Building a good business base

The same principles that apply to building a good farming operation can be found in many walks of business life.

Take a stroll around Christchurch and the temptation would be to assume that with all the building going on over the last four years that owning and operating a building company would have been smart, profitable and satisfying option. But official records show that 35 building companies have gone into liquidation over the past year or so.

This would suggest perhaps that another 35 businesses will go into liquidation over the next year and maybe another 35 are operating close to the wind right now. Of these building companies perhaps 50 per cent to 75 per cent have competent builders and tradesmen in their ranks. Here then is a good example of how having ability at something is quite different from making a long term, sustainable, bankable business from that same ability.

Here is a test for every farmer and businessman. See if you can honestly tick off having a good grip of your own situation in these 34 well proven business laws or attributes. You really need to be heading for a 90 per cent pass rate. 1. The reason 75 per cent of new businesses fail in New Zealand is the lack of a sufficient apprenticeship to operate and manage the business and/or being significantly undercapitalised. Either of these is potentially a major problem. 2. What does the abbreviation CFIMITYM stand for? Cash flow is more important than your mother – a strong statement but so true for many businesses. 3. Never, never tell me that you are too busy looking after other sections of the business to worry about what is happening on the bank statement – this is a classic statement from somebody that is heading for trouble. 4. Sound profits in your mind are often a long way from cash and the bank statement – you can’t fix these issues by just turning them over in your mind and need to deal with reality. Cash is reality and your mind spends most of its time a long way from reality. 5. Never forget that losses manage themselves extremely well. Losses don’t need managing, but your profits need constant managing and massaging. 6. Cut your losses early on – the bottom group in every business sector let their losses run on to see if in time they will come right. 7. Get the point clear in your mind that ‘production is vanity and profits are sanity’. Production without profits is just dumb. 8. Don’t fight with your bank. You need them pushing strongly from behind, not pushing against you in the front. If they are not pushing from behind then there is a message and you need to deal with it – never shoot the messenger. 9. Remember if you find your advisers difficult it will almost certainly mean you have good advisers. 10. Are you under-promising and over-performing. If not why not? This is the only business path worth travelling from your customer and client’s point of view. 11. The comment that a particular expense is income tax deductible and as a result is important is nonsense. Profits are not made from this type of thinking and are destroyed from this type of thinking. 12. Profits must come before choices, not the other way around – you must get the sequence the right way around. 13. The argument that you thought you had just won with your spouse is not over yet. If your spouse doesn’t like or agree with your business plan then stop immediately, take a threeday weekend and work it through. Your spouse may not know the core of the business as well as you, but he or she will know your weaknesses better than you will. They are often the core of the problem. 14. Business profits are often hard to bank. Talking, thinking and writing about profit is worth nothing if it’s not bankable. If you can’t bank it then it’s not a business deal – it’s a hobby. 15. Sometimes a loss leader business decision is obvious from day one. When you think you recognise a loss leader stop dead and walk away. Loss leader decisions should be illegal. 16. Profit making is a decision – your decision. If you don’t plan to make a profit from some key decision then stop planning. Waiting until the year’s end to see if some action makes a profit is a poor way to run a business. 17. Never forget that the most important file in your business cabinet is your own. 18. Build your financial reserves at every opportunity. Once you get on top of this area you will do a much better job with the business decisions in front of you. 19. Don’t get yourself tangled up with unrealistic expectations about some aspect of your business. Many business people make this mistake. It’s hard to put a realistic value on your own business. 20. Don’t guess about any key issue in your business – get the facts as guesses can be costly, frustrating and time wasting. 21. Be careful with a business venture that has a lot of moving parts or variable issues. If the issue is important and you can’t keep it simple then maybe you shouldn’t keep it. 22. In business you need to be wary of the articulate incompetent – they are alive, they are around and they are breeding. 23. Your business operating expenses are probably increasing at a rate of about 4 per cent a year. If you remember the rule of ‘72’ this means your operating expenses will double within 18 years. If the expenses increase about 6 per cent compound each year then your business operating expenses would double every 12 years. The point is that your charge out rate policy is crucial and a gradual annual increase will tend to be better than a heavy increase every three – four years. 24. Don’t forget that New Zealand boom cycles tend to be shorter than the bust cycles and plan for this. 25. Remember that only lawyers and painters can turn black into white. Don’t waste time trying to justify an error of judgement – move on and burn the error into your memory banks. 26. The best equipped to make crunchy decisions are the individual or parties who have skin in the game. Don’t delegate down the line these decisions. Take them on yourself and turn them around or fix them.

Time management is often an under rated area – time can be a positive factor but when it comes to low profits or losses time is a major pain because losses accumulate and you can run out of time before you realise just how serious things have become.

27. Fixed costs are often referred to as a major problem, but in my financial trouble-shooting years I found fixed minds were just as much of an issue. The recesses of men’s minds are a dark place so if new information comes to light then unfix your mind. 28. Where will you have the most business problems going forward? The problems will occur with individuals or parties that have weak balance sheets. Do your own research on these people at the outset, not after the event. You need to be gracious with people, but relatively ruthless with money. 29. Low margins over a long period of time tend towards low profits. Time management is often an underrated area – time can be a positive factor but when it comes to low profits or losses time is a major pain because losses accumulate and you can run out of time before you realise just how serious things have become. You must harness time or it will harness you. 30. Fraud and cash are partners. Fraud almost invariably involves cash in smaller businesses – this is why people owning and operating those businesses must not get too far away from the bridge and the engine room of their business. 31. Government keeps telling us that there is almost no inflation in New Zealand at the moment. Perhaps technically they are correct, but anybody involved with a capital cost projects and the cost increases going on at the moment every three months or so knows the Government is out of touch with reality. You and I need a second over-run cost provision on top of our original estimated cost over-run provision. As for trying to produce a five-year budget projection your time would be better spent fishing. 32. You need to be able to package the word ‘no’ . When well packaged this word would save a lot of businesspeople from making serious mistakes. 33. Can you grow your business too fast? Yes you can and need to get your direction right and let any haste come later. 34. You will get seven out of 10 for planning for profits, eight out of 10 for implementing the profit plan and nine out of 10 for completing the planned work. But you will only get 10 out of 10 for banking the profit.