Business funding certainty
Conatus is focused on business funding certainty, business growth and business turnaround which gives some interesting insight into key areas where business resilience can be reviewed and improved. Each business is unique but underlying problems can be similar. Director Justin Nevison-Grainger highlights some topical examples.
Putting everything into context, whilst the mix of clients coming to us in financial difficulty is increasing, as uncertainty and tightening lending policies impact, there remain lots of good news expansion client stories too.
Sales and debtor mix can have an enormous impact on both resilience in cash terms and the ongoing support of any lenders. For one of our clients, we ran a simple excel report based on their sales over 12 months, broken down by new (gained over the year) and existing customers.
Whilst overall sales looked like they were improving, the report highlighted that 90% of the client base was either reducing spend or had become dormant. Also, of the new customers gained, most were either dormant, declining or had stopped spending recently.
The report also showed that resilience to sales falling below breakeven was impaired and over reliant on only four customers representing over 40% of sales. Therefore, a real risk existed that the clients bank working capital facilities would be reduced due to the lack of spread in the underlying debtors.
This information prompted a total rethink on how the directors and sales team were operating, with an immediate switch to re-working existing and previous customers. It also led to reassessing the risk and credit quality of each customer; in fact, we arranged debtor insurance to increase resilience should one of the major debtors fail.
Unintentional poor pricing and margin is often a real danger to business resilience and paradoxically more common in previously successful and fast growth businesses. It may sound daft but mark up (the difference between product cost and sale price) and gross margin/profit (a percentage of sales price) are commonly confused or misinterpreted by staff on the ground resulting in “mysterious” poor profitability…
One business owner planned a gross profit of 40% to give him the annual net profit and resilience he needed. However, his customer-facing staff marked up each product by 40% hoping to achieve the owners profit strategy i.e. each widget costing £100 was sold at £140 making £40 on the sale BUT only a 29% gross profit. To meet the owner’s objectives, the mark up should have been about 68% i.e. £100 product cost x 168% = £168 selling price, minus £100 cost = £68 profit, achieving the desired 40% of sales. This meant the much lower annual gross profit was insufficient to meet fixed costs and substantial losses resulted for the year.
A tested and simple pricing plan, that staff understand, can avoid this issue and enable some sort of differentiation based on customer importance e.g. different percentage mark-up for Bronze, Silver and Gold segmented customers. Analysis of discounts given, and credit notes can also be very insightful.
One important tip though is that, if there is a problem in the business it is not likely to improve by doing nothing. However, it’s very likely that a professional firm such as Conatus or another trusted turnaround professional, will have seen similar issues in the past and have some practical realistic advice and support to solve the problem and improve resilience for the future.
Therefore, if in doubt, let there be no doubt and make that call.
Justin Nevison-Grainger is a director and the co-owner of Conatus Financing Solutions. Conatus are Associate Members of R3, The Association of Business Turnaround Professionals, and managed over 30 successful turnarounds over the last two years. Contact Justin on firstname.lastname@example.org or 01473 851587
Photo Credit: Simon Finlay