Archive for 2010

Execution – Flexibility In Practice

Wednesday, December 22nd, 2010

There’s been a lot written about the need to be flexible now that uncertainty plays such a part in the new normal. And, like so much else, it sounds like good, profound advice. Especially when you’re giving it, which, as strategy consultants, is something we have been doing for some of our business owner clients.

But, every now and then, life hands us a very practical opportunity to practice what we preach.

For example, for a number of reasons, I have to go to the U.K. at Christmas. For the first 5 or 6 years I did this my travel plans went smoothly. Last year I had a few weather related challenges coming back to Canada. Still, it was manageable.

But this year I have already been handed an opportunity to develop my flexibility – and I haven’t left yet!

I was supposed to fly out last Sunday night but, that morning, my flight was cancelled. Not a “biggie”, I reworked my strategy, developed an action plan and began to implement it.

I had to react quickly because there were lots of competitors also trying to grab the available seats. I had to alter my route, but I saw that as an opportunity to avoid Heathrow and the ongoing threat of bad weather there. And I may have saved a few dollars on the cost of the original fare. Bonus!

As in business, there were “knock-on” effects. But I rearranged the rental car and called in additional resources – my relatives. Their offers of help were gratefully accepted.

Now, it looks as if we (my wife is also scheduled to leave tomorrow night) are going to continue to have opportunities to work on our flexibility. Will our connecting flights be operating and will the roads on the final leg of our journey be passible? Then, in 10 days’ time, we have to get back home.

However like, I suspect, some of our business owner clients I find the mechanical aspects of being flexible – e.g. changing schedules or the start or completion dates of action plans or modifying budgets or forecasts – relatively easy.

But developing and executing an action plan to deal with the intangible aspects is more difficult. Chief amongst the intangibles in the case of my example is the impact on the person we are going to see – my Mother. She’s 82 years old, lives alone and her health is not as good as it used to be.

Reassuring (while not promising) her that everything will be fine and that we will be there for Christmas requires different “skills” than re-booking a flight or a rental car. Recent changes in her health have created new threats because she lives alone and mean that, while we’re there, we have to find new opportunities to provide support for her.

I find that responding to the requirements of being flexible is much harder when I’m managing people and their needs and expectations. I suspect that some of our clients find that too.

So perhaps being reminded that there’s more than one dimension to flexibility is the real lesson of the last few days. It’s an essential one because people are much more important than anything else.

And so my first New Year’s resolution is to bear that in mind when I work with our clients in 2011.

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3 Reasons Why Consulting Assignments Fail – Part 2

Thursday, December 16th, 2010

I mentioned the first of 3 reasons why I think assignments fail – Trying To Solve The Wrong Problem – last time. Here are the other 2.

• Reason # 2 – Failure to manage expectations.

If you don’t set expectations you can’t manage them.

I’ll begin with the money. The consultant has to accept the risks and estimate or quote a fee they can live with. The conditions under which the fee can be changed must be clearly understood by the client. Both parties must believe that termination conditions are fair. Most importantly, there can be no surprises. If there is even the possibility of additional charges the topic must be raised immediately.

If the consultant and the client don’t agree on clear, realistic goals and deliverables before the work begins, then neither will know what outcome the other really expects. The key word is “realistic”. The consultant has to avoid over-promising, which sets the stage for under-delivering. The client has to avoid asking for a $50 result on a $5 budget.

The assignment must be broken down into a series of steps or building blocks, each of which has clear deliverables. Each step must have a start and finish date.

When things get off track, and they will, the consultant must immediately draw that to the client’s attention. If the client is troubled by any aspect of the assignment she/he must bring that to the consultant’s attention. Alternatives must be proposed and agreement reached (no doubt involving compromise on one or both sides) on how to adapt and move ahead.

Phone calls, voice mail, email and ad hoc meetings are the communication tools we use most frequently. But they cannot replace regular face-to-face meetings, with a pre-arranged agenda and record of the follow up actions to be taken.

The consultant has to obtain the client’s agreement that the deliverables for a step have been met. There is no room for hesitation, if the client isn’t sure, the step is not complete.

• Reason # 3 – Changing the scope of the assignment in mid-stream.

It may be perfectly logical to make changes to the goal/deliverables of an assignment before it’s complete. For example, if new or unexpected questions arise as a step is completed it might be necessary to find the answers to them.

But it just as easily may not be. For example, deciding not to roll out a research project nationally based on input from customers in one Province, so that the money saved can be used for something else.

Even when changes are made for good reasons they may require time and other resources that weren’t considered in the original plan. Giving in to the temptation to complete more work with the same people usually results in underestimating the delays to the original assignment.

So both client and consultant have to objectively assess the impact and agree on the adjustments to the plan before making any change.

It’s certainly not fair to say that all business owners are anti-consultant. But it is fair to say that many have at least some degree of scepticism about what consultants can actually achieve.

When I asked some colleagues for their top 3 reasons why assignments fail, most said responsibility rests solely with the consultant. However, this can’t always be true.

But, unfortunately, it is true that we (the consultants) are often holding the gun when it shoots us in the foot.

3 Reasons Why Consulting Assignments Fail

Tuesday, December 14th, 2010

Let’s have a show of hands – everyone who enjoys going to the dentist put your hand up.

I can almost hear the response – “What, are you crazy? What a silly question”.  So let’s try another one and let’s make it a multi-part question.

Hands up everyone who enjoys hiring; OR working with; OR even sitting down at a networking lunch next to a consultant.

I’m prepared to wager money (not a statement to be taken lightly when made by a Scotsman) that the response was similar. In fact the only variable in my mind would be how many more people prefer their dentist to a consultant. Why is that?

The answers to that question range along a scale. At one end we have business owners who are not really sure what, if anything, the consultants they hired actually achieved. At the other stand the entrepreneurs who hired consultants to do something – like increase sales or generate more leads – and it didn’t happen.

If we could be objective about the topic we might be able to agree that it’s not always the consultant’s fault when things go wrong. But it is true that we (the consultants) are often holding the gun when it shoots us in the foot. There are a number of reasons why that is the case. Here are 3 of the more common ones.

1. Trying to solve the wrong problem.

Let’s use the example of increasing sales or generating more leads.

When sales drop a common reaction is to assume the problem lies with the sales people. So the solution is to train them in appointment making, presentation and/or closing skills.

The same thing happens when leads begin to dry up. The assumption is that, if we have marketing campaigns, they aren’t working. And if we don’t have marketing campaigns we need some.

The next step for the owner is to start talking to either sales training or marketing consultants.

Let me use a medical analogy to explain what happens next. Let’s say you have a sore shoulder. Your family doctor sends you to see a physiotherapist and a surgeon. Odds are the former will suggest physiotherapy – at least for a start. But the surgeon will probably suggest surgery to quickly solve the problem before it gets worse.

Why does this happen? In 9 cases out of 10 it’s not because the physiotherapist and surgeon are driven simply by wanting to make money. It’s because most of us – for the best possible reasons – are predisposed to see a need for that which we know. And if the symptoms – whether they relate to medicine or business – fit, we react accordingly.

But every now and then the problem isn’t that the sales team’s skills are weak or that our advertising campaigns don’t work. The real problem is that our competitors have introduced more advanced technologies offering more features/greater value. Or it’s that they have adopted innovative processes which have reduced their costs, allowing them to reduce their selling prices.

Sales skills training or introducing creative social media campaigns are simply not an effective response to those problems. And adopting them is the result of faulty analysis – by both the business owner and the consultant.

If you were going to let a surgeon cut your shoulder open the odds are that you would get a second opinion before letting him/her begin. Why would you not do the same with a critical business problem?

I’ll talk about the second and third reasons why consulting assignments fail in my next post, later this week.

Selling Price of Your Company – Goal or Output

Thursday, December 2nd, 2010

A statement early in Larry Bossidy and Ram Charan’s book (see 5 Reasons I Love Execution) caught my attention. They say that “increasing shareholder value is an output, not a goal”. I’ve always said that increasing the value of your company is 1 of only 2 rewards for being a business owner i.e. it is a goal.

But, when I thought about it, I realized the logic really runs like this.

• The income a company generates from its operations, on an ongoing basis, represents the real value of the business to a purchaser.
• Which is why the value of an owner managed businesses is determined – most frequently – using a multiple of operating income.
• So, if management find the right strategy and execute it well, operating income will increase.
• As a result of that, all other things being equal, the value of the business will increase.
• The goal, therefore, is to find – and execute – the right strategy. Do that and owner/shareholder value takes care of itself and is, in fact, an output.

This is true regardless of whether the shareholders are a small group of family members or the public at large.

Around the time that I read Bossidy and Charan’s statement I attended an excellent seminar at the accounting firm SB Partners LLP called “Preparing Your Business for Sale”. One of the partners, Trevor Hood, a CA and CBV, explained clearly and thoroughly how businesses are valued. He finished by listing 2 sets of variables, 1 of which is under the control of management, which affect a valuation.

When I looked at the controllable variables later I realized that all of them related – directly or indirectly – to strategy. For example, markets, customers, competitive superiority, technological innovation, human resources, production and operating systems are all components of strategy.

Many of the other variables under management control – e.g. documenting policies and procedures, financial reporting, managing gross margins and costs/expenses, building an effective management team – are fundamental to successfully executing a strategy.

Even the variables Trevor correctly described as uncontrollable – economic conditions, industry trends, legislation etc. – all have to be considered during strategy development and/or business planning.

At about this point all of this thinking became very satisfying. Trevor’s variables are amongst the areas we focus business owners on when we work with them to build value in their companies. And since our whole purpose in life is strategy development and implementation – strategy made practical – it was all very reassuring………..

Then I saw an article, “Sell the Business, Sail into Retirement,” on the Globe and Mail web site. It talks about the number of businesses that will change hands in the next few years as the baby boomers retire. The article quotes a survey, which says that selling will be the most popular exit strategy.

But, the author goes on; activity is down, not up. Why, because although valuations have gone down because of the recession, owners’ still expect to get the prices that applied 3 years ago. (We encounter this “expectations gap” quite regularly.) But the good news is that low interest rates and easier lending conditions are pushing valuations back up.

We’re not sure that we buy into the comment about easier lending conditions – yet. But it is possible that it will happen in time for, or to coincide with, the boomers’ retirement.

So, what does all of this mean?

If it’s time to sell; and if valuations are going up; and if value is an output, or result, of a good strategy effectively executed then business owners need to demonstrate that they can execute better than ever before.

All of which reinforces the point that execution is, at the very least, a big issue for businesses today; it is the major job of the business owner/leader and it is a discipline which, if mastered, will give a business competitive advantage.

I’m glad we’re in the strategy business!

5 Reasons Why I Love Execution

Thursday, November 25th, 2010

I think I may be in love.

I’m reading Larry Bossidy and Ram Charan’s book “Execution – The Discipline of Getting Things Done”. Although I’m only one third of the way through it, I believe it’s the most rational, practical book about strategy that I’ve read in years.

Why do I think that? Well, for a start I buy into their fundamental premises. Here are 5 that I think are particularly important:

1. The difference between a company and its competitors is often the ability to execute.

All business owners have access to the same business books, webinars, training programs, coaches and consultants etc. Why then do 2 companies in the same industry, operating in the same markets and with similar strategies, produce different results?

The only remaining variable is execution. Which doesn’t mean the market leader is executing well – they’re just executing better than the other players. As an old friend used to say – “In the kingdom of the blind the one-eyed man is king”.

Some of you may argue that we haven’t considered culture or leadership. In that case, read on.

2. Execution is the biggest issue facing business today – and nobody has explained it satisfactorily.

Bossidy and Charan make several great points. Over the years, a great deal of thought has been given to strategy development – the result of which has been thousands of books and articles. You can hire a strategy consulting firm (including mine) who will guide you through the various “models”. The same is true – or rapidly becoming true – of leadership development and culture.

But how much thought has been given to how to execute? Not much. (Although, I have to say, our firm has always emphasised it). Perhaps execution has been neglected because it’s traditionally been confused with tactics. But it’s not – execution is integral to strategy.

You could argue that the field of project management is concerned with execution. But is it? Or is it concerned with how to manage the projects that someone else decided have to be executed?

3. Execution is the major job of the business leader. The leader who executes puts in place a culture and processes for executing.

If execution is the biggest issue in business today it had better be the #1 job of every business owner. But there are a couple of bear traps here.

Entrepreneurs have to avoid the temptation to execute or do everything by themselves. They also have to avoid micro-managing or being too hands-on. If the owners don’t do that they lose sight of the forest and only see trees. They stop being strategic and get lost in tactics.

The authors say the most effective approach is “active involvement”. That means getting things done through people. But having such a detailed knowledge of how the business makes money that an owner can constantly probe and ask the right questions – leading people to develop the right solutions.

The owner/leader has to find the correct balance if she is to lead by example and make execution part of the culture.

4. Execution is a discipline, a specific set of behaviours and techniques that, if mastered, will give you a competitive advantage.

The “easy” parts of the statement are that there are specific techniques, they can be mastered and, if you pull that off, you will gain competitive advantage.

The more difficult part is that there are a specific set of behaviours to be mastered also. Human nature being what it is, changing behaviour – even our own – usually takes far more effort than learning a technique. But perhaps that’s where the discipline is required.

5. Execution includes mechanisms for changing assumptions as the environment changes.

This is my personal favourite. Many of the owners and management teams we work with get the intellectual concept of “no fault, no blame” when following up on plans and finding they haven’t worked quite as intended.

But even they find it hard to put guilt and value judgements aside when targets are missed because assumptions were “wrong”. The authors’ stress need for “realism” in running a business. Realistically then, has anyone ever been able to accurately predict the future? Let’s put the fault, guilt, and blame away for good.

In case you hadn’t noticed, I’m excited. There is just so much common sense in this book I’m looking forward to reading the rest of it. I should have read it years ago………but there goes the guilt thing again!

Give Yourself A Chance in 2011

Thursday, November 18th, 2010

Last week we sent a survey to over 600 people in our database and asked for their input on 6 things that we think may impact their performance in 2011. They were the Canadian economy; the US/global economy; changes taking place in their industry; competitors’ actions; finding people with the right skills and experience; and the ability to secure financing.

We also asked the respondents if they expected their profits to increase in 2011. Over half of them said yes. Their fairly positive outlook is similar to, but more cautious than, the mood in recent survey by accountants PriceWaterhouseCoopers (PwC)[1]

When we asked the participants how they thought they will do against their goals and expectations for 2010, half said they would miss them.

We closed the survey by asking 2 questions about a key internal process for growing companies – business planning.

About a third of respondents told us they finish planning 2 or more months before the new fiscal year begins. Another 30% complete their planning during the month before the fiscal year begins. The remainder only complete their planning during the first month of the new year, or later.

Then we asked the participants if they used a structured planning process, an unstructured process, or no process at all.  Almost 40% said that they have a structured process, while only around 15% have no process at all. The remainder said they have an informal process.

The answers to the last 2 questions could be influenced by the size of some of the companies responding to our survey. However, it is tempting to speculate that the companies (every participant works for a different company and 75% of the respondents said they were the owner of the company) who expect to miss their 2010 goals are the same ones who leave planning late and have either an informal process or no planning process at all.

But a sample of individual responses showed that many companies who will miss their 2010 goals say they have a structured process and finish their planning before the start of the fiscal year.

Clearly this raises some questions, such as;

  • How well did the companies gather information about the external environment?
  • How realistic were they about their strengths and weaknesses and the quantity and quality of the resources they had?
  • Were the assumptions which formed the basis for their goals/ expectations/forecasts overly optimistic?
  • How well did they actually execute on their plans?
  • Is some combination of these 4 at work?

And if the companies which have a structured process and plan well in advance of a new fiscal year still miss their goals – what chance do those with an informal process who leave planning to the last minute have?

I wonder how many of those companies will actually increase their profits in 2011!

Give yourself a chance next year, download our 2011 Business Planning Checklist

If you want more information about the survey, or would like to participate in the next one, contact us at growprofits@profitpath.com


[1] “The new business as usual. The Business Insights Survey of Canadian Private Companies 2010” PriceWaterhouseCoopers

6 Tips for Getting Better Results in 2011.

Monday, November 8th, 2010

In a recent blog posting I wrote that business planning has started/is starting/should have started for 2011. Then the other day I came across these 6 tips which I pulled together at the end of 2008.

At that time, you may remember, there was a deluge of bad news pouring from the newspapers, Internet and TV all day, every day. Some forecasters were saying the economy would rally in late 2009, others were saying it would take years before we saw an improvement.

I made the point then that, when so much of what is going on around you seems out of control, it’s easy to stop focussing on the things that are under your control. So, since uncertainty is still with us, I thought it was worth freshening up the Tips.

Tip #1 – Remember that we have always had to deal with uncertainty when developing plans and strategies. It may be true that there is more uncertainty now than in the past. However, don’t forget that no one has ever been able to accurately predict the future with any degree of consistency.

Three ways to deal with uncertainty are – keep digging until you find the best information available before firming up assumptions; put flexibility into plans and strategies; and think through contingency plans (e.g. plan for the best, worst, and most likely outcomes and be ready to deal with all of them). A fourth technique is to review, and adjust, goals more frequently.

Tip #2 – Make sure that you actually implement your plans and strategies. According to an Ernst & Young survey, 66% of corporate strategy is never executed.

In our experience implementation is handled just as poorly in owner managed companies – which generally have fewer employees (who are often located in the same premises) and which have fewer departments and layers. All of which should make communication and coordination easier.

There are a number of reasons why strategy implementation fails and the remaining tips will help you avoid them.

Tip #3 – Develop detailed Action Plans for execution. Involve key people when figuring out your goals for 2011 – and they’ll buy into what has to be done.

Compare the goals with the current situation and gaps will appear. Then ask them what – specifically – has to be done to close the gaps, by whom and by when. The answers to those questions will form the basis of your Action Plans for 2011.

Tip #4 – Avoid attempting too much, for 2 reasons. Firstly, there may be a long list of things to be done to close the gaps and no company has the resources to attack them all. So, prioritize the things which have the most impact on your goals and focus on them. You can go back and tackle the others later.

Secondly, you want to stay flexible enough to respond to whatever happens.

Tip #5 – Commit enough resources to completing the priorities. Business owners are inclined to tackle too much at once. They also try to do everything in the minimum amount of time – while spending as little money as possible.

Think about the priorities this way. You’ve invested time identifying reasonable goals and figuring out what has to be done to reach them. That effort will be wasted unless you commit the resources required to complete those action plans.

Even if you are allocating too many resources, you’ll complete the job ahead of schedule. Who doesn’t feel good when that happens?

Tip #6 – Follow up regularly and in a structured way. There are also 2 reasons for doing this. First, because no one can accurately predict the future you have to make time to compare what you thought would happen with what has happened and adjust for reality.

Second, what could be more important than making sure you complete the action plans that will lead to achieving your goals? Not dealing with the day-to-day problems, which always seem to be “urgent”. Prevent them getting in the way of the “important” priorities by making time to review progress toward your goals once a quarter.

The odds are that you’ve heard each one of these tips before. But the reality is that a gap exists between hearing – even knowing – the right thing to do and actually doing it. That’s why 66% of the companies surveyed wasted their time.

Winners eliminate the gap.

How To Keep Control When You Work With Consultants

Wednesday, November 3rd, 2010

Marie Wiese at Marketing CoPilot wrote in her blog last week that CEO’s begrudge – even hate – spending money on marketing services or marketing consulting. She says that’s because marketing feels like a series of unconnected projects and tasks with vague un-measurable results.

We often encounter similar objections when we meet business owners. Some haven’t worked with strategy consultants and just don’t know what to expect. Even those who have are concerned that they are getting into a situation over which they have no control.

Consulting assignments have a reputation for expanding beyond their original scope and budget. Then there are the results – or apparent lack thereof. Entrepreneurs and business owners who, by nature, want to be in control find this hard to deal with.

But it doesn’t have to be this way. Start by asking for a written proposal which contains the following 5 sections:

1. Our Understanding of the Situation. Look for a detailed description of the situation you now face and the factors which created it. This section should echo your discussions with the consultants – and should be written from their notes of those discussions.

2. Scope of Work. This should contain a step by step explanation of how the consultants will help you deal with the Situation. Ask for the full assignment to be broken into steps and laid out in a table with 3 columns:

  • A description of exactly what will be done by the consultants in each step.
  • A clear statement of the deliverable or deliverables for each step.
  • The resources that both the client and the consultant must provide in order to secure the deliverable(s).

3. Schedule. This section contains the estimated time required to complete each step. The consultant may provide a range of times if they perceive risk, e.g. they have not been able to examine documents being provided by you. Insist, however, that the lowest and highest estimates of the hours required, and the factors which determine them, are clear.

The Schedule should include a proposed start date and may have a target date for completion.

4. Fees and Payment. Preparing the Scope enables the consultant to determine who – e.g. partner, senior consultant, or research associate – will do the work. Completing the Schedule enables a realistic estimate to be made of the time required. Applying the rate for the person doing the work to the hours required to complete it generates the fee for each step. This section should also contain the total cost of the assignment. Ask for it to be broken out by partner etc.

Travel costs – e.g. mileage, air fares – or other expenses should be shown separately. (Note some consultants bill their clients for the time they spend travelling, others do not.)

We always include the statement, at this point, that no additional costs of any type will be incurred without the client’s prior approval.

Usually taxes e.g. HST are excluded from fees.

Make sure the proposal is clear on how and when the consultant is to be paid. In most cases, we send our clients an invoice when we complete a step and request payment on presentation. In this way they are constantly in control of how much they are spending on us.

5. Termination. Insist that you have the right to terminate an assignment at any time. Clarify the financial terms attached to termination before the work begins.

We tell our clients that if, if the deliverable(s) for any step are not completed, they can terminate the project at the end of that step. In that event we simply expect to be paid for the work we have completed.

There is no reason why entrepreneurs and business owners should not be in control when they work with consultants. Getting a clear, specific, written proposal will get you off to a good start. We’ll talk about other ways to stay in control in future posts.

Most consultants just want to deliver results – and we don’t want to be hard to deal with.

It’s THAT Time of Year Again

Tuesday, October 26th, 2010

The last quarter of the year can be very frustrating. In addition to the “normal” workload, there’s all the seasonal stuff to be done – what should our Holiday card say, what will we give people this year etc.? (O.K. so I am a Grinch.)

Second, the results for 2010 begin to take shape. Hopefully you’ll have a great year, possibly even so good that you’re not keeping up with demand. A less attractive, but still acceptable, alternative is that you’ll make your targets (if only just). The outcome that no one wants is that you’ll fall short of some or all of your goals.

Then, of course, strategic or business planning has started/is starting/should have started for next year. And what is happening in 2010 will affect the “mood” and possibly the approach, to that exercise.

By the way does anyone really enjoy strategic planning? And does it achieve anything in this age of constant change and heightened uncertainty? I saw 2 blog postings over the weekend that argued we can no longer do strategic planning as we’ve always done it.

The first, Time to Retire Strategic Planning and Adopt Innovation Strategy by Kamal Hassan, said that that strategic planning has become too formulaic and we’ve come to rely too much on what has worked in the past. But isn’t that argument rooted in the application of the process rather than the process itself?

Kamal went on to say that we currently study the past to plan the future but that history is no longer the best teacher. However, as someone (I think it was Winston Churchill) said, “If we don’t learn from history then we are doomed to repeat it”.

This posting closed with the comment that inventing the future is better than predicting it. To invent the future we have, amongst other things, to replace historical data with subjective data (customer surveys, competitor strategy, trends, gaps, etc.). But haven’t been doing these things for some time now? I know the companies we work with do.

While saying that attempting to define the business over a 3 or 5 year horizon is probably foolhardy at best, the second post Strategic Planning and Innovation by Jeffrey Phillips, did acknowledge that it is very important to define strategic milestones or goals and determine how the firm arrives at those goals.

Jeffrey thinks that these are more “tactical” activities than pure strategic planning. At the risk of splitting hairs, I’d say they’re more about execution of the strategy.

In closing Jeffrey says that he doubts we’ll ever see the end of “strategic planning” but that what we will see over time is the realization that innovation and trend management is the actionable part of the strategic planning process. And I tend to agree with that.

I was talking to a colleague today who articulated the point I want to make really well. The strategic planning process will always be with us but it must develop, as most things do, with time. However we must adapt the process rather than declare it hopelessly broken and throw every part of it away.

Forecasting several different scenarios, building assumptions on thorough, comprehensive research (formal and informal) and thinking through contingency plans are just some of the things we can – and must – do in this age of fast, unrelenting change. Looking at, and adjusting, our goals more frequently is also, I believe, simply good sense.

So, I think strategic planning is as relevant in this age of constant change and heightened uncertainty as it has always been. And I think it can accomplish as much, or as little, as we allow the links between strategy development and execution to achieve.

But as for enjoying it, well……….

4 Things You Can Do To Make Your Bank Love You

Tuesday, October 19th, 2010

Have the interest rates and annual review fees charged by your Bank gone up? Are you being asked to submit reports monthly? Have you had trouble getting a loan or LOC extended – even with personal guarantees?

A number of business owners we meet are not happy. Some can’t get access to new financing. Others are saying things like “I’ve been a good customer at my bank for 15 years.  I’ve had 2 bad years and they are treating me like a new customer.”

So, when I was talking to a Commercial Account Manager at one of the banks recently, I asked him about the situation. He talked about what the past 18 months has meant to their business – higher loan loss provisions, increased costs of monitoring accounts etc. Then he told me about the risk factors they assess when they’re doing a scheduled review of an existing customer or pursuing someone they would like to do business with.

The financial ones are what you would expect – trends in revenues, gross margins, and inventory and accounts receivable days. They also want to be sure that the dividends the owners are paying themselves reflect the company’s operating performance.

But it was the 7 non-financial risk factors that caught my attention. Here they are. (The “editorial” comments in italics are mine):

  • The length of time the company has been in business. If you’ve been in business several years good if not, there’s nothing you can do about it so focus on the others.
  • How well the business performed in previous “adverse conditions”. If you were around and performed better than your competitors make really sure the Bank knows about it. If you weren’t and/or didn’t, focus on the others.
  • How well the company responded to the Bank if it had financial “challenges” in the past. Would you deliberately annoy the biggest supplier of inputs (human or material) to your product or service? Then why do that to your Bank? It may well be uncomfortable but it won’t hurt as much as shooting yourself in the foot.
  • If there are currently any liability issues? If there are, go for full disclosure and be pro-active – tell them about the plan you have in place to deal with them.
  • Whether there’s a succession plan and key man life insurance in place. Any company which has grown beyond “start-up” mode should at least be thinking about an exit strategy and/or succession plan. And every company should have key man/woman insurance.
  • If there’s breadth in the management team – with a clear separation of duties. If you’ve had a business for 4 or 5 years, still tightly control everything yourself; have no key person insurance; only did “all right” or “OK” in the last downturn; and had to be asked repeatedly for information, you should expect to be asked for personal guarantees – and you may be lucky to find a Bank that wants to deal with you!
  • Report in a timely fashion. There’s really no reason not to be reporting regularly. You get the information to provide feedback on how well you’re implementing your strategy anyway (don’t you?) So why not share it?

There’s not a great deal you can do today to impact the first 3 factors. And if there are liability issues they probably result from something that happened in the past. But you can have an immediate, ongoing impact on your ratings in the last 3 items.

Why? Because a variety of forecasters and commentators have predicted that the financing situation will be the same in 2011 as it was this year.

And if that’s the case then there are 4 things you can do to make your Bank love you;

  • Operate profitably and efficiently during these “adverse” conditions. This will give you a double win. You’ll ace all of the financial risk factors. And you’ll build a track record for the future in the second non-financial factor.
  • Regularly provide all of the information your Bank requires – before they ask for it.
  • Either begin or continue to spread responsibility for the company’s success over several key people, making each one responsible for a separate area e.g. selling, accounting and operations.
  • Buy or update your key man insurance and develop or update your exit/succession plan. (We can recommend professionals to help you with both.)

You’ll improve your chances of having enough funding to get out of the recession first/stronger.

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