendor should ‘manage their expectations’ and assume that there would be a significant shortfall in the future payments. At least one admitted that he had advised a client to assume that it would be zero.

My own take is that it is important for the vendor to understand that the business that is being sold is not the business that is being purchased.

The purchaser will, it is hoped, want to take the business forwards into new markets and launch new products. If this isn’t the plan, then the vendor has done a very poor job of preparing the business for sale and will more than likely be getting a very poor offer.

However, here is the double-edged sword.

The irony is that the better a job the vendor has done of creating a scalable business that can attract a high multiple upon sale – the easier it will be for the purchaser to manipulate the P&L to reduce the future consideration.

It isn’t unusual for a vendor to purchase a business in order to obtain the brand, distribution and market penetration – and to then to use these strategic assets to leverage their own existing products. In some cases the ongoing products from the original business may even be dropped. A poorly advised vendor may find them selves with their deferred consideration based on the profit from a product that has sidelined whilst the purchaser has transformed the combined business by leveraging the brand loyalty.

The lesson is three fold:

First of all, if you are thinking of selling your business make sure you are getting professional advice.

Second: be very careful to understand your purchaser’s motivations for acquisition so that you can structure your deferred consideration in an appropriate way.

Third: Do not assume that you will get all, or even the majority, of your deferred consideration.

Sightpath – Success comes to those who plan for it

Right now I’m in the middle of reading a great book by a friend of mine; Robert Copping: The Heart of Business Success – How to overcome the Catch-22s of growing your business  It is available from Amazon right here

In the book Robert explains that there are three key Catch-22s that collectively conspire against the entrepreneur and contribute to the high rate of business failure.  They are as follows:

The Entry Catch-22 – Achieving first base:

To grow to the first Stability Step requires funding – yet funding is only available to business that have already achieved the first Stability Step

The Growth Catch-22 – Balancing Growth:

Your level of funding dictates your growth gradient and hence your future earnings – yet it is future earnings that will define the level of funding worth investing.

The Exit Catch-22 – Financing ambition:

Your desired exit valuation requires a level of funding – yet the level of funding increases the exit valuation you require.

Robert states that in order to be successful you need to break into the circularity of these three Catch-22s and overcome them.  He then shows how this can be done through the implementation of a solid and professional business plan.

However, as many Excel experts will tell you, this isn’t something that can be done with spreadsheets – which are notoriously bad at circular arguments.  Spreadsheets models are also very prone to input errors and far too easy to break.  I know – I’ve broken a few! So, what does Robert suggest?

His answer is to use Sightpath.

The Sightpath Business Planning Service is far more effective than the ‘do it yourself’ option yet far more affordable than the alternative option of engaging a consultant.  As Robert mentions on the Sightpath website:

You tell us about your business (or your business idea) – i.e. your customers and your products or services and about your ambitions for the business.

We’ll model it using our unique business planning system to generate a business plan with a growth gradient that best suits your specific situation.

We use a 3-stage process for Business Planning:

1. Model it – Create a model of the business that links the 3 critical ‘C’s: Customers, Capacity and Cash. At this stage there is no scale to the plan.
2. Balance it – Balance the scale of your ambition and funding to specify a Strategic Objective(s) and generate a Growth Gradient
3. Sense check it – Check the plan makes sense compared with the scale of the market and conduct a Sensitivity Analysis.

Our system will calculate the maximum Cash Requirement to reach your ambitions and we’ll help you decide how best to cover it.

We will process all the numbers you need for your business plan – from Customers through to Cash flow. Our process works on marketing and finance as part of the same process.

Find out more:

I am really excited that Robert has agreed to let me licence the product from him so that, as an official Sightpath Business Catalyst, I can offer this service to my clients. If this is of interest to you – and if you have any type of business then it really should be – then you can find out a bit more by clicking here or simply get in touch by email or phone.

Crowdfunding – Success or Failure?

First of all, congratulations to Sue Acton at Bubble & Balm.  Sue has successfully raised her full £75k target through Crowdcube.  It is a brilliant achievement.

To quote Crowdcube founder, Darren Westlake:

“In the current climate with banks being risk averse, we are thrilled that Bubble & Balm has succeeded in getting vital growth investment.”

Furthermore, Darren believes that this marks a

“significant moment in the history of small business finance in Britain”.

So a massive achievement for both Bubble & Balm and Crowdcube.

Or is it?

I’ve taken a moment to extract some numbers from the Crowdcube website and, to be honest, they don’t make pretty reading:

On the day that I ran the numbers – 24^th July 2011 – there were nineteen pitches on the Crowdcube website.  Of these, I would only consider two of them to be a success.  The first being Bubble & Balm and the second being the Personal Development Bureau who have so far raised 43% of their target.

Looking at the remaining seventeen pitches, the average investment target is £86,765 and the average investment raised so far is £635 – 0.7% of the target – from an average of 9 investors – that is £57 from each investor.

Now, each company that attempts to raise money through Crowdcube has 180 days to reach its target.  The average age of the seventeen pitches is 123 days.  So, they have taken 68% of the allowed time to raise 0.7% of the target funding.

Going into more detail; twelve of the seventeen have not even reached 1% yet.  Furthermore, the five oldest of the seventeen – all of which are more than 90% of the way through their allotted time – have raised a total of £6,920 out of a combined target of 280k, which is an achievement of 2.5%

Of the five oldest – who have raised £6,920 – one pitch has raised £4,570 and another has reached £1,450.  So out of the seventeen, fifteen have not yet achieved £1,000 in funding.

So what does this tell us?

Is this saying that crowdfunding doesn’t work?

Or is it saying that nine-out-of-ten start-ups are based on ideas and business models that just don’t stack up?

Do start-ups need more financial support or do they need more reality checks?

Meet The Cash Coach…

‘Turnover is vanity, profit is sanity, but cash is reality’

I’m guessing that you’ve heard this phrase before – but what does it mean in the real world:

Well, I’ve seen too many businesses spending their time chasing low-margin orders, giving larger discounts, extending terms – all in the misguided belief that such activities would save their business.

And any accountant can make your profits look good.  Just don’t look too closely as they wave their magic over ’accruals and prepayments’ etc. – all in the misguided belief that a profit, however small, means you’re succeeding.

But the sale isn’t done until the customer pays, and you can’t hide losses on the balance sheet forever.  The cash runs out, the salesman and the accountant get their bonuses, but the bank gets the house.

I’ve seen situations like this all too often.  I have dragged businesses back from the abyss.  The secret – as always – is in the cash.

All this can be avoided with a bit of Cash Flow Kung Fu.

If you want to know more then click here to read on…

Be careful out there!

The other day the phone rang – it was HMRC

It turned out that they had the wrong number.  The number they had was our number but we’d never heard of the business they wanted to discuss.  Of course, data protection acts etc. meant that they couldn’t give us any more details apart from the desired company name and our phone number.

However, I was intrigued.  I’d hate to think that there was a chance that someone had given HMRC our number as it could, possibly, become a hassle.  So I thought I’d spend five minutes on the internet.

• Within a few seconds the Companies House online service had confirmed the existence of the business in question…
• It also mentioned a London Gazette entry – Interesting…
• It also gave me the name of the director…
• A few seconds later I found him on LinkedIn…
• So I now have a picture of him…
• It also told me of another business in which he is currently involved…
• The website of that business gave me an address…
• Then 192.com confirmed that the electoral roll had him resident at that address…
• It also gave me his wife’s name…
• Then the online planning office gave me the floor plan of his home.

Within a few moments this quick experiment had given me a scary amount of personal data.  All available free-off-charge for a few moments work on the internet.  It was quite an eye-opener and a reminder that it isn’t easy to stay private or ‘off grid’ these days.

Is it too easy to get such information, and more restrictions should be in place? Or is it up to individuals to take more care about what they publish?

Be careful out there!