Business Finances - David Dandie

Benchmarking

Many of us wish that we could knock on our competitors door and ask to look at their financials and see what their profit was last year. You want to know if they are in the same boat as you and see how they are really going. Unfortunately not many are going to give you this information.

The next best thing to this is to look at a benchmarking study. These studies show how a franchise system or an industry has behaved on average in the last trading period. It will allow you to compare your results against other similar businesses. From this you can see whether you are doing better or worse, what areas should you improve, what were the success factors for the top performers and what are the key things that you should be monitoring in your business.

The Franchise system is perfect to run benchmarking studies as they have a target audience, same structured business with common issues and problems. They have a governing body who have a vested interest in their financial performance and there are proven results of benefits to both the franchiser and franchisee.

Every business operator wants to make prudent and well informed decisions benchmarking studies are another way of making this a little bit easier.

What to look for in a franchise

When considering buying any franchise you should consider at least these three things:

The first is what support is offered by the Franchisor: in particular the training provided before and after you open and the ongoing support of the business and staff in technology, policy and new product developments.

The second is: understand the details in the Franchise Agreement. This relates to the term of the contract, the renewal options, the fee structure, and royalties paid. Understand the conditions around termination, territory and competition.

Finally: understand stock and cash flow requirements. Specialised plant and equipment, fittings and stock add up quickly It is important to understand if the franchisor manages and supplies the stock and if so on what terms.

Always have independent financial and legal advice including due diligence of the projections and trading results provided. Talk to other franchisees and ask as many questions as you can.

If you are across these things you will understand the franchisor's responsibility and more importantly what is expected of you!

Many profitable businesses collapse because they couldn’t get the cash flow they needed to support them in the short term.

Profit and cash flow are two different things. Profit supports growth of the business, contributes to the value of the business and pays back long term debt. Cash pays for every day expenses and pays back short term debt. Both are required for a business to survive.

Consider a business that in the first eleven months had sales that just met commitments, and then in the last month made a large sale making a fifty thousand dollar profit. The profit and loss statement will show an annual profit of fifty thousand dollars but will not show that for the first eleven months they were strapped for cash and nearly had to close down. So profit and cash are two different things.

This is why you need to complete a cashflow budget so that you can plan for how much cash is required to survive the peaks and troughs in your business.

Debtor Collection Tips

Make sure you do a proper job of qualifying the customer's credit worthiness before you extend credit.
Update the credit history on your customers at least annually to spot trends before they affect you.
Hire an experienced accounts receivable manager.
Try for low turnover in the A/R department (the more experience bill collectors have, the better they get).
Offer A/R personnel incentive pay for keeping the A/R within specified guidelines.
Offer an electronic payment facility.
Categorise slow payers and deal with them accordingly:

- No ability to pay - Try to get bills settled ASAP (before others realise the situation).
- Slow bureaucracies - Speed up the issuance of bills.
- Slow payment as a matter of policy - Try to prevent further slippage.
- Unexpected slow-up in regular payment pattern - get the reason and a commitment to make it up.

If you offer a discount, print a "plain English" translation of your discount policy on bills; for example: "Our 2%/10 days/net 30 means you get an effective annual discount rate of 36% if you pay within ten days of the date of this invoice."
If the bill isn't paid promptly, send a photocopy a week later marked, "Your discount period ends tomorrow."
Make collection calls early in the week.
Talk directly to the person who signs the cheque.
Make collections calls as personable as possible; always address the customer by name.
Give the customer a chance to explain; there may be a good reason for the delay.
Try to get at least a commitment for partial payment - then use that amount to arrange a payment schedule.
Restate the agreed upon details of the payment before hanging up.
When a customer agrees to pay, immediately send a letter formalising the agreement.
After setting a deadline for payment, stick to it.
And in all situations: be persistent !

Working Capital Cycle

Every business regardless of what they do, operates a working capital cycle. This simply explains how cash flows through your business. To start any business, cash is required, you then use this to buy stock to put on the shelf or provide the service you are offering. When you sell the stock, if you don't make a cash sale then you create a debtor and eventually you collect the money.

Lets say that on average the stock sits on the shelf for 45 days and that it takes 55 days on average to collect your debtors. This means that it takes 100 days for each dollar in the cycle to return to be reinvested into the business.

While you are waiting for this dollar to return you are using your overdraft or credit funds to buy more stock to keep the business operating.

The more efficiently you can turn this cycle, the faster the money returns to your pocket which means you rely less on your overdraft or surplus credit funds saving you money.

There are many ways to improve debtor collection and stock turn over. Some of these tips I have placed on the inside franchising website for you.

Remember that turns in the cycle are measured in days and that days are time and time means money.

Borrow Properly

Have you ever looked at the balance of the overdraft and thought to yourself I'll just write the cheque out and worry about it later? If you are purchasing large ticket items with your overdraft facility you are bound to experience cash flow problems.

I have had customers purchase houses, a helicopter, forklift and an aeroplane with their overdraft facility and needless to say all ran out of cash pretty quickly. It is important to understand that there are different types of finance facilities for a reason. The purpose of the overdraft is to help meet every day expenses and not to pay for long term assets.

It is best to speak with the Bank first, they will confirm serviceability of the loan and suggest what loan options are available. The key is to match the life of the loan with the life of the asset. Remember a long term asset requires a long term loan and the overdraft is not spare cash it is already committed to cover every day expenses.

Monitoring Financials

If I told you that I could show you a financial tool that would help you make more profits, more cash and sleep better at night, I know you would be

interested. The funny thing is that every one in business gets that financial tool every year in the form of their financial statements. Knowing how to use them to your advantage is often the difference between a business that just survives and one that thrives.

Many business operators make something or sell something. Most are not accountants by training and many consider financial management as nothing more than a necessary evil. Financial statements are your report card, how you have behaved in the past, they show you what you did right, or what you did wrong but more importantly what to change to make things better. Once you understand these things you can learn from this information to help project the future of your business.

Many business people I speak with find financials daunting, but once shown how to use simple tools to unlock the information, measure and monitor performance they don't look back.

Dealing with Banks

If a friend had asked you to lend them a large sum of money what would be the things you would want to know before you handed it over? You would probably want to know what were they going to do with the money, will it be enough, how and when will they pay it back and what happens if the deal went wrong.

This is the same when borrowing money from the Bank. You need to prove to the Bank that you understand the business and processes involved so that they are comfortable in lending to you. Understand how much you need and be prepared to put some money in yourself, this shows the Bank your commitment. Provide a plan on how you will pay it back and be aware that you may need to offer security in case something goes wrong.

The advantage in being associated with a specific franchise system is that it may strengthen your application. Some Banks will lend against accredited franchises to help buy, fit out or expand the business. The Bank knows that the franchisor has a vested interest in the success of your business and proven support systems. So choose a Franchise that provides good training, ongoing support and has a strong reputation in the market place.

Planning Business

Traditionally when you mention a business plan eyes glaze over and people start to fall asleep? Business plans do not have to be thick and they don't have to be written by a business law professor but when done, can be a powerful tool in helping obtain the lifestyle you are looking for.

Put simply the plan should out line where you are today, what you want to achieve, how you are going to do this, and by when. Businesses change over time and so do your plans, it needs to be a living document that can easily be changed and read.

Many people open and shut the shop door each day, year in year out. They get dragged along by their business wherever it takes them. Business plans help set objectives and goals giving the business direction. It highlights strengths and weaknesses, training needs, helps you prepare for growth, predicts cashflow requirements, when to employ the right people and the areas that need to be monitored regularly to obtain long term success.

If you don't know where you are going then how are you going to get there? I suggest you do a plan.

Transition Planning

Many people can't wait to get out of their business and retire. Other people don't want to go into retirement, they don't' want to think about it, they don't want to know about it - but whatever you want to do in your business it's important to knw where it is going, what is the transition plan of your business.

So it's important that you sit down and say what am I valued at today? What do I need to be valued at in say 10 years time and what are the steps between now and then to actually obtain those goals?

When you're in business you've got 3 options, the first one is to sell your business, the second one is to hand it on, and the third one is to liquidate or to close it down.

If you are going to pass it on to your family it's important to understand, are they ready? Do they know that they're going to take it on, and out of the number of children you have, which one is going to inherit it? All of them? And if not, what's going to be done?

But at the end of the day if you're looking at planning your retirement, you need to understand what is the transition of your business, where are you going to be, what it is that you want to get out of it for all the work you've put into it over the last so many years you've been running it.

At the end of the day, transition is not really what's in your will, it's not when you die, it starts from the day when you open the doors of your business.

Seasonal Cash Flows

Are your sales going through the roof and you put your hand in your pocket and you find that there is no cash there? Why is that the case? It is perfectly natural for people to experience that when you operate under a seasonal business. When you go into your season and you're running out of cash you basically have to keep up with the stock to put it on the shelf; to keep up with the demand for that product; in a service industry you have to keep paying more wages and provide that service to keep up with the demand. What happens is that when you finally get to the top of that season, you come down the other side so initially you experience what we call cash gaps, and then when you're coming down the other side there's less demand for your product, so you don't have to keep buying more to put on the shelf, you don't have to keep paying more wages, and so you get what's called cash surpluses.

It's important that you understand what your cash requirements are for your business, so that when you go into planning, growing your business, understanding what its requirements are, you'll have sufficient cash to carry you through your season.

Consider what you need to know if you are going to grow your business

Are you tired of being dragged along by your business and you want to take it by the horns and direct it in the path that you want to go?

Then we're going to have a look at some of the things that you should consider when you're looking at your business.

Many of you may have heard the statement:

" Don't grow too fast "

What does that actually mean?

Consider the potential cost of growth to your business.

Growth is not a bad thing, but make sure that you are ready for it.

In many cases, businesses grow too fast and a lot of people think that they want to open 10 franchises throughout the city and then they will live and retire happily ever after - but in reality the more businesses, the more work. So, if you can't work through them, don't take them on too fast. That's not to say don't do it, but what it is saying is consider:

. How many you can physically take on.

. Are you staffed properly.

. Are you operating properly.

. Do you have the cash support.

. Do you have the finance.

. Is it in a growth market.

. Is it in the right area.