ZERO [PART 3]

In our previous blogs we have looked at the challenge of close-to-Zero economic growth and raised the following actions for consideration in your business, whether you are a one-person business or a more corporate entity:

Zero Part 1:

1. Complacency

2. Costs

3. Cash.

 

Zero Part 2:

1. Income

2. Facilities

3. Staff Morale.

These elements of business always bear relevance. Fact is, when things are going well and economic growth is flying, we all lose sight of them. That’s why I chose to discuss Complacency first – it is our fat-and-happy state where nothing can go wrong, … go wrong. Beware and avoid the hardship of missing the chance to streamline your business. Apart from Complacency, practically everything else works in combination rather than in any order. The same goes for this blog’s elements.

 

In Part 3 I would like to suggest some actions around three final issues: Hard Work, New Opportunities and Relationships.

 

1. Hard Work:

I must admit, I am old school. Many years ago in Nedfin Bank, our MD introduced the “next big thing” idea – Work Smarter Not Harder. We had post-its [they’re not that old, you know!], personal note pads, diaries and notice board posters. We all had to work smarter, not harder. It was a bit like losing weight; I tried and tried to work smarter but hard work just kept on coming back. I went home earlier to force smarter work and then came in early to catch up on yesterday. I thought smart, acted smart, threw out lots of questions and had lots of answers but, alas, smarter eluded me. Hard Work won most of the small successes and in between, a little Smart helped.

Identify with me? If not, count your lucky stars! I have seen young men in the sub-Prime days begin to hold onto their business. When it was quiet, they did other things, lived in different places, bought motorbikes to save fuel and basically hussled while they waited. No other smart idea could keep their businesses alive and survival brought out the best in them under the worst of situations. But survive they did. Hard work did that and if there was a modicum of Smart work, that just helped. I know I’m being simplistic and that many great Smart ideas have made people fabulously rich. But, my sense is why we know them so well is that there are so few of them. The rest have worked their guts out to get where they are today.  You make your call, never denigrating Smart if you can possibly think of it, but Hard will probably be the way through to better economic times.

 

By the way, two of the smartest things you will ever do is Delegate – well-explained tasks to people you know can do them [or be supervised to learn to do them] –  and, Develop a Succession Plan. The former we will take as understood, but the latter is like getting excited about doing your Last Will and Testament. But, who will run your business if you’re incapacitated? Do you have Income Protection insurance for long-term illnesses? What would happen if you never come back to work – who would keep the business going? What does your Will say about your shares and to whom do they devolve? Knowing that “it happens to the other guys”, many of us sadly leave these questions unanswered and cause much family strife and employee harm when something “happens to us”. Think about it and DO something about it.

 

2. Opportunities:

Mom always said, “Opportunity only knocks once.” I loved her dearly but, coming through the Second World War it must have felt like that for her generation. But we know that it is simply not true. Indeed, we live in an age of multiple opportunities – which to choose and expend our energy on, is our dilemma. We have opportunities coming out of our ears and need to remember a few [I’m sure you can think of more] basic guidelines to avoid mistakes:

  • Focus is the opposite of Diversion. A simple Resource Set will categorise an opportunity as one you can take and one you should leave. If you don’t have the resources, “stretch” may just prove too thin.
  • Good strategies comprise of what you decline and what you accept. Saying “No”, is also good strategy. Saying “Yes” to everything is bad strategy.
  • Stay within your core skills or be very careful. Origination was my core when I ventured there. RMD Meats was non-core and therefore a high risk for me. You can only justify the latter if you have demonstrated that you know how to run a business in spite of the product. Know when you are out of core and learn quickly about the product, and its industry.
  • Know adjacent businesses and pursue them if you seek more opportunity. Bond origination and Insurance are adjacent. In theory, so is Estate Agency but estate agents will tell you very different so listen to their advice.
  • Take your team with you. The old analogy of riding into the sunset whilst the posse breathes in your dust, is true. Don’t go it alone; you might end up there.

 

3. Relationships:

I wrote a blog called Relational Affinity so I don’t really want to repeat myself. However, most business depends on relationships. They mean the difference between transactional business – doing many deals with different people –  and, relational business – doing many deals with the same people [in a spirit of mutual respect and trust].

When Zero is your reality, the good news about relationships is that they become a higher barrier to entry. Think of it this way: It is really hard to break into origination when you have to develop new relationships rather than enjoying doing the business with long-standing relationships. On the other hand, holding onto long-standing relationships is even more important when Zero is your reality than in the “good times” when “everyone” is buying and selling.

Cherish your relationships is all I’m saying. Keep them strong, loyal and resilient as they are a very source of your success.

That’s All Folks! is the famous ending of Walt Disney cartoons. Some of you will say: Thank Goodness!

But “positive” is not just the opposite of “negative”.  It is also the advice that comes from experience; the advice we sometimes know but just need reminding of. Nothing is new in the last three blogs but, I can tell you, failure to heed some of these elements of business, have taught many businesses very harsh lessons. On the other hand, heeding some or all of them, has kept many a business alive and enabled it to prosper and even take emerging Opportunities, when times were less than favourable.

Homeloan Junction cannot promise you good news all the time. Personally, I find these blogs daunting when politicians and the like are stealing or talking rubbish to adherents, and we’re on the cusp [25th] of a Rating review. It is tough to be positive and I won’t be simply do it to sound like I am. But, sound advice, in the face of very low economic growth, is also positive and even, caring. We care about the businesses that associate with us and we care about the decade-and-longer relationships that we have nurtured over the years. Our success is linked to your success and that commercial umbilical cord means far more to us than you imagine. In that spirit of inter-dependency we write; hoping that something of value is imparted to you in your personal and business capacities.

Yours in Property.

ZERO [Part 2]

From Zero to Hero.

You have heard the term; a kind of Rags to Riches phrase.

It has extreme application to this blog. You see Hero as You if you function as a sole trader or commissioned estate agent or bond consultant and certainly, it has application to every business.

The Business [read, if applicable: You] is the Hero. Nothing you do, nothing you say, nothing you commit, no contract or future promise or anything that you spend or save, should be done for you as opposed to your business. Your business is your steed in war, your comfort in distress, your source of funds and funding, your means to grasp opportunity, your tax-breaker and your tax-maker, your alter-ego , your income and cashflow, your means to success, your source of wealth and that of others – your business is the Hero under every circumstance. Keep it alive and you and every dependent upon it, is kept alive. Allow it to fail and you and every person dependent upon it fails. If you are a breadwinner in your family or a significant portion of your household income, You, in your individual capacity, are the Hero. You or your business become the reason for your commercial existence.

Too extreme a view? Consider this. It’s May 2008 and you are about to retrench the first employee. It’s painful, not according to plan, and she is your friend. But all you can say is, even though you have had a very good profit for the month, you know that sub-Prime will shut those profits down within 8 months as the banks pull in their credit granting and go into an underground shelter that only an annuity mortgage business can provide. You have to begin retrenching while you still have the resources to give your people an adequate retrenchment package that profits and cashflow allow. It is horrible to face them but if you keep the company, the Hero, alive you know you have a chance. Cull it and it culls you. We succeeded and the company survives to this day. If the view had been different, a kind of Winner Takes All mentality, the company would have folded and the people would have been seriously hurt. This way, we all felt the pain but everybody was cared for to the best of the company’s ability and we all retained our dignity. A tough, true story.

After a Zero to Hero story, the above shows you that you need not be Hero to Zero on the other side and even in the most extreme of global economic circumstances since the Great Depression in 1929.

On the 31st of October 2016, we received the news of Pravin’s [and his SARS colleagues] release from fraud charges. These little good-news windows, provided by the one-and-only Shaun Abrahams, are an opportunity to take a breather and blow a fresh breath of life into your Hero, your business. Don’t be surprised if the long-winded retraction of the charges, spurred by the Helen Suzman Foundation and Freedom Under Law submissions, is not already being taken into account by Moody’s [open to correction] in their 25 November pronouncement regarding the possible downgrade of their rating. A fight well fought and won – Justice prevailed!

So with that firmly stated, three more things to watch for as Zero remains our stagnant growth path.

1.Income

Income is obvious to every business but what I want to highlight here are some tips for its measurement. Strangely enough, more is not necessary better. Watch for:

  • What proportion of your income comes from one or more sources? You see, a mix of income sources is better than “client reliance.” One or few big clients have the ability to call the shots, and the ability to cripple your income if they leave for whatever reason. The Pareto Principle, 80% of income comes from 20% of clients is as significant in 2016 as it was when Pareto posited the theory. Don’t be caught and lulled into thinking that the “one big client” won’t have you for breakfast one day. A golden rule is to have the courage to deduct a big client’s income and work the business on the balance.
  • Your geographical spread is important. The Western Cape is growing, the Northern Province declining and Free State Province and KZN may be in decline. Is your business showing this or not? If not, expand where growth is occurring and be wary where growth may be in decline. You are not special, business follows trends and if not, the note above this one may apply.
  • What proportion of your Income is new business versus existing business? Are you dependent on old business? Could it dry up? Have you become complacent that you can hold onto all those existing relationships? Or should you be hunting for a greater proportion of new business? Do your sums and check your stance to them; you may avoid a huge surprise in the near future.
  • What proportion are paying customers and what is not? Turnover is a fool’s paradise if cashflow does not result. Debtors are real assets until they are not; then they drain every ounce of resource out of you – your time, your emotions, your facilities [more about this below], and your cash. Your Debtors Ageing Analysis says it all. It is the tool of your past and the measure of your future. When it ages, you age. You have to keep income coming from debtors who are experiencing Zero just like you; tirelessly hunt payment or it will hurt you. Debtors and Rentors are very similar. Either one may not pay you and you need to nip the issue in the bud and get paid or get out.
  • Finally, the health of your income lies in the margin. For the traders, your Trading Account says it all. Turnover less Cost of Sales plus Opening Stock less Closing Stock reveals your margin [Gross Operating Margin]. You may keep turnover by reducing margin but the more you allow it, the less your Hero can afford one mistake. Hear me please. The big client with the reduced margin that squeezes you for extended terms – yes, that client – could be the rod that strikes your back. One bounced cheque could be all it takes to reduce your Hero to Zero. And that old fact, played out in so many businesses over the decades, unwinds all the goodwill with bankers and funders built over years. Identify them, and deal with them – at least, having read this, understand the risk you face.

2. Facilities

As an old banker, there is a saying that bankers lend you an umbrella in the sunshine and take it away in the rain. True, and the reason is that bankers have a fiduciary duty to the investors and not to their lenders. In the massive size and excellent capitalisation of our banks, we forget this truism. But I can tell you, it is built into their DNA from the day they join the bank, and will come at you in times when you need facilities most. Hero needs to arrange facilities when Hero’s financial figures are good. Yes, the bank can call the facilities in but it is useless you going to the bank when you need the money; it’s just too late. Facilities, well positioned and used from time to time and managed immaculately, are not optional when you need it as Zero growth slowly takes hold of your business. Extend your bond in the good times as a precaution; afford your business facilities when the Income is great. Many of us, who have had to survive the bad times and this consistent “Zero” growth, know that those facilities are life savers if and when you need them. Of course, I’m not suggesting a lack of discipline. Don’t have the facilities, use them to continue to fund your lifestyle and then cry that they are used up when you really need them – Please No!

3. Staff Morale

One thing you know as the steward of Hero is that People Matter. Be careful that you don’t adopt a haughty “if you don’t like it, leave it” attitude with your people. Some of those people are the reason why you are where you are. And so help them, they could become the reason why you end where you don’t want to be. I know a business that is highly dependent on a Rep, another which is highly dependent on an Owner, another that requires a Specialist Team to thrive [I remember the day when the Syfrets traders broke away and formed Coronation Asset managers – and the rest is history], another that has lost key resources and another that needs to address Ageing Ownership in order to survive. All Heroes in their own right, but all dependent on the people who run them.

Don’t think that your people don’t read the papers and get worried about their futures. Ook maar net mens, I could say. But, it is your responsibility to lead them for the benefit of Hero. They deserve to know where Hero is at – going bad, they tighten belts, going good, they benefit. But if you look like you’re against the ropes every day and they don’t hear you trading in Hope, they also become miserable. Bear in mind this truth I have learnt many times: People don’t leave you when they leave, they leave you long before they go. Up to that time, they are expense but when they leave, as much as they may leave a huge hole, they at least don’t cost money. It sounds callous but those of you who have worked in tanker-type Corporates know how much damage an unhappy person can do for so long before they finally leave. How much more pronounced is the effect when in a small company, someone is miserable, unhappy, unproductive, toxic and just plain obstructionist. When Hero is the reason for being there, at least you have a mirror to hold the person to until they get happy or leave. How many times I haven’t said to someone, You can leave but leave a good report behind you. In Zero, people get unhappy; they feel Hero’s strain and pain [in your face!] but it is your responsibility, your sovereign duty, to ensure that the morale of your people is as high as you can make it. As a leader, you trade in Hope and Zero needs you to fulfil that responsibility.

I have written my heart out. Years of boom and bust and Sub-Prime have taught me the little that I share. The quality of your income, long-arranged facilities and motivated people can bring you through, You and Hero, your business.

Just a word on Homeloan Junction. This Hero may not be  the biggest but it is a conqueror. October 2003 feels like history but it was founded then in a single garage in Brackendowns. Courage, intelligence, facilities, discipline, trusting relationships, and hard work carried it through. Entrepreneurship of the highest order with inexhaustibility [if that’s a word] kept it alive and made it the success it is today. People always mattered and have been the foundation of all it has achieved. Bottomline, with guts like that, you are well placed as an associate and a client.

Part 3 awaits. Hope you’re gaining some nuggets to think about.

Yours in Property

ZERO [Part 1]

If it were debt, this would be a seriously catchy title for my blog.

Sorry for you, but it isn’t debt unless you are one of those very fortunate few who have been wise and able to reduce your lifestyle to zero debt; more of that later.

It is the prospect for future growth in a given scenario in South Africa. And the really good news is that it seems we will avert it if can all work together. This blog will toggle a little, but I really want you to know two things up front:

  1. I believe we will not see Zero growth in our country.
  2. In case you have a jaundiced view of SA growth, bear a thought for Britain as it falls asleep economically at 0.5% growth post Brexit. SA is not the only egg in a tough economic tray. Brazil is -1.22% over the last 5 quarters, Russia was -3.7% in 2016 (estimate) and -1.2% in 2016 (forecast). India and China, both slower at present, carry BRICSA at 7.5% and 6.7% respectively.

The Medium Term Budget Policy Framework was another brilliant outline by Pravin Gordhan. At the heart of it was mutual co-operation. My belief is that SA Inc does understand that pulling together at this time could bring us through without a downgrade. In addition, despite the national debt at an all-time high, [frightening at R2tn and interest per year of R149bn!], he projects a reduction of Debt:GDP over the next 2 years. Unfortunately, in the absence of growth, that reduction will come through cutting government expenditure and higher taxes. I have made the comment many times before that our economy is well-managed under Treasury and SARB but we need, with SARS, to dig ourselves out of a (w)hole (lot) of debt.

So why Zero if all this positive belief abounds? Well, Pravin reduced our growth forecast yesterday from 0.9% to 0.5% before telling us this would change upwards next year. You can argue with me, but with the IMF also downgrading the growth forecast to 0.3% and the Sword of downgrade Damocles hanging over us, whatever the growth will be before the upturn of it, Zero sound like a number to capture my attention. Bear in mind that when you have a dramatic, quick drop in growth, you cope abruptly. It is this slow [“zero”?] growth that worries me on behalf of my readers. You can be lulled into believing that “everything seems to be okay” and then only get caught that first month salaries are late. The same applies for companies as for individual households, so whether you’re a housewife, an estate agent, a principal or a company owner, the rules apply.

If you buy what I’m saying, let’s look at how you cope with this slow growth scenario. No rocket science, just some sage input from 40 years of being in business. The real good news is that you can survive and even flourish if you just heed some simple actions.

1.Complacency

Nothing beats a careless attitude oblivious to reality. The good times end so slowly in low growth that complacency can set in easily. Remember the Rand when it bounced up to R15:US$1 and then came back “as it always does” to under R8.50? Oh really! Well it’s a little stickier this time and struggling to stay under R14. But, complacency says, we’re learning to cope. Oh really! If you’re reading this and thinking: “Hmmm….”, you’re probably not complacent. You’re probably aware that the only thing that is saving the world’s bacon right now is the Oil price and quite low inflation, both of which retain low interest rates. An attitude of: “Ag, we’ve coped with bad times before”, may belie the slow constriction of your business causing things to simply slow down.

Let me be clear, I would take what is currently happening any time, rather than some of the sudden sub-Prime medicine of recent economic history and the Boom/Bust cycles of our past economic history. The former was a gut-wrenching blow to every part of every business; but the latter was completely unstable. It was easy then to solve the problem of inflation by raising the interest rates, suppressing demand, until you could release the throttle again – binary monetary policy with a little fiscal help. These days, with the world so small and money flows almost instant, the monetary and fiscal armoury is far more complex and difficult to assess. In all of this, complacency settles in and weaves the relaxation of business to the reality that is gathering like storm clouds. Beware!

2.Costs

Costs creep up on you like complacency. Simple really – you start complaining how expensive things have got. The stationary bill rises 12% year on year, your staff need increases, transport gets expensive as fuel taxes rise, your medical aid goes up 10.2% [that’s Discovery for real in 2017 and rising!], and SA communication costs are world record-beating. But the first year you don’t feel it, the second gets tough as you discuss business over a beer and then the third……… well, that’s when you realise that it’s not about the costs, it about whether the cost is really necessary. Big difference!

Reinstate your quarterly meeting with your accountant and start to analyse those Income Statements year on year and one year before that. Have a look at the trends that highlight movement upwards. Go home and sleep on it. If no trend is too dramatic, pat yourself on the back and make sure you diarise the next meeting; your turn will come. If there is something obvious, begin the journey to recuperation sooner rather than later. One of the great ways to do this is to assess each line of cost as a percentage of Total Cost or as a percentage of Turnover. It is much easier to go up than come down. But, coming down saves businesses despite the hardship for some. Little is sacred when it comes to cost reduction. You probably never had the cost or its proportion a few years ago. Now you have allowed it to escalate out of proportion and it’s dragging you down. Ke Nako – It’s Time – to deal the issue before Zero tightens its grip.

3.Cash

Cash is king. Old but ever-true. Let me bottomline Zero when it comes to cash in your business – if your cash reserves are draining, you have a problem; plain and simple. Cash reserves accumulate when you have a healthy turnover with healthy margins, controlled expenses, managed capital investment and paying debtors. In our blog, Overtrading, we discussed growing too quickly and running out of cash to carry investment and debtors. Here in Zero, we consider turnover and margins declining while expenses and debtors increase. The answer to the latter is spelt N-O-N-E and it refers to your cash in the bank. Please remember if you’re reading this blog but you don’t have a business that you are nothing more or less than a one-person business. If you are not experiencing cash accretion, Zero could be at your back door. Awake from complacency, assess and manage every cost downwards or out of the system, and then re-build your cash reserves.

I say this many times but it bears repeating. Quoting Jack Welsh, “Take control of your life or someone else will”. In this blog I have offered some advice to stir any complacency and ensure the health of your business. In Part 2, I will continue this down-to-earth message as we all cope with very low economic growth. “This too will pass”, said Og Mandino and the one thing I know is that despite the tough times [Mr Gordhan says two years], we can and will come out stronger.

 

Yours in Property.