This side of things took a little longer than expected so they obtained an overdraft and a loan, signed up for a factoring deal and also borrowed personally to support the business, thus accumulating more overheads.
They signed up clients and delivered a good service and in positive months made a decent profit. The trouble was that there were also poor months: sometimes campaigns were delayed or there were problems and sometimes gaps between campaigns. And as a result of the large fixed costs such as staff, premises, servicing debt etc, these bad months overwhelmed the good months, and when they looked at the cash in the bank… there wasn’t enough money to pay directors wages again this month.
So they redoubled their efforts and worked even harder. A year on and they were facing exactly the same problems, just with higher debts; the same the following year and the year after that.
What was wrong?
When finally I got to meet them it was fairly clear that the business model was bust, you might think. No, not a bit of it: they had a new plan, a great business coach. They wanted me to deal with the personal debt whilst they sorted out the business. They were renting, having sold their properties long ago to put into the business, and were drawing very low salaries, if any at all. Thus they were in a strong position to get most of, perhaps all, of their unsecured debts written off.
Better or worse?
Fast forward six months. The strategy of writing off the personal unsecured debts was on track, unfortunately the business wasn’t. They decided they couldn’t afford the business coach and the last six months have turned out to be much like the last four years, only slightly worse. However, there were some wonderful contracts in the pipeline and though the deal wasn’t quite closed, the financial projections were very rosy. Things were difficult though: the directors hadn’t drawn a wage for three months and the VAT man was banging at the door.
I decided it was time for some home truths: of course I could have lost the clients, but I had to try. I suggested that the pattern was repeating itself and that in six months the profit would have slipped through their fingers. They are intelligent hard working people, they know their business, it was just that the business model was broken.
The truth
For a period, there was more denial and then the truth began to dawn: “We had to spend so long dealing with creditors, training our staff, or sorting things out when they mess up, it took longer than we expected to deliver campaigns. If we had done it ourselves there wouldn’t have been a problem”.
It was the moment I had been waiting for. I was then able to suggest looking at a business model where they would indeed do all the work themselves. We went back to first principles, they have good clients that liked their work: so for a time they could focus on delivery.
“Give up the business and keep it very simple. Work from home self-employed, do it all yourself, there’ll be virtually no overheads. Yes it is hard work, you will probably spend all day on the phones but you know you can do it, after all, what your clients buy is your expertise, nothing else.
If you have a turnover of £12,000 a month, rather that £12,000 in fixed costs and loan repayments which means you have earned zero, you’ve both earned at least £5,000. If you have a bad month and turnover is £5,000, rather than being £7,000 in the red, you will both have earned £2,000, and because your personal debts have been dealt with you can probably get by, even in your bad months.
The change
Roll forward 12 months, you’ve employed a decent business coach and you are exploring smarter ways of growing your business….or perhaps not. Perhaps you have a small group of clients who really value your work and you can increase your margins and reduce or eliminate the bad months. You now average £15,000 a month turnover, £12,000 profit. You might even decide to reduce further and concentrate on the highest value clients where your expertise is really respected. In three years time, it is still just the two of you with a part time admin person, but you work four days a week, take decent holidays, but earn the same”
I’m reminded of the old story told to me by a wise friend who had spent many years in Kenya. A development worker was talking to a farmer who just had a small field. The family lived very simply but seemed content, they didn’t have much, but they had enough. The farmer was sitting by his field in the shade of a tree doing not very much and watching the world go by.
The development worker tells the farmer he should get up and WORK. The farmer, being a polite fellow, listens. “Yes,” says the development worker, getting into his stride, “you should get up and get another field, and then another”. “And what do I do then?” asked the farmer politely. “Well, you employ people to plant the crops, to look after the crops, and to sell the crops. And then you buy another field and employ more people, and so on and so on.” “And what do I do then?” asked the farmer. “Well,” said the development worker, “then you can relax and sit under the tree and look at all you have achieved.” Perplexed, the farmer replied: “But I’m sitting relaxing under the tree now.” Even more perplexed, the development worker walked away scratching his head, trying to work out where he had gone wrong.
The farmer had sufficient margins from his field. It wasn’t much, but it was enough. Why risk taking on loans, employing people, getting stressed out, when he was fine as he was. I suspect that there are many small business people that could learn a thing or two from that Kenyan subsistence farmer.
Trimming the fat
Catie runs a small café in London’s East End. She used to have a much better business, she provided cakes to city firms. She was persuaded to take on a large loan and expand her business, unfortunately, just before the last recession. The first thing the city firms did was cut out the expensive cakes. Didn’t make the slight difference of course, but they felt they were tightening their belts. She lost her business, hence the small café she runs now.
Beware the disease of over- optimism, especially in the current economic climate. If you are thinking of re-mortgaging your home or taking a secured loan for your business or even signing a personal guarantee, think, think and think again, and maybe see a Cashflow Dr first!
Donald Findley has been providing solution for business for 20 years. Cashflow Dr and its sister company Debt Dr can help you cut your losses, organise a smooth and cost-effective exit and get you started again, or we can rebuild the business. We protect your assets, and help you sleep at night. Tel 08456 449 220
email: df@debtdr.co.uk
Website: www.cashflowdr.co.uk
