I Wish That I Had Done It Right From The Beginning - Credit Squeeze

At the beginning of August 2008 I spoke to a small business owner on his problems emanating from the present credit squeeze. His problems centred around the following issues-

• He was running out of cash, because he was taking too much out of the business.
• He was using his business credit card for his personal expenses.
• He was two months in arrear with his lease rental payments.
• He was employing family members who were contributing nothing to the business.
• He had taken expensive holidays at the cost of the business.
• He had ignored his customers because he thought he had the market. He was always late for meetings and would not go to their premises to settle problems, they were now looking elsewhere.
• He was weak with administration and recording systems.
• He had a bad relationship with his bank.
• His creditors were pushing him.
• His tax payments were made but not always accurate.

He was now in the position that at the end of August he only had enough money to pay his staff or VAT-he could only pay one. I wonder how many small business owners who are or have been in the same position.

I asked him what he was planning to do and he said that he would not take so much money out of the business, would put up the costs of his products and when he did consultancy he would charge for more hours than he actually performed. Further he would pay his staff not his VAT at the end of the month

I strongly advised him that-

• Reducing his drawings was a way forward, but expenses wherever possible must be reduced
• It would not be sensible to put up his prices because customers were close to leaving him.
• If he took the consultancy hourly excessive increases route and did not pay his VAT he was guilty of fraud-so they were not an option.

We came up with the following solution-

• He must reduce his drawings as much as possible (even more than he planned) and only take enough for household needs.
• Company money must only be used for company business. So not using the company business card for personal ends.
• Importantly, cut out as many expenses as reasonably possible, cash flow must be controlled. He was very social and cutting out his drinking habits helped his health.
• Try to make a deal with creditors but be ruthless with debt collecting.
• Fire family members-they contributed nothing. In fact their salaries were more than half of his payroll.
• For all those persons he must meet such as-the bank manager, customers, lessor and the receiver of revenue-go to them cap in hand and explain your position openly and honestly-they can be human.
• Cut out for the time being expensive holidays, even if he was paying himself. He was needed for the business to turn it around before it was too late.

The following actions eventuated-

• The lessor gave him 6 month to settle arrears (without interest) -Lessors are also struggling-“A bird in the hand is worth two in the bush”
• He visited all customers, on time, at their premises and humbly explained his position... He did not raise his prices and to date they have stayed with him.
• With regard to the bank manager, they also gave him a reasonable time to settle his problems, because of the way he approached them. It is hard for many of us to call someone Sir-who we don’t respect-But?
• The Receiver was also approachable-and gave him a month to settle (with interest)
• Some of his family members were not happy, but accepted his position, they had no option. They also realised that they may have avoided tax so wanted to exit quietly.
• Advice was given by a friend for administration update and he changed his book-keeper-whom he blamed for not helping him, but I pointed out that it is easy to blame someone else for your shortcomings. He was the boss and he was to be blamed

What do we learn from this case study-

• To stress get it right and do it right from the beginning.
• Cash is definitely King-cash flow even more so.
• Keep business and personal finances separate.
• Pay the Receiver-but I wonder how many in the same position would have paid staff first? Before VAT.
• Family businesses are in order provided all play their part.
• Put away savings for a rainy day.
• Don’t neglect administration-perhaps we all do-but don’t.
• You are the boss-Watch the warning signs
• Call the bank manager and Receiver Sir?
• Perhaps luck also comes in to it.

It is still early days, but he is surviving. I believe he has learnt from the hard school of life and will do well, but I don’t wish it on anyone.