Lessons From Michael Jackson

1. OK, you've got tons of talent - but your 2 biggest assets are your health and your time. Let either of those slip, and you've had it.

2. Should those in your organization even be there?

3. How did they get into the organization in the first place?

4. Are you clear on what authority they actually have, as opposed to the authority they think they have?

5. Who's paying them? For what? And Why?

6. What's your cashflow burn rate? Per Week? Per Month?

7. How strong is your ability to draw on new sources of funding?

8. Are your contractual commitments clearly spelt out?

9. Will you be able to keep those commitments?

10. What are your financial, logistical and creative resources to stage a commercial comeback?

11. Do you have the physical, emotional and mental stamina to see it through?

12. What's your corporate succession policy after you've left the scene or the planet?

13. Just how much drama will you tolerate before creativity dies?

14. Your business legacy will be ..........what, exactly?

© 2009 Sanjeev Aaron Williams All Rights Reserved

Directors & Home Equity Loans

Directors of SMEs, particularly those in start-up mode, are always looking for cash sources. It’s common for them to take a personal home equity loan and siphon the funds into their business. The assumption is that the business will make enough cash to service the home equity loan.

The reality is the home equity loan is usually a second mortgage and the business is saddled with paying that off – plus all the other overheads related to the business. In the US, particularly between 2002 and the end of 2006, rapidly rising home values and lowering interest rates, made home equity loans particularly attractive. Cash appeared to be right there, in the walls of the house.

People borrowed massively. The sillier ones for consumer items, the desperate ones to pay their other bills including their first mortgage, the greedy ones to speculate in property and the occasionally smarter ones, for business investment.

An online report of the New York Times dated 27 March 2008, put the figure of currently outstanding home equity loans in the US at US$1.1 Trillion. Falling interest rates and the Fed’s “nuclear option” of massive injections of “apparent liquidity” (yes, the words are deliberately in quotations because the liquidity is just recently printed money issued in exchange for less-than-stellar mortgage debt) have done nothing to ease the mistrust that exists amongst commercial lenders. Further, falling home prices, rising debt delinquencies and negative equity have only increased the mistrust between commercial lenders and consumer borrowers.

In a financial world awash with US Dollars from emergency measures (recently described as “Dollar Pollution”), there seems to be a huge shortage of US Dollars owed by the consumer borrowers to their lenders in the field of home equity loans.

So worried are lenders who made home equity loans, that they are actively obstructing the borrower from selling the house or refinancing it, unless there is some prospect of them being paid. As the New York Times article pointed out, when the going was good, they really didn’t mind what the borrower did. Using the home as an ATM was widespread.

Should the property have negative equity when sold (i.e. its value is less than the outstanding mortgage(s)), holders of the first mortgage have a priority lien to be paid in full first. That leaves nothing for the home equity lenders – particularly in areas of California, Arizona, Nevada and Florida where home prices are said to have fallen significantly.

If the same lender holds the first mortgage and home equity loan, they might be more willing to allow the borrower to sell or refinance. Where there are different lenders, home equity lenders are obstructing the sale and demanding at least partial recovery from the first mortgage holders.

For a director of an SME whose business cash flow is compromised by a souring US economy, refinancing the home equity loan may be difficult in the face of obstructive tactics by second mortgagees. Further, a delinquent home equity loan is noted on the borrower’s credit record. That will compromise the director’s ability to raise personal financing in future.

If the director files for personal bankruptcy, their ability to manage the company into which they poured equity in the form of cash and sweat is finished. Effectively, the director loses his home and his company. In other words, his cash flow.

It’s a zero-sum game: the worst kind of business equation.

© 2008 Sanjeev Aaron Williams All Rights Reserved

Erosion Of Capital

Let’s face it. The cascading torrent of losses in the billions sustained by the *ahem* financial pillars of society, are no longer riveting. Lately, we’ve come to expect it in the same way as sewage leaks out of a ruptured pipe. For those doing the disclosing, their meltdown in the full glare of publicity might as well be the sequel to Al Gore's "An Inconvenient Truth".

Take Merrill Lynch for example. Not to bash, but reading the BBC’s online report for 17 January 2008 and Financial Times online report for 17 January 2008:

• In the last quarter of 2007, it lost US9.8 Billion – the biggest quarterly loss in its history;

• It made a net loss of US12.8 Billion in the 12 months ending on 31 December 2007;

• There were approx US15 Billion in asset writedowns:

• US3.1 Billion in contracts with bond insurers to hedge against losses;

• US9.9 Billion in *ahem* “asset-backed” CDOs;

• US1.6 Billion in its holdings of individual sub-prime mortgages;

So what’s the lesson for SMEs? The importance of enough working capital.

Merrill’s embarrassment, that eroded its market capitalization and its internal capital base, was attributable to debt and the assumptions made in respect of it. Specifically debt was very poorly assessed initially, then shunted “off balance sheet” via CDOs and SIVs, ceased to produce cash flow, could not be properly identified, could not be properly valued and ultimately had to be brought back on to the balance sheet and very publicly written down.

When one cuts through the artificial fancy corporate structures, the debt was intended to be a receivable that was supposed to generate regular cash flow. The entire sub-prime fiasco was a failure in receivables management that hit a company’s capital base and, in the case of Citigroup, its credit rating as well.

SMEs, focused either on survival or growth, often overlook the importance of receivables management. It’s handled in a haphazard or tardy fashion, only becoming urgent when the Accounts Receivables Ageing Report looks distinctly ugly, or the company faces a cash crunch like inability to meet payroll or rent. There’ll be some frantic activity for a few days to chase up on unpaid bills then it’ll die down again till the next AR Ageing Report or the next crisis.

In the meantime, the Receivables appear on the balance sheet as a Current Asset. That’s the formal way of saying “we’re keeping our fingers crossed and hope we get paid”. If the company doesn’t get paid for a while, their accountants will advise them to write it off as a Bad Debt. That’s a nice way of saying, “we’ve just lost capital we could have used”.

At that point, your SME is no different to Merrill Lynch or Citigroup. Bring on the firings, the tears and the downsizing.

Play your cards right, consistently tighten up on receivables management and the company could have predictable working capital for growth, overheads and a sweeter credit rating.

© 2008 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

The First 3 Months Of The Year

It may come as a surprise to realize that January, February and March are difficult for businesses, even during good times. Why?

During these months, companies analyze and plan their objectives for the year. It might include expansion of product lines, production facilities, more employees, upgrading the marketing.

The company needs to project where the additional funding will be coming from, while still having cash on hand to pay expenses incurred at the end of the proceeding year. It is important to note that while the cost of expansion will be recovered at some point in the future, the costs of expansion are payable now.

It’s at this time of year that a company should be considering factoring. The cost of factoring will be offset by the additional revenue generated by their expansion plan. For example, if a business concludes that an expansion of its sales and marketing staff will generate more revenue in the coming 6 months, they could factor the revenue during those 6 months in order to have the cash resources to grow beyond that period.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Factoring And Insolvency 2

The business is then required to obtain and unsecured loan. At first glance, it sounds paradoxical since the business is likely insolvent and lenders require collateral. Banks might not step up to the plate and the business will initially look to individuals or angel investors.

In reality, assuming that the business still has customers, the only tangible security it can offer are its new sales, evidenced by the invoices (which are technically, commercial paper).

For the purposes of Bankruptcy, factoring is not regarded as being in the ordinary course of business and the business must obtain the Court’s permission to factor its receivables. The Court will hear the factoring proposal and any objections from the creditors.

If the Order is made, the business will be allowed to factor the receivables which came into existence on or after the date of the filing of the Bankruptcy Petition. The factoring may be for a specific period of time (which can be extended by further order) and may require the factor to pay a portion of the advance into a designated account in favour of the creditors.

It is important to note that the Court’s Order is as good as a UCC filing.

Note: this posting is in general terms only and is not to be taken as containing specific or implied legal advice. A business must consult its lawyers and accountants where Chapter 11 is contemplated.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Factoring And Insolvency 1

There is no doubt that factoring enhances cash flow for a business operating as a going concern. But what about a business that is unable to meet its current debt obligations and is facing insolvency?

In the US, a business may seek temporary protection from its creditors by filing a Chapter 11 Bankruptcy Petition in the Federal Bankruptcy Court. The effect of the Petition is to create an automatic stay that suspends the ability of any creditor, secured, or unsecured, to obtain payment from the company or to enforce the security.

Further, the Petition generally prevents the company’s future assets from being appropriated by creditors – notwithstanding any language to the contrary in any security agreement.

That means that a creditor who, in its agreement with the business, used typical language to secure “all the accounts receivables of the business whether currently existing, or hereafter arising, no longer holds an interest in those receivables which come into existence after the filing date of the Bankruptcy Petition.

Effectively, the business can make a fresh start with those receivables and negotiate with the creditors to formulate a Cash Collateral Order (which allows the business to use existing cash to meet at least a portion of ongoing obligations) and the Plan of Reorganization.

However, before Factoring can be implemented to assist the business, a few more steps are required. These are set out in the next post, entitled, Factoring & Insolvency 2.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Business Cash Flow Cycle 2

OUTGOING CASH

1. Interest on debt servicing – payable periodically. If the company defaults, a full range of legal consequences can follow including removal of Directors, appointment of Receiver/Manager, rescheduling of company debts, restructuring the company, selling collateral, or winding-up the company.

2. Operating Expenses – also known as Overheads. These are usually all expenses that are not directly related to Production.

3. Plant & Equipment – Also the subject of Capital Budgeting, companies have to decide whether to buy or lease such equipment and how long to keep them to claim Depreciation expenses in their Accounts.

4. Manufacturing Expense and Inventory Control – A major cash flow drain, which does not operate at constant levels. High levels of sales, or large variety of products, require high levels of inventory. Also Inventory builds up to reduce the cost of Production, and as a result of uneven sales.

5. Dividends – both private and public companies pay them, sometimes several times a year. There is no legal obligation to declare or pay dividends.

6. Corporate Taxes – may require to be estimated and paid in advance.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Business Cash Flow Cycle 1

This 2 part breakdown given an overall understanding of how cash moves through a business.

INCOMING CASH

1. Shareowners capital – these are the individuals who really own the company. They provided the initial cash injection when the company was incorporated (or contributed to the business if it was a partnership). In return, they received shares in the company. They can be asked for money periodically, in return for additional shares. Shareholders capital also includes angel investors and venture capitalists. They will however, seek to be repaid on terms and within a certain time frame and should be regarded as private lenders. Whilst they are invested in the company, venture capital shareholders might wish to direct the management of the company.

2. Borrowing – from private lenders or banks. Can either be short term or long term and are the company’s Lines Of Credit. Some can be negotiated beforehand and some companies resort to short term borrowing several times a year. Security or Collateral is required and interest is payable to service the loans.

3. Marketable Securities or Commercial Paper – usually available to the largest and financially strongest companies only. Essentially, the company goes into the Money Market and issues an IOU to obtain large amounts of cash which it will repay on terms at a future date.

4. Accounts Receivables – theoretically the main source of cash into a business. It is generated through sales and timely payment of invoices. In practice, many companies have poor control of their Receivables. This means that their invoices are not properly followed up and their cash flow becomes unpredictable. This impacts the company’s ability to fulfil new orders, grow, invest in marketing, and pay operating expenses such as salary and debt servicing. Poor control of Accounts Receivables can make or break a company.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Watching Your Cash Flow?

Did you raise enough “seed capital” or “angel investment” or “mezzanine financing” or full blown venture capital?

Exactly what stage of growth is your company at?

How good was your sales forecasting?

How tightly are your expenses being controlled? Are you bleeding the company by drawing prematurely excessive salary?

Reduce inventory to minimal acceptable levels. Consider “just in time” inventory. Otherwise you might be forced to unload unsold inventory at “fire sale” prices.

Inventory financing can be very expensive. A business is effectively penalized by the bank if the inventory offered as collateral remains unsold for too long.

Consider Equipment Leasing strategies instead of buying outright. There may be tax concessions.

Rate your customers on credit worthiness. Decide who will be given credit and for how long.

Revamp you internal Accounts Receivables Management. When the Receivables are factored, the funding source effectively becomes the Receivables Management division of the company. This saves time and expense. It allows the business to focus on sales and marketing which are direct revenue generators.

Bill more frequently – then factor the invoices for faster cash flow. This tactic works best when factoring invoices from your best i.e. most creditworthy clients.

Early payment incentives to your debtors rarely work. Factoring the invoice that you send them does. The cash can be made available within 24 – 48 hours.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

10 Reasons Why Businesses Fail

Timeless advice. The source of this posting is acknowledged below.

1. Undercapitalization
Too many SMEs underestimate how much money is needed at start-up and during a potentially lengthy transition as the business attempts to make it to commercial viability. By starting out undercapitalized, a business may never have enough to catch up.

2. Poor Cash Flow
Intermittent or poorly managed cash flow fails to meet recurring and capital expenses. The business develops a “cash flow burn rate that is not met by income.

3. Lousy Planning
Lack of a comprehensive business plan that covers all the bases.

4. No Competitive Edge
Lack of clearly identifiable niche and a failure to identify at least 1 element that sets the business apart from its competitors. Becomes a facsimile of ever other business in that field.

5. Lousy Marketing
Poor and non-unique marketing

6. Delayed Flexibility
The ability to correct on-the-fly is crucial to SME’s success.

7. Incomplete Customer Service
Not just the obvious, but the stuff that goes beyond the ordinary.

8. Lack Of Specialist Help
Refusing to talk to Accountants, Lawyers, Tax Advisors who specialize in SMEs.

9. Disconnect Between Founders And Staff
Failure to share the vision, failure of staff to buy into it, inadequate staff training, lousy staff compensation, self-indulgent executives.

10. Poor Scaleability And Uncontrolled Growth
Many SMEs that succeed too early, fail early too. Further, SMEs may have their highest sales volume just before they fail. Production systems must keep up with demand and there must be sufficient cash for expansion. Expansion must be tracked and controlled.

The above posting is taken from an article entitled “10 Reasons Why Businesses Fail” published in the American Cash Flow Journal, December 2002.

www.cashwerks.com

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Cash Flow And The Quick Fix

Often, companies approached Cashwerks looking for an instant solution to their cash flow problems. The Directors proclaimed their own solution and demanded the Quick Fix. They were reluctant to talk about the company’s business, its future growth, the effectiveness of the funding or even the cost of the funding.

Fixated on their solution to a perceived problem, they turned defensive when told the Due Diligence requirements of the funding source.

Predictably, these deals failed and the encounter was somewhat childish. There was no solution to a multi-layered problem and if there was, it was probably wrong or deficient.

Months later, Cashwerks would be contacted again by the same company. This time, there was panic in the Directors’ voices. The company was going under, the banks had turned hostile. The company was now ready to listen.

After the deal had gone through, the Directors quietly admitted they should have listened and acted months earlier.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved