CHAPTER 9

Stop—What If…It’s the Money?

“I can’t grow the business, I have no money to…” is a frequent cry. But before you’re bumping up against the glass ceiling of: I have no money, you’re most likely first hitting the glass ceiling of lack time/resources/energy. We know that doesn’t seem to be the case, but what if it is? That’s why the Stop section so far focused on those nonmoney issues. Once you have implemented the relevant recommendations in the Stop section covered so far, you will have freed up time/resources/energy to be ready for growth.

And then you are ready to rightly ask yourself, if there is anything I need to Stop, to stop leaving money on the table? And we’ve got you covered in that department too. First by considering recommendations about cash, and then on the next section considering recommendations about price—which is perhaps the most underestimated source of money by most business owners—but more on that later.

As we have already identified, it is the margin you make on the sales, translated into cash in your bank that gives you the tool—money—to do what you want/need to do. It’s the absence of this money that risks you overtrading.

Overtrading is easy. All you have to do is spend all your money on inventory and then regardless of how much demand there is for your product, or whatever fancy prices you are charging your customers, until some of them actually pay, you have no money to buy any more inventory, or meet your wage bill, or pay for any other overhead. So, there’s a risk you’ll go bankrupt and leave a lot of potential money on the table for the liquidator to collect badly instead.

And talking of nonpaying, do you have customers who don’t pay you until they want to order from you again, and are you then perverse enough to persevere with them and their little game? If so, new rules. The customer prepays future orders or they take no further product from you.

Factoring and Discounting

Let’s just check you have already researched either one of the two related opportunities of factoring and discounting.

Invoice factoring is selling all your invoices to a finance company, which then advances you a largish percentage of their face value upon receipt of invoice, paying you the rest when the customer settles up with them.

Confidential invoice discounting is where you sell the finance company the invoices but the customer doesn’t know—they still settle with you—and you settle with your discounter once you’re paid. The discounter still gives you a large percentage of cash on day one, but you are better able to control the collection process. Obviously the confidential invoice discounting only works if the discounter approves of your systems and trusts you to return its advances.

With either method of funding above, unless you have negotiated non-recourse terms, if the customer ultimately doesn’t pay, you get the invoice back and have to reimburse the advance you had earlier received against it. Non-recourse is great, but you’ve got to have one hell of a quality order book and a broad spread of customers for the factor/discounter to agree to work on that basis. Even if they do take them off your hands—with no comeback—you’ll frequently be stymied by the seemingly unrealistic credit limits that finance companies place on each of your favored clients. It’s no different to insurance really, because that’s what non-recourse is.

If you’re not using one of these, then why not? Having say 70 percent of your receivables in your bank account rather than out there must make sense if you’re always short of money.

Stock-Turn

But let’s not get fixated. Apart from covering your anticipated short-term requirements, it is almost certainly better that your cash is tied up in saleable inventory for customers that do actually pay you, than sitting in the bank. Then your cash is at least working for you—assuming your pricing allows for attractive net margins—rather than kicking around in the bank earning paltry interest—if any. Again, note the words saleable and pay. Unsalable inventory is another name for landfill; nonpaying customers are worse than a bad joke.

A lot of businesses require inventory to function, though obviously it is of considerably less significance if you are a services company or a software company. You’d be surprised though. If you are an architect, do you have a lifetime’s supply of the wrong-sized drafting paper? As a restaurant owner, what’s been in your store room since time began? Almost everyone acquires some inventory irrespective of the type of business, so don’t rush to deny it. But either you do, in which case read on, or don’t and you then skip this section, having paused to remember the meaning of the three-letter acronym (TLA): JIC. For those of you tempted to skip ahead, thinking you don’t have inventory, do you have any “spare capacity” in any aspect of your business?

If you don’t think you have inventory, as you read the next piece try to substitute the words “spare capacity” for inventory. Yes, spare capacity is very different from excessive inventory. It’s not true substitute, but like excessive inventory, spare capacity is leaving money on the table in that some of your assets are underutilized. We feel that if you allow yourself to be creative, this substitution might still help you unearth a few interesting recommendations for yourself.

Inventory is stuff you hold in anticipation of a sale (or to build into a sale) that you are storing at considerable cost, but which could conceivably be better left with its manufacturer. Look at the auto industry. Forty years ago when there was a genuine industry, each company took pride in building pretty much every component themselves, in-house. However, the risk of strike action, the inability to match supply and demand, and so on, led to each of these manufacturers into building huge storage complexes to handle fluctuations and to ensure that the production line had weeks of supplies on hand. Nowadays, autos are assembled from components made by subcontractors and, in accordance with best just-in-time (JIT) principles, the subcontractors are sent orders electronically today, for tomorrow’s assembly-line requirements. Inventory levels can now be measured in the auto business in hours’ worth rather than in months or years.

So why have you got so much of it? Why shouldn’t much of it still be cluttering the original manufacturer of the stuff, rather than you having to not only find space to store it? Worse, you are also having to finance it as well. Reaching for the well-worn, bumper book of excuses we can see JIC trying to win out against JIT. That’s pathetic. If you went over to JIT, and JIC actually happened (and it rarely does), surely you’d still manage to get the required item(s) from its manufacturer/supplier in plenty of time to satisfy your customer. A good way to ensure this and make it the supplier’s responsibility is for you to agree with them an SLA (service-level agreement) preferably negotiated when you first start trading with them, detailing their commitment to reacting to changes in your demand.

“It’s not inventory stock-turn which is the problem,” we hear you retort—though in truth it often is. Much more likely, however, is that you were hoodwinked by the original manufacturer or supplier into taking more than you need at any one time because of their seeming insistence—by word or financial inducement—to make you take minimum quantities of a line, make up minimum order sizes, or have you fall for one of their promotions that transfers their overstock problem on to you. A consequence of that is you almost certainly have a lot of money invested in saleable inventory but that it might be some years before much of it gets sold by you. Perhaps 80/20 applies here too: 80 percent of your sales come from only 20 percent of the inventory—which is regularly replaced—whilst the rest just stays around from one annual stock take to the next.

With a Little Help from Your Suppliers

One way to potentially deal with the excess, if you accept that your manufacturer/supplier—who always insists you take a minimum quantity of each item—actually has opened cartons (for instance) in their warehouse because they will supply odd pieces of inventory either to their own retail customers or as warranty replacements for faulty items, and so on, then there is a potential deal to be done. If you can identify what you hold in inventory but which in your hands doesn’t sell from one year to the next, you then ask your manufacturer/supplier to take those items back. If they are current lines, they should—but always be ready for a sharp intake of breath from them.

Maybe this book should be titled: A breath of fresh air as you might be entitled to ask why each time we hit a big decision, breathing is involved? There is no obvious answer to that one—though most other refreshing solutions involve brands like Coca Cola—no, let’s not go there. But just maybe it gives you the really positive thinking time you needed, in clearing the head. There is science to support the notion of deep breaths being helpful, as University Of Michigan’s Health blog suggests:

So breathing really does help.

Back to our supplier, in originally shifting the items to you, they made a profit on it; then to give you a refund or a credit now will, in effect, mean them giving you back some of their previously banked profit. So expect their expelling of breath to occur in parallel with a jumble of words headed in your direction and where you’ll find the two key discernible ones are bound to be: restocking charge. A restocking charge in effect gives them some margin on the returning items to replace the profit they’re handing back to you, and when they resell the items again, they’ll make a new profit too.

Now from a cash perspective, suffering a restocking charge is worthwhile because it turns products which are tying up your cash into spendable cash. But from a profit and loss perspective (and if pedantic, the absolute total amount of ultimate cash in your business too), this restocking charge by them is a loss for you. So here’s what you do. You say “will you waive the restocking charge if I spend all of the credit amount on new inventory?” There’s certainly a negotiation to be had here. Try it.

And next time their representative comes to see you with a great price, if you will take a large volume, say “yes” to the deal, but demand that you call it off (i.e., take delivery and pay) in bite-sized chunks over the ensuing weeks (or months) and so have it as you need it rather than all upfront.

Everything is negotiable until the other side says it isn’t. The question then is whether to switch the same conversation to an alternative supplier. If the supplier in front of you wants your business, it should be on your terms.

Overheads over Your Head?

It is easily possible for a customer to have historically wrapped you around his little finger and persuaded you of the wisdom of doing him a “one-off” or “special.” It hopefully led to great things, but we would suspect that your business would now be better off if you hadn’t had your arm twisted, because it didn’t finally lead to great things. Are we right?

Hindsight is a great way of beating yourself up, but to no advantage. Better to use the lessons derived from looking back, to look forward.

There is no doubt that, unless your business is high-end jewelry, commodity trading, or stockbroking, people are your biggest expense. That’s why there’s the section about people—and it’s quite a long section—at the beginning. So we won’t provide a repeated summary here except to ask, Do you have people on your payroll, acquired historically, but now retained JIC?

Similarly, do you have underutilized assets JIC? Are your premises now too large for what you want to do? Perhaps you sublet part or move somewhere smaller? Do you have too many premises? A branch office perhaps when you thought it important, retained now JIC? Or are you renting/leasing/owning a number of places in this locale, when one site would be a better way of doing things? Are you hanging on to somewhere for purely legacy reasons, when a fresh pair of eyes would see it rather more hysterical than historical?

As a restaurant, could you create space for a delicatessen in one corner? As an architect, might it make sense to sublet an unwanted office to a quantity surveyor? As a realtor, shouldn’t the art on your walls be for sale, as your visitors will soon have blank walls to fill? For our widget maker, would some sensible pallet racking or a mezzanine floor installed in the warehouse shrink your total ground floor area needs and then allow you to revisit the sublet question?

The same sorts of questions apply to your fleet of cars and trucks. Are you holding on to any of these JIC? Should you do your own distribution at all? When did you last have a third party quote to take all of that chore away, particularly if you are taking part loads, long distances. Clearly someone else could consolidate into their loads built up from a variety of sources and at least reflect some of their savings back to you.

Now it is time to ask the questions of your plant and machinery. How much of that was acquired for business you no longer do and would its release put any cash back into the business and potentially free up some space for the future or to sublet? And look in those dark corners and the back of the yard. We’re talking about the stuff you really aren’t using and never will again, yet you never finally disposed of?

And then, do you remember all those fliers you have had from the we check your utility bills companies which you’ve binned over the years? And all their blood-sucking, leech-like properties are lost to you when, had you called them up, they’d have given water, power, telephone, and so on, the kind of review of these expenditures you’ve kept promising to do and never had. Given they should only work on a percentage of what they save, why not give them a whirl, now? But as with everything, read the small print as paying a fee of one year’s savings might be fair, but committing to an ongoing fee for ever might be a rip-off.

Pause: Did you make notes of things in the Action This Today section in the back of this book? If not, please take this opportunity to review the prior pages to identify again any thoughts and ideas you want to follow up on.