The Bank of Canada rate went up Wednesday from 0.50% to 0.75%.
OMG!!! That’s a 50% increase!
Well technically yes, but in reality no.
The rate is essentially a basis for the banks to raise their rates by the same 0.25%. So if your current Line of Credit or variable rate mortgage is at 2.75% it may soon be going to 3.0%. That’s still a 7.5% increase in interest payments and may have a painful on cash flow, if you’re currently very tight. On a loan balance of $300,000 it means an additional $62.50 in interest charges per month.
More importantly, it’s an indicator of interest rates rising from the bottom (0.50% in Canada since 2015) and following the US Federal Reserve lead of last year.
Have you done a stress test?
Are you heavily leveraged because debt has been so cheap? It’s easy to justify new investments if your ROI only has to beat a borrowing cost of 2.75%. At the more normal rates of 5% - 6%, there is less margin for under-performance on assets.
Try calculating the impact of higher rates on your cash flow. It may be time to de-leverage and start building cash reserves.
The Bank of Canada is trying to reduce the risk of high inflation by slowing growth in the economy. You are expected to take the hint. And if the interest rate is not enough to convince you, you will notice that higher rates also mean a higher value Canadian dollar, so exports will now be more difficult. Your import and foreign exchange costs will go down. (There had to be some good news in all of this.)
Be aware of what it all means to you and your business. It is not yet urgent, but it is important. Take a closer look and start cautious application of surplus cash to reducing debt. Be more selective on new investments and in commitments to any new recurring expenses.
Be better. Do better.
Your Uncle Ralph,Del Chatterson
Visit LearningEntrepreneurship.com or contact DirectTech Solutions at www.DirectTech.ca for assistance on your strategic business issues, growth and profit improvement plans or your exit strategies.
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Most entrepreneurs and business owners regularly monitor a few key numbers – sales, profit margins, operating expenses and the bottom line. All easy to understand and regularly reported.
But it is not enough, if you want to be a top performer in your industry. You need to dig deeper to more quickly recognize growing problems and exploit competitive advantages.
Managing by the numbers is a requirement at all stages of running a business. From the initial business plan on start-up, through the performance challenges of growing a sustainable business to the final valuation on exit. Managing the numbers requires monitoring and comparing: to your goals and objectives, to past performance in the business, and to industry benchmarks for the average and for the outstanding competitors.
And it is not just the obvious financial ratios: profit margins, debt ratios, asset turnover, but especially those that are particular to your industry. Maybe that is revenue per engineer, turnover per tabletop, scrap per square millimeter, or per cent billable hours. You may have your own secret formula, but the industry, your banker, investors and future owners will have expectations based on industry benchmarks and will decide on what reflects good or bad management. Be sure to keep score on yourself before someone else lets you know how you are really doing.
From start to finish, monitor and manage the key variables that will determine your long-term business performance.
Be better. Do better.
Your Uncle Ralph,Del Chatterson
Contact DirectTech Solutions at www.DirectTech.ca for consulting assistance on your strategic business issues, growth and profit improvement plans or your exit strategies.
Join our mailing list at LearningEntrepreneurship.com for ideas, information and inspiration for entrepreneurs.
Click Here to check out Uncle Ralph’s books, "Don't Do It the Hard Way" and "The Complete Do-It-Yourself Guide to Business Plans" Both are available online or at your favourite bookstore in hard cover, paperback or e-book.
This article is an extract from Uncle Ralph's, "Don't Do It the Hard Way" and the advice on managing your banking relationship is always relevant. Read the book.
Is your Bank a Welcome and Willing Partner in your Business?
If not, then you need to make changes.
Entrepreneurs are usually quick to agree that banks are an obstacle to their success, rather than a key supporter. Most business owners certainly do not consider their bankers as welcome and willing partners in their business.
Yet it is an important relationship that will often affect your ability to grow and to survive periods of financial stress. It may very well be your most important strategic partnership. So give your banker the same priority and attention as your best customer. You do not want to have them become your worst supplier. If they are; then something needs to change.
Working with your bank as an unwilling and unwelcome partner can be a destructive distraction from managing business growth and profitability.
My recommendations for a more effective partnership with your banker are built on understanding the following key principles of that relationship:
1. They will not get it.
Start by accepting that your bankers will never fully understand what you do for a living - your motivation, your challenges or your circumstances. But you do have to try to get them to understand enough about you and your business operations so that they can be confident that working with you will be good for them.
Remember the bank's primary role is not to lend you money; it's to earn a return on their investment for their shareholders and limit the risk of losing money.
2. It's only for the money.
You will need to prove that the money is all you need; because you have looked after everything else.
The banker does not want to worry about your customers, your management team, your sales and marketing efforts, your operating efficiencies, your health, your marriage or anything else except the financial services you need.
3. They have a checklist.
When you meet and fill in the forms, remember the banker wants to be satisfied on these five criteria:
Character – do you have a reputation of integrity and responsibility on prior financial obligations?
Capital – do you have enough invested in your business to be personally at risk?
Capacity – do you have good potential to support the cash flow requirements?
Collateral – if you cannot repay your loans, what assets are available to cover them?
Conditions – is your industry in good economic condition or in a downturn?
Good answers on these points will provide the start to a good relationship with a confident and willing partner instead of tentative support from a cautious and reluctant partner.
4. Reduce the risk.
You may be stimulated by risk and reward; your banker is not. Banking is a very conservative career choice. Regardless of how good you and your plans are, the banker will still want personal guarantees. That means he gets your house if you fail. (Note: I have never met a banker who found it amusing to suggest that you should get his house if you succeed.)
5. Think big.
The more you need, the more interested they'll be and you'll likely get better terms. (The only time I had no personal guarantees was when the loans were up to $4.8 million.) So, if you're starting small, be sure to describe your growth plans and your intention to build a strong, long-term banking relationship.
6. Get a second opinion.
Bankers love to win business away from other banks. That is good for their careers. (That’s how we got the $4.8 million with favourable terms.) So check out the competition anytime you need new financing or your current bank is not serving you well.
Just be sincere and be ready to change. One banker asked me directly, "If I meet all your requests will you move to my bank?" I said, "Yes". Then he delivered and so did we.
7. It's not a people business.
It's a numbers business and you cannot negotiate with a computer. That friendly, helpful person you're talking to does not make the decisions. Your numbers get fed into some obscure computer program and the answers (or more questions) pop out. They are not negotiable. A good banking relationship means that you will be told what numbers are required to get favourable answers.
8. Manage your numbers
Make sure your business plan computes and gives financial results that are attractive to lenders. Then manage the numbers to deliver the results and stay within the limits set by the bank. Read the fine print to be sure you don't miss any requirements to maintain financial ratios or any restrictions on payments to shareholders. Deliver financial reports as required, but also be sure to provide your own analysis and explanations before someone else does. You don't want that computer to set off the alarms.
9. No surprises, please.
Bad news is never well received, but the reaction will be much worse if it's also a surprise. And no news at all only makes them worry.
Keep your banker aware of what might go wrong and what you plan to do about it. Then keep them current as things evolve so they get used to your ever-changing circumstances and how you are handling them. (Hopefully, well.) Avoid going back with a new plan too soon or too often. And try to plan well ahead of any request for more financing. It is very hard to get the bank to help you out of a disaster when you’re in it.
10. People still matter.
The personal connection is still a very important part of a good relationship with your bank. Part of managing that relationship is to be sure that you are not entirely dependent on just one contact. If the relationship lasts, your contact person will change and you need to know someone else to maintain continuity of the relationship. Stay connected at several levels.
Your banking relationship needs to be strong to withstand the inevitable hard times that hit any business. A welcome and willing partner should help you weather those occasional storms.
I’m sure you have your own anecdotes of unsupportive bankers, but it is more important to get them onside with your other key strategic partners.
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Click Here to check out Uncle Ralph’s books, "Don't Do It the Hard Way" and "The Complete Do-It-Yourself Guide to Business Plans" Both are available online or at your favourite bookstore in hard cover, paperback or e-book.
The Seven Biggest Mistakes that Entrepreneurs Make
Which ones are you making? How can you avoid them?
I was recently asked to do a presentation with my associates at a breakfast seminar for business clients. We had arrived at the title “Seven Biggest Mistakes that Entrepreneurs Make” before I had the list prepared, so I decided to do a survey of entrepreneurs and their advisors to complement my own ideas. The feedback was enlightening.
Here are some of the suggested “Biggest Mistakes” from the survey: “Cash flow, cash flow, cash flow”, “Afraid of Marketing and Sales, “Reactive, not strategic”, “Not delegating”, “Hiring too fast, Firing too slow”, “Not focused”, “Communicating too much, or too little”, “Not using consultants” (That last one was from the consultants, not their clients!)
The feedback also reinforced my own experience that it is OK to fail and make mistakes, as long as they are small, frequent, and early. It’s all part of the learning experience to get better. But big mistakes can kill your business.
Here is my final list of the Seven Biggest Mistakes that Entrepreneurs Make.
#1 Too Entrepreneurial Certain characteristics of entrepreneurs are necessary for them to be successful. But if over-indulged they can lead to big mistakes. These include the tendency to be too opportunistic and not be sufficiently selective and focused; to be too optimistic and miss or ignore the warning signs; to be too impatient and expect too much too soon.
Entrepreneurs usually have great confidence in their instincts and consequently rely on “gut feel”. The mistake is to neglect or ignore market feedback and analysis of the facts. Being action-oriented, the tendency is to react and “fire” before the “ready, aim” stages are complete. Painful surprises can result.
Many successful entrepreneurs have achieved a lot based on their energy, charm, charisma, and persuasiveness, but then get caught by selling on personality, not on performance. Clients start to notice that expectations are not being met.
Entrepreneurs are expected to be decisive and demonstrate “leadership”. Both can be overdone – deciding too quickly and providing too much direction so that input, initiative and creativity are stifled.
“Doing it my way” often means improvising and learning on the fly, or sticking with what works, until it stops working. The mistake is in neglecting to evolve and grow by optimizing systems and installing best practices and latest technologies.
All these mistakes can lead to serious consequences, as a result of being “too entrepreneurial”.
#2 Lack of Strategic Direction
Another consequence of the action-oriented entrepreneurial approach is the tendency to get lost in the daily details and completely neglect the original strategic plan and objectives. The owner-manager soon becomes pre-occupied by operating decisions and all the demands on his time from customers, employees and the constant fire-fighting. It leaves little time for fire prevention.
This situation is worsened as the entrepreneur concludes that the best solution is “do-it-myself”. Not delegating to staff or using external expertise may seem like the least-cost solution, but probably undervalues the owner’s own time and expertise and does not lead to long-term solutions.
The entrepreneur may have good awareness of long-term strategic issues and had them in mind when the business was launched. But they are now neglected, and the original Business Plan (if there was one) is not documented, updated or shared.
Lack of strategic direction is listed here as #2, but may be the Biggest Mistake that Entrepreneurs Make.
#3 “That was Easy, Let’s Do It Again!”
Another common mistake that can have devastating consequences on the business is the over-confident entrepreneur who concludes, “That was easy, let’s do it again!” So he or she leaps into new markets, new product lines, or even a new business or investment opportunity. It’s important to remember: Making money doesn’t make you smart.
Do you really know what you did to succeed? Or what mistakes and risks you avoided? Is now a good time to start something new? How much will the current business be impacted by new initiatives? Is your success really transferable?
Many successful entrepreneurs have made the mistake of jumping into a new venture – merger, acquisition, restaurant franchise or real estate investment – and blowing away the equity value they generated in their original business. Another big mistake to avoid.
#4 Focused on Profit
Being focused on profit doesn’t seem like a mistake. After all, isn’t that the whole purpose of running a business? No, actually. As I explain to students in their first Finance class, the primary financial objective of any business is “to enhance long-term shareholder value”. Many short-term profit-oriented decisions can hurt long-term value. Examples are many: cutting staff, maintenance or marketing expense; not upgrading systems and technology; accepting high credit risk or low margin customers; avoiding taxes, environmental or quality issues.
Most entrepreneurs are very focused on managing the bottom line by monitoring sales, gross margin and expenses. They always know those numbers.
But they are usually ignoring asset management, especially cash flow. The business may appear very profitable, but have constant cash flow challenges because management is neglecting inventory and receivables, in particular. And unfortunately it is not as simple as: Collect fast, Pay slow. Customer and supplier relationships can be at risk if cash flow issues force you to take that approach.
Managing the Balance Sheet also requires good management of debt and balancing short-term and long-term needs with short and long-term sources of funds. And the Most Undervalued Asset doesn’t usually even appear on the Balance Sheet: Human Resources. That leads to Biggest Mistake #5.
#5 Neglecting Key Relationships
The key relationship for any business is the one between its owners and the staff. Management and employee communications are essential to business performance and often not managed very well. Key employees need to be recognized and engaged. Mistakes made with key employees can jeopardize the whole business.
Similarly, don’t make the mistake of being distracted by the most annoying and persistent customer. Your biggest customers are not likely the “squeakiest”, just the most important. Don’t make the mistake of letting them be neglected.
Do you need to squeak more yourself? Do your suppliers appreciate you enough? Fast growth and profitability may be coming from one or two key customers or suppliers which can lead to over-dependence on their business. And your success may be convincing them that they don’t need you in the middle any more. Be wary.
Another key relationship not to be neglected: Is your bank a welcome and willing partner in your business? Remember “friends in need” have to be developed in advance.
#6 Poor Marketing & Sales
You know there is a problem brewing when you hear the entrepreneur explaining that “The product sells itself”, or “Price is all that matters”, or “Our Sales Reps need to do a better job”. These are signs of poor marketing and sales results. Usually the company is failing at both the strategic marketing level and at the execution of effective marketing and sales activities.
Not only are opportunities for profitable growth being missed, but the company may be on the downward slide to “out of business” without a well-conceived marketing plan and effective sales strategies.
#7 Distracted by Personal Issues
And finally #7 – Personal Issues that distract attention from good management of the business. Personalities and their issues can seriously affect business performance regardless of whether they are owner, management or staff issues. Sometimes they are simply ignored until they become a problem. Sometimes they are a result of too much success and behaving like a rock star.
Family businesses in particular run the risk of favouritism and having family matters interfere with business success. Managing personalities and corporate culture are a particular challenge in family businesses.
In Summary, the Seven Biggest Mistakes that Entrepreneurs Make:
Too Entrepreneurial
Lack of Strategic Direction
“Let’s do it again!”
Focused on Profit
Neglecting Key Relationships
Poor Marketing and Sales
Personal Distractions
Now the obvious question is: How to Avoid Them?
The answer is: Balance!
Each of these Big Mistakes is a result of the entrepreneur failing to achieve balance between opposing approaches and decision making processes. Avoiding these mistakes requires the entrepreneur and business owner to:
Balance the Entrepreneurial Approach with Analytical Input
Balance Strategic Vision with Operational Detail
Add the Head and the Heart to the “Gut Feel”
Manage for Long-term Value not just Short-term Profit
Keep Personal Priorities in your Plan but Out of your Business
I hope that helps you to grow and prosper in your own business and avoid the Seven Biggest Mistakes that Entrepreneurs Make.
I introduced myself to a new corporate finance class yesterday and was reminded that, although much has changed in business and the economy since the 1970's when I first taught the course, the same basic principles of financial management still apply.
Not to be confused by current economic circumstances or the impacts of globalization, green themes or new technologies, the basic principles are worth remembering.
A quick summary may help you get back to basics too:
The primary objective of financial management is to increase long-term shareholder value, not short-term profits.
Long-term value requires ethical consideration of other stakeholders - employees, customers, suppliers, government - and respect for corporate social responsibilities.
Every financial decision needs to deliver an economic benefit that adds to shareholder value.
Risk and return are inevitably linked - expectations of higher return will necessarily involve acceptance of higher risks associated with volatality and uncertainty of results.
Continuous monitoring and improvement of financial performance requires analysis and benchmarking against prior years and the indices of top performers in the industry.
Higher fixed costs in operations or from debt financing add to risk and raise the break even point for the business.
There is a time value of money that requires future cash flows to be discounted to Net Present Value.
Managing cash flow is as important as managing net income.
The simple principle of managing working capital by "Collect Fast, Pay Slow" needs to be balanced against the maintenance of good service relationships with customers and suppliers.
Asset management cannot be neglected and significantly affects liquidity, credit worthiness and the valuation of the business.
Was it the bottom finally? Did you have the nerve to jump back in and was your timing right?
The advice of most so-called experts was either to stop watching and worrying or start buying at the bargain prices available. The latter advice sounds to me like being at a big game when someone yells "Fire!" and thousands panic and run for the exits, but your buddy suggests now is a good time to buy front row tickets from someone on their way out; then head back in.
That's a good plan if the fire is out and the game is back on. Not so good if its getting worse before it gets better. Maybe if you can grab a season ticket at a good price then be patient until everyone comes back in again.
Who knows?
It's a good time to remember it was always a risky investment and we've been here before. This too shall pass.
I am just completing the teaching of two summer courses in Financial Management at Concordia University. It's time for their final exams so I'm now thinking about what are the most important lessons to learn for future business managers and entrepreneurs. Or alternatively, what do most entrepreneurs neglect in the management of their businesses?
Most of us focus regularly on the income statement - revenues, gross margins, expenses and the resulting profits. But we often neglect the management of our balance sheet - inventory, receivables, return on assets, and the short and long-term sources of funds. These issues can all have significant impact on profitability and the long-term value of the enterprise.
So I will try to emphasize the importance of regularly reviewing performance of assets and liabilities in addition to the more obvious and intuitive issues of sales and income. How does balance sheet performance compare to prior years? the plan? or the industry averages?
Can we improve turnover on inventory and receivables without losing sales or diminishing service levels. Can we extend payables and get additional short-term financing without hurting our credit ratings or adding to our costs? Are we making good use of long-term debt to add financial leverage and improve the return on our equity investment?
All important issues for effective financial management.
The Bank of Canada rate went up Wednesday from 0.50% to 0.75%.
