Embracing Change: Navigating the Winds of Transformation in Business

How many people have you heard say, “I love the wind”…? Probably not too many. 

The wind, with its unpredictability, often brings feelings of uncertainty and fear of the unknown. Similarly, change can evoke similar emotions in the business world, making leaders and employees hesitant to welcome transformation with open arms. 

Recalling a powerful moment of revelation, I was in a room when Larry Mandelberg asked a group of professionals whether they believed people liked change, and not one hand went up. Conversely, when asked if people disliked change, all hands shot up. He then shared a thought-provoking insight: “Everyone likes change… just not change that is done unto them but change they do unto others. 

This simple yet powerful revelation mirrors our human tendency to resist changes imposed upon us while embracing the ones we initiate ourselves. Understanding this psychology can help businesses cultivate a change-ready culture that navigates transformation with enthusiasm. 

To foster an environment conducive to change, open communication and transparency are essential. When employees comprehend the reasons behind the changes and the potential benefits, they are more likely to support the transformation process. 

“I love the wind” can serve as a metaphor for embracing change willingly. Instead of fearing change like an unpredictable gust, we can learn to see it as an opportunity for growth, akin to a refreshing breeze that invigorates our organization.

In the ever-evolving business landscape, stagnation is not an option. Change is the wind that propels us forward, driving innovation and adaptability. Embracing change enables companies to identify new possibilities, innovate products and services, and respond to customer needs effectively. 

As leaders, let’s draw inspiration from Larry Mandelberg’s example and encourage our teams to not only accept but embrace the winds of transformation. By providing the right guidance, support, and encouragement, we can empower our employees to view change as an ally rather than an adversary. 

Just as we can learn to appreciate the wind’s unique qualities, we can redefine our approach to change in business. Embracing change with an open mind and a proactive attitude can set the stage for a successful and prosperous future. Let us rewrite “I love the wind” as a mantra that signifies our willingness to embrace and harness the power of change in business transformation.

How do I grow my business?

The question that is on the mind of owners of small business everywhere:   How do I grow my business (and make more money)?

There are a lot of elements that are critical to growing small business: bringing good value to the marketplace, quality people, the right amount of business structure for the position in the life-cycle curve, etc. The list goes on. It seems that one impediment that is consistently dogging businesses across industries is access to cash. It takes cash to purchase inventory and pay payroll while one waits to collect receivables. This article will touch upon the most common financing methods that businesses use to accomplish their growth goals. Feel free to contact us to discuss your situation and the choices that may make sense for your business.

Many businesses are formed with injections of cash. Frankly, financiers want to see that the owner has skin in the game. Often the initial capitalization is from personal reserves, friends & family, the sale of other businesses, or through home equity loans on the principal’s residences. Capitalization from outside investors is discussed later under Angel Investors / Venture Capital. Banks in particular, like to see that a company is capitalized at least to the level that is common in the businesses’ industry.

Trade Credit:
Suppliers typically offer terms for their regular customers. Some specialty industries offer extended terms (called dating or invoice dating). Some suppliers offer discounts for quick payment. It is common to see 2/10 net 30 as offered terms. That means the supplier will accept a 2% discount if paid in 10 days, but the invoice is due in 30 days nevertheless. Banks want to see that the balance on trade credit does not exceed the balance in inventory. Otherwise they think that the business has diverted sales proceeds from paying the payables that supported the inventory from the sale. They also look at the ratio “payable days” as compared to industry averages to see if the business is overly relying on trade credit. If one does not have a bank and suppliers are patient, some businesses grow via stretching the trade credit.

Lines of Credit:
Traditional bank lines of credit are at the forefront of most business owners’ thoughts. Business owners tend to get frustrated when they are declined for a line. Banks tend to charge Prime + X, with X being 0-5%. Lines are typically granted when there are both primary and secondary sources of repayment; collateral is available (whether or not taken); and debt to worth ratios fall within industry guidelines. Secondary sources of repayment means that there is a reasonable back up plan if something goes wrong the original plan. This can include collateral, financially supported guaranties, or multiple distinctly separate sources of repayment. Non-bank asset based lines of credit fall into this category.

Many businesses want to grow faster than their sustainable growth rate. Often the businesses’ debt is out of proportion to their net worth. Factoring solves these problems. Factoring is the process of selling the businesses’ accounts receivable. Typically a receivable can be sold once goods or services become verifiable with the buyer of the goods or services. This can provide cash to meet payroll and cover inventory purchased on short terms. Factoring is a good choice for high growth companies. It tends to be a poor choice for companies with very small gross profit margins.

Letters of Credit:
Sight Letters of Credit are very common with international transactions and are sometimes used domestically with large transactions. A bank, supporting the buyer of the goods provides a letter of credit that stipulates the terms of the purchase. The bank’s credit supports the transaction, not the buyer. Upon presentation (sight) of certain documents as specified in the letter of credit, the bank pays. Occasionally a letter of credit is drawn for sight plus a number of days, perhaps 90 days. That means that the bank pays 90 days after valid paperwork is presented. In such cases the buyer gets terms. The seller may have the option of selling the approved but not paid letter of credit in the Banker’s Acceptance market thereby getting cash earlier than the 90 days.

Some companies are equipment heavy. Term loans and leasing tend to be very good choices. Basically, banks and leasing companies see equipment as good collateral (secondary sources of repayment) therefore they tend to have very good rates for leasing. Since the leasing company owns the equipment and you are renting it, they have an edge on other lenders in a businesses’ bankruptcy. This allows leasing companies to be a bit more liberal that equipment lending institutions.

Vendor Financing:
Vendor financing is a choice that many businesses fail to properly consider. Vendors often make arraignments with a lender to finance their sales on a more liberal basis than they would otherwise do. Lenders may ask the vendor to guaranty a re-purchase of the items sold if the bank were to have to repossess an item. The vendor may also subsidize the interest rate. Often the bank will witness a very low loss ratio with respect to a particular type of equipment, thereby allowing them to justify more liberal lending criteria.

Sale Leaseback of assets:
Some established companies with equity in the equipment have an opportunity to grow. It may make sense for them to sale their equipment to a leasing company and lease the equipment back. This strategy allows the company to receive cash for other purposes (payroll, inventory or even other equipment purchases).

Government assisted programs/grants:
A variety of programs exist by industry and location. Some programs are sponsored at the National level, some at the State level and some at a local level. Programs include farm subsidies, SBA guaranties, micro loan programs and rarely locally distributed community development block grants. The more common national grants support specific types of innovation. Private industry has been known to issue grants, though these are hard to find. Google search will be your friend when trying to find grants.

Extend/Offset payroll periods:
Some businesses pay their employees every two weeks, or even monthly, instead of weekly. Doing so enables the business to stretch their cash. Generally speaking, employees would rather be paid more frequently. This technique is used less frequently and tends to be industry specific.

Payroll Taxes:
Some businesses grow their businesses by failing to fund payroll taxes to the government. This is a bad idea and I do not suggest that this strategy be followed. The potential result is tax liens, seizure of assets and disqualification for other types of credit. There is even personal liability for failure to forward the trust fund portion (employee withholding) of the taxes.

Angel Investors:
Angels are high net worth individuals that typically have other successes in business. Angels take risks for the potential of large returns. Angels often bring other Angels to the table to share the risk. They may inject capital for common stock (direct ownership). They may take a preferred stock position through a private placement, or participate through notes or warrants. Banks typically see Angel’s investment as equity and tend to allow the investment to be leveraged by a bank line of credit. Often Angels’ exit strategy is to be taken out by Venture Capital.

Venture Capital:
Venture Capital (VC) is somewhat similar to Angel investing in the form of the investments and their desired return on investment. VCs tend to make larger investments and want the company to be a bit further in their product development/sales cycle, whereas Angels tend to become involved at earlier stages.

Bob Stackhouse, President, Asset Commercial Credit

The top 10 reasons businesses fail to thrive

Most people start off their lists of business failure with businesses being undercapitalized. Unfortunately that communicates that money can solve everything. It cannot. It also doesn’t get to the core components that speak to the likelihood of success in bootstrapping the business or the likelihood of obtaining credit or investment. Therefore you will see that my list takes a different look at the problem of success/failure.

I’ve been in the business risk assessment business for over 34 years. I know it well, having financed over 3,000 businesses and managing a portfolio of over a billion dollars of small business loans. Clearly, things go wrong in all businesses. The single most important point is whether or not management has their eyes open, watching risk and has contingency plans. I hope you do not find yourself in the risk categories below:

1. The number one reason businesses fail to thrive is that the principals do not understand the risk of the business and therefore are not watching. Think of a cruise ship sailing without navigation charts … or without someone at the helm. Imbedded in this reason is also the situation where management does not know enough about their business and does not align themselves with people who can help them. This includes engineer business owners who do not know accounting and other knowledge based flaws.

2. The number two reason businesses fail to thrive is lack of focus and clarity of Mission, Vision and Values. Employees can get distracted with their own priorities, likes and dislikes. Whereas clear Mission, Vision and Values combined with laser focus on objectives that are tied to them makes it easy to know where the ship is sailing and how to get it there.

3. The number three reason businesses fail to thrive is that they have either too much structure or too little. Many businesses are started by people who cross over from successful corporate industry. These individuals often implement procedures and processes that worked well in their old jobs. Unfortunately the old job was with a company that might have been mature in their industry, while the new company needs to be entrepreneurial. If they do understand business lifecycles, they might forget to implement structure as they grow. Successful entrepreneurs understand business lifecycles and the need to match structure with their lifecycle stage. This is one of my consulting specialties where I have taught CEOs to be more effective and productive.

4. The fourth reason is that management creates too much capacity in the form of their plant, qualified labor (thought to be irreplaceable) and other fixed overhead. When sales become volatile, the overhead absorbs the profit, and often one of these elements is responsible for a loss or business failure. Outsourcing manufacturing can lessen the risk of this element. Over the last few years, many businesses did not shrink fast enough. Luckily many businesses ultimately did reduce capacity. Shrinkage actually creates cash flow. Unfortunately, when their management wants to grow again, they will find that they do not have the balance sheet support to find the financing that they once had.

5. The fifth most common reason is that they grow too fast and do not have the capital to traverse the growth curve. Basically, they have too much money tied up in inventory and receivables. This is the traditional “undercapitalized” business. Banks allow a certain amount of leverage. If your business outstrips a bank’s pallet for risk, alternative financiers such as Factors or Asset Based Lenders are available to lend to support accounts receivable growth.

6. The sixth reason is they build something that isn’t really wanted in the marketplace, or at least not at the price that it can be profitably delivered. Too many people believe in “build it and they will come”.

7. The seventh reason relates to the long term price support given competitive forces (elasticity of demand). This really breaks down into two things, pricing and competition. We’ll start with competition. Competition includes alternative methods of solving the core issue that are resolved by the product. Too often management ignores the alternatives that our customers have. One must look at all the alternatives when one is evaluating how to price one’s products. Your customers will certainly look at alternatives.

8. The eighth area of general business risk is theft (internal as well as external). Theft and fraud are interesting topics. It is appropriate to design systems and processes to keep honest people honest. Moreover, one must keep an eye on key financial indicators to be alert. It seems that thieves are always coming up with new ways to sneak under the radar. One must keep one’s radar diligent, flexible and current.

9. People management is the next area where productivity is harmed, thereby causing issues with operating margins. The foundation of management is to have clearly understood Mission, Vision and Values. Once established, decisions must remain consistent with this foundation. Follow through, communication, respect and appropriate rewards must be valued by management.

10. The last issue on my top ten list spans both start-ups and traditional businesses. I like to refer to it as Murphy lives! Whenever something can go wrong it will. This especially includes things taking longer than one wants them to, or projects them to take. My best advice is to always have a back up plan and know that things take longer than you want them to.

OK, so there you have it. If you have any of these attributes/issues, give me a call. Once you are aware of the attribute/issue, you may be poised to solve it yourself. You may need the assistance of a Certified Management Consultant that specializes in the area of concern. In any event, subject to availability, I’m happy to have a conversation on your issue, provide you with support including an introduction to a consultant or financier.

Bob Stackhouse, President, Asset Commercial Credit

© Bob Stackhouse – All rights reserved – January 2014

Ego States, Eggshells and King of the Hill- Part three: “King of the Hill”

Have you ever learned something that empowered you to help others throughout you career? Sharing stories is the focus of this series. Here is another gem from my past designed to help with managing people. This core concept/analogy has also been used many times to help employees and friends who are having issues with others to find a productive path to solving their own communication issues. This next one is about power, authority and control.

You all remember (though perhaps not) that a common game kids play is King of the Hill (find a three-foot mound and try to stay on top while your friend tries to physically knock you off then they take your place). You might have played tag, dodge ball or some other competitive game. A question to ponder is: are kids naturally competitive or do we teach them to be competitive? Personally, I think humans are naturally competitive. You just have to look at sports to see competition that is not limited to children. My co-worker just told me of an adult version of king of the hill that is played on a tennis court.

Adults play king of the hill in the workplace, though it is disguised and not necessarily physical. Some of it is productive while some is not. It tends to be about power, authority or control. Understanding what is driving the game helps to find the most effective solution. 

Let’s talk about control first. It’s my opinion everyone needs control over something in their lives. Some have a big need while some have a smaller need. My theory about aggressive drivers is that they are exerting control over other drivers because they are being controlled in some other aspect of their lives that they are unhappy about. My theory about teenager’s acting out is that they are attempting to say: Here I am! I am not your property but an individual human being. Basically, it is them taking control of their lives, sometimes rejecting their parent’s control. So, if we have an enate need for control, a work place can be a bit happier if everyone has control over something. By ensuring they have control, less King of the Hill is played.

Power is also something that many people crave. That can be a good thing in that leaders need to be driven but we should also be aware of how their need affects others. It can be a bad thing when a subordinate is in a power play with their boss. It may even feel like which dog is the last to pee on the fire hydrant. That analogy can cause people to back down when they realize that they are exhibiting animal behavior. A subordinates need for power can surface like a game of King of the Hill. Ultimately, power seekers have a drive that when combined with knowledge, understanding, and empathy make good managers and leaders. So, my advice is to discuss power openly (that makes a world of difference in itself) and have complete training available for the other skills employees need to grow and thrive. If training and support are not available then let the power focused people move on. Otherwise, it will be disruptive in the workplace.

Authority in the workplace is also an interesting point to consider. It is interesting that a business’ life cycle is integral to the formality of Roles and responsibilities. Young business tends to be loosely managed thereby creating an atmosphere where creativity is fostered. Employees gets their guidance from a quality Mission Statement, a Vision as to what or where the company wants to be/go, and clear Values that are the foundation of the business’ culture. More mature businesses tend to rely on a business structure which has more formal lines of authority. I’ve seen many businesses that are in the process of becoming more formal but are not yet there. When roles and responsibilities are partially implemented but not clearly defined, workplace authority issues erupt. Team members that want to lead, but are not in leadership roles can be disruptive.

There are different solutions based on the core issue, though the surface problem may look the same. When one is trying to understand a particular situation that needs resolution, one can ask; Is this a power, a control, or and authority type of issue. Once you settle on what kind of issue it is the solution seems to be easier to find.

Bob Stackhouse – President, Asset Commercial Credit

©All rights reserved

Ego States, Eggshells and King of the Hill- Part two: “Eggshells”

Have you ever learned something that empowered you to help others throughout you career? Sharing stories is the focus of this series. Here is another gem from my past designed to help with managing people. This core concept/analogy has also been used many times to help employees and friends who are having issues with others to find a productive path to solving their own communication issues.

This initial challenge occurred early in my career when I was the assistant manager at a bank. Three of the employees were upset (I’ll call them the choir). The core issue was stated to be the behavior of one particular employee. She seemed to do things that caused angst. The rest of the team wanted nothing to do with her and frankly slowed their performance. The offending employee did get her work done with decent quality. Many customers gravitated to her.

When I drilled down on the actual things that the employee was doing, her actions were somewhat defensible, but certainly were not cooperative or team oriented. She was pretty and glided like a princess, expecting others to pamper her desires. She was very self-centered and while she thought she was a team player, she was not. It was one of those situations where her sense of self was out of sync with her actual actions. In fact, she was a prima donna. She got her confidence from her looks and relationship with the reigning Regional Vice President that was ultimately everyone’s boss. Locally, she didn’t care that she offended others, perhaps she actually liked it. I think that the more she offended, the happier she was. I think it made her feel powerful.

What solved that situation was to get the choir to stop putting out egg shells (I’ll explain shortly) in her path and to stop reacting when she stomped them out. The concept that the choir subconsciously tempted the prima donna was something that they were unaware of. They originally wanted me to direct her behavior on each and every issue. I call that a traffic cop solution. The choir stopped putting out egg shells so when the prima donna started stamping, nothing broke and the choir started to see her for what she was. Shortly thereafter the prima donna changed her behavior and stopped stamping and the whole atmosphere changed in a positive way.

The concept of using egg shells which are easily broken is an analogy for something that is easily offended.  The analogy can be very useful in focusing one on what they are really doing and in changing behavior. It’s kind of like baby proofing a house when you have a toddler … or avoid unwanted critters by stop putting out food in the backyard.

One moral is to store your fine China (things that easily upset you) out of reach because people will be people. A second lesson here is to avoid being a traffic cop or referee. Otherwise you’ll be doing that permanently. First, understand the core issue and not just the symptoms, then find a solution that can be a catalyst to the core problem resolving itself.

Bob Stackhouse – President, Asset Commercial Credit

©All rights reserved

Ego States, Eggshells and King of the Hill- Part One: “Honey, where are my shoes”

Have you ever learned something that empowered you to help others throughout you career? I’ve gathered a few gems from my past and will offer them in a quick, easy to read series designed to help with managing people. Throughout my career, I’ve used this first story many times to help employees and friends who are having issues with others to find a productive path to solving their own communication issues.

It was in the late 1970’s and I was the Real Estate officer at a bank. My dad was the manager of a different branch of the same bank,. He shared with me a cassette tape of a speaker from a management conference he attended. The speaker was very dynamic and uplifting. I remember the speaker’s last name was Wilson. He told a story about communication that went something like this:

Husband: Honey, where are my shoes? (said innocently)

Wife: If you put your shoes where they belong, you’d know where to find them. (Said with sarcasm and tone!)

Husband: Up yours baby! (Said with great emotion!)

Mr. Wilson then went on to dissect the conversation like this:

Husband: Honey, where are my shoes? … is a question asked from the husband’s adult ego state.

Wife: If you put your shoes where they belong, you’d know where to find them … is a response from the wife’s parent ego state.

Husband: Up your baby! … is a response from the husband’s child ego state.

While this example uses unfair stereotypes that were predominant in the 70’s, it nevertheless causes the listener to grasp the concept of ego states. Nowadays I clarify that it can be either spouse in either role, matching the innocent gender to the person I’m talking to.

Mr. Wilson made the point that true communication only happens when both parties are interacting from their respective adult ego states. This is especially true a business supervisorial setting. His conclusion was if a party is in their child or parent ego state, find a way to hook their adult and only then deal with the problem at hand. Hook first, then resolve!

Since that time, the internet has exploded with information, including more depth about transaction analysis, ego state theory, personalities, behavioral science, and psychology. I’ve since learned that ego states is part of Transactional analysis that was formulated by American Psychiatrist Eric Berne in 1958.

If the concept that people are wired differently and have different needs, focuses and ingrained methodology in approaching life is of interest to you, then you may want to learn about Temperament Types. Please Understand Me by Keirsey & Bates is a good start. It explains Myers & Briggs Temperament Types and is one of many models that help people understand that we are all wired differently. Given our differences, understanding others helps one to get along with and even to motivate others. I highly recommend this reading.

If that reading gels with you and you are looking for even more interesting reading, I suggest Emotional Intelligence by Daniel Goleman. Goleman delineates the five crucial skills of emotional intelligence, and shows how they determine our success in relationships, work, and even our physical well-being. Truly, understanding others is critical to meeting the needs of employees and providing employee satisfaction. Of course the company will benefit from more productive, quality work in the process.  

It must be said that no one has all the answers to every situation but when your core value is to create an “everybody wins” objective, then paying attention to solving communication issues becomes important. We welcome the opportunity to add value to all our relationships and hope this information helps you.

Bob Stackhouse – President, Asset Commercial Credit

©All rights reserved 2021

12 Tips for working from home

First, a few words about the times. Bad things are happening to many (a gross understatement). My prayers are with all who Covid-19 has impacted, their families and the health care workers who are witnessing tragedy every day. I really cannot imagine the burden the Health Care workers carry. Clergy carries the same or similar burden as they help us deal with death and tragedy.

We also see and hear a lot of people channeling their instinctive hostile energy to very negative political rants. Anger to a degree can be a motivator to action to solve a problem. Anger can also eat at one’s soul and be harmful to one’s physical health. Getting it out is better than holding it in. However, my hope is that we can all find a way to channel that instinctive hostile energy into creative and constructive outlets and not let it eat away at us. My suggestion is to avoid angry rants and find a way to productively solve the problem or issue. If you are feeling powerless, find a group and talk through potential solutions. Brainstorming can be effective in both exercising the anger and in solving the problem.

If you can, let’s not lose sight that good things are happening to many. My granddaughter recently expressed joy about getting very quality home teaching from my daughter. Some of this kind of interaction is both trying and rewarding at the same time. This time together can truly be an opportunity for belonging, growth, productivity and joy.

Many of us have expressed that we just do not have the time we need to complete priority tasks. We are picking and choosing which tasks are the highest priority.  One might just take this opportunity to go deeper on our lists and get more done. That may be reading the book you’ve been wanting to read. Perhaps it means cleaning the garage or going through possessions and getting rid of items that you no longer need. Alternatively, one could study up on that skill you wanted to learn. This may be the best time to connect with distant family who you’ve been meaning to talk with but haven’t because of a lack of time. A good friend recently said that he was experiencing Groundhog Day. After laughing and thinking about one of my favorite movies, I responded: “So when are you taking up piano lessons”.

Health care workers, teachers and other essential personnel are overloaded with responsibilities, duty and demands on their time. My best response is to suggest they think about what type of help or assistance can be productive and then ask for help. Helpers do not always know how to help or what is the most efficacious assistance. Sometimes they actually get in the way as they are trying to help. Thinking it through and then giving constructive guidance is the key to getting quality relief. Also, to the degree possible, overloaded people should unload responsibility to others in addition to tasks.

Many of you are working from home during the pandemic. That probably means you still have a job or if self-employed, you are pursuing your dream. It might mean that you are furloughed or laid off but are trying to keep your skills fine-tuned. Here are twelve items to keep productive and your sanity:

1.Decide you will make this time productive. Choose to make the best of it. A big part of life is attitude. It will make a difference in the quality of life.

2. Create a dedicated space to do your work that way it will be easier to stay focused. Avoid the TV and the couch. If you are like me, the couch signifies relaxing and I’d easily be distracted.

3. If you have family at home get an agreement with them that work hours belong to work, unless there is an emergency. Though a quick hug on their way to the park is still a good idea.

4. Make a schedule and keep to it. The schedule should be as detailed as your personality preferences will allow.

5. Get up at the time you normally get up. Routine is important for productivity.

6. Take a walk for the length of time you normally drive to work. This is a gift to yourself and your health. It will help to remain focused during the rest of the day.

7. Set clear goals for the day, listing them on paper or a white board. If you are not a list person, do it anyway. It is about creating structure and defining the day’s success. This self-feedback will be important to staying focused and minimizing the drudgery of an extended isolation period.

8. Communicate with your team. Learn about conference software and use it. I like Zoom and Facetime. There are many more.

9. Take a lunch break away from your work space. Eat and relax. You might want to set a timer so as to avoid letting the break run away with the day.

10. Be sure to take at least two other short breaks during the day. Physical activity has great merits. Exercise, walk or dance to your favorite song. Set a time limit to go back to work.

11. Check off completed tasks. That will give you visual evidence of your productivity and help you stay on task.

12. Stop at the end of the work day. Remember time off work is valuable to your health, enjoy.

If you have other good suggestions, feel free to respond to this blog.

Something else for fun:

  • Some say the glass is half empty -Pessimists
  • Some say it is half full – Optimists
  • Some say it is the wrong size glass – Engineers
  • Some say that there is not enough information, it depends on whether the glass is in the process of emptying or in the process of filling (momentum) – Physicist & OD Consultants

Bob Stackhouse, President, Asset Commercial Credit

© Bob Stackhouse – All rights reserved – April 2020

Disaster Assistance- Is there anything else we can do?

We regularly talk to clients and prospects about their businesses, their opportunities, strengths and weaknesses. In the middle of the Coronavirus Pandemic the conversation has changed. We offer as much support as we can while creating a win-win scenario for our clients, their customers, our investors and of course our company. We thought that putting some of the information on a blog would be helpful.

Management operating a business that is affected by the Pandemic should consider applying for an SBA Disaster Loan. The President has declared a Nationwide Disaster therefore disaster funds are available throughout the United States. Information is available on the SBA’s web site: 

As of Friday, 3-27-20 the Senate has approved the CARES Act. The house is expected to pass it today and the President is expected to sign it. For a copy of the details before the House of Representatives, click here.  STOP THE PRESSES! In the middle of writing this blog the House passed it and the President signed it. It will be interesting to see if anything changed. YEA for government support.

This act provides for individual and business support in many ways. Businesses that keep employees have access to a special program called The Paycheck Protection Program. That program allows businesses to borrow at low interest rates and long maturities. Certain expenses that the business pays during an eight-week period will qualify some or all of the loan to be forgiven. The biggest focus is on keeping employees on payroll. This is certainly something that businesses need to look into.

Also, several counties have created programs to support businesses in their jurisdiction. One example is San Diego County (CA).  Details of their program is available here Be sure to check with your county and also any State programs that develop.

After discussing the above with a prospective client today, they asked, “Is there anything else we can do”. It’s a simple question that often has a complex answer.

Not meaning to be wishy-washy it ultimately comes down to the identity of the company, their vision and what level of change management is willing to implement. Let’s start with the understanding that no one can be an expert in everything. That then leads me to management. Are the right leaders at the helm? Do they know their limitations? Are they willing to bring consultants to the table to support areas of weakness? Keep in mind that consultants have knowledge in their area but are not experts in everything too. An ethical consultant will not consult in areas where they do not have sufficient knowledge and experience to be valuable.

My good friend Larry Mandelberg is a Change Mentor for Executives. He has developed a methodology to quickly center focus on the most serious issue that when resolved will fix a multitude of business symptoms. He calls it the Mandelberg Business Managers Realty Index (mBMRI). I’ve independently tested it and found it to be fully in sync with my observations in financing over 3,000 businesses in my career.

So back to the question, is there anything else we can do?

  • Some companies need to look at their mission and are they really in tune with accomplishing it.
  • Some companies need to look at their values and are they really in tune with their decisions.
  • Some companies need to look at the vision and is everyone focused on accomplishing it.
  • Some companies need to look at their procedures and processes to see if they are appropriate.
  • Some companies need to look at management, do they have the right people in place to accomplish their vision
  • Some need to look at employee training, supervision, support and feedback systems.
  • Some need to do better planning, whether broad plans or marketing plans.
  • Some need to merge with other companies to get economy of scale.
  • Some need to shrink because their market has shrunk or they overgrew the market.
  • Some need to find investors, selling a piece of the business in order to correct capitalization issues.
  • Some need a line of credit or term loan to properly leverage their capital.
  • Some won’t qualify for traditional bank credit facilities so an SBA guarantied loan may make sense.
  • Some need to factor their receivables thereby creating cash in the short term while they wait for additional relief.

I could go on but I bet that you may have stopped reading the bullet points half way. Ultimately it is up to management to know where they are driving the business and how to get there. If you need a consultant contact the IMC (Institute of Management Consultants) for a specialist to help guide you through your path.

Bob Stackhouse, President, Asset Commercial Credit

© Bob Stackhouse – All rights reserved – March 2020

Sustainable Growth

You may have heard the words sustainable growth and not thought much more about it. You may have even studied about it in college. Unfortunately many business people forget what they learned because they are too busy or distracted with all of the details of their business. After all, sustainable growth is a concept within accounting and accounting is for someone else … isn’t it? … No! No! No!

First, accounting is for every successful business person. Accounting is like a pilot’s instruments when he/she is flying at night in the fog. Accounting is like the marauder’s map in Harry Potter. Harry needs to know when Snape is just around the corner. Accounting is more than your friend, it’s your eyes and ears when you can not be everywhere at the same time.

Next, Sustainable growth is more than a concept or theory. It is a practical method of calculating how fast you can grow naturally without the infusion of cash from an outside source. If you are in business, studying sustainable growth is the key to maximizing your opportunities. Think of it this way … if you find yourself in a maze, you’ll want a map that directs you in the fastest way out of the maze. Sustainable growth is that map.

The way to understand sustainable growth is like building a house. Start with the foundation and then build your home. The foundation is pretty simple. You can only grow as fast as you retain profits. The formal way investment bankers define this to their public companies is: Return on Equity minus dividends. Unfortunately it does get more complicated than that when you look at small businesses. Let’s use an example:

Let’s first look at one business cycle. Say you have 1,000 in cash to start a business. You buy inventory for $700. You pay someone $200 in commission for each sale. And you pay someone $100 per week to handle paperwork and shipping. You sell the goods for $1,200. That returns you your initial $1,000 plus $200 profit after you collect from the buyer. We’ll ignore taxes and many more overhead components to keep the example simple. This is one business cycle. It may take days, weeks, months or years, depending on the product/service & business.

You think to yourself … gee … let’s double things right away because twice as much is a good thing. You tell your sales person, good job. Now, go ahead and sell two. The person jumps right on it and sells two. Now, you have a problem. You only have $1,200. You need $1,400 to buy two products at your cost. Your business either blows up by upsetting your customer, or you ship one and tell the customer they have to wait, or you talk the supplier into trade credit, or you use your credit cards. Oops, then there is payroll. You owe the sales person $400. in commission and the paperwork & shipping person $100. In my scenario, the paperwork person can handle the additional work because it is the same week. You don’t have the money to meet your obligations and are faced with missing a payroll or borrowing money from someone, or like many businesses do, don’t pay your taxes. None of these situations are good for long term success. Too much growth, too fast! Not sustainable. Ouch!

Unlike the out of control growth in the above “doubling immediately” scenario, Sustainable Growth is the amount of growth you can accept within your financing constraints.

You’ve probably figured that after five business cycles, you’ll have your original $1,000 plus $1,000 in profits. At that time you can afford to sell two units. After another three cycles you can afford to sell three units. At some point you’ll reach the capacity of the paperwork person and you’ll need two of them. At some other point, you’ll hit the capacity of the sales person to sell and you’ll need additional sales people. And this is how a business grows naturally, sustainably.

OK, so let’s complicate the equation. Real businesses tend to overlap their business cycles, not complete them end to end. They tend to be always selling, always buying, always servicing, and always collecting. Hopefully they have enough capital to support a given level of sales. Now they want to know if they can grow beyond a particular ceiling or how they can grow at all. So, how fast can they grow?

The foundation continues to be: retained collected profits fuel or make additional cash available to pay for increased cost of goods sold which enables sales to increase. But we cannot stop here in explaining sustainable growth. We need to answer the question, what fuels the creation of cash? The sustainable answer continues to be retained collected profits.

Is there anything other than profits? Yes, it is important to note that there are significant temporary methods of gaining incremental growth. Once these methods are implemented, they hit a ceiling or maximum point of effectiveness for incremental growth. These methods are collecting receivables faster, selling your receivables, stretching out accounts payables, sale of unused assets, shorten the business cycle, make efficiencies in the delivery of products or services (do more with less), and defaulting on debt (employee taxes). OK, so I’ve missed some options that are unique to certain industries, but you get the point.

Some managers have success with these methods but seemingly don’t understand why they hit a growth ceiling. My answer is that you can only collect receivables so fast after which you upset your customers. You can only stretch payables so far and then they put you on COD. You can only push your employees so far until they start to become less efficient. The government will only put up with delinquent taxes for a short while, and then they really get in your way of operating the business. Business efficiency and automation can be continually effective for certain types of businesses, but not all types of businesses.

You may ask the question, what interferes with sustainable growth? The biggest item is the business owner that does not fully understand sustainable growth. Often they will withdraw too much from their companies and/or will create too much capacity, thereby wasting monies that are otherwise needed to grow. Oh, and of course, unprofitable operations, but that is a whole other story.

Basically, once you compress your business by using the temporary other methods and have established a fairly static business model, you can calculate sustainable growth rate, right? Not so fast. We have another thing to look at, “other & non-cash business growth constraints”.

What do I mean by “other & non-cash business growth constraints”? I mean those items that need to expand in stair steps versus proportional growth. If you are selling … say toothpaste, and double sales … the cost of the toothpaste is probably close to twice the original amount (though perhaps not because of discounts). Alternatively, if you are providing a service and the service can be performed by current staff, then the marginal sales are more profitable than the previous ones because you do not have to pay your staff more to accomplish the growth. But what happens when you have to hire a new employee and train them. The hiring process, on-boarding process and training are all costs that do not immediately have a productive affect on sales. Initially, they are detrimental. The same period of less efficiency affects new sales people, new service employees and new mid-managers. Indeed many businesses grow to a point of nice efficiency, then they sacrifice profits as they hire and increase capacity. At some point sales increase and efficiency raises to higher levels. It is at the plateaus that businesses enjoy the most profits.

Another area of “other & non-cash business constraints” happens when you expand territories, come up against new competition and sharpen your pencil to retain sales and customers. Basically … your internal profit engine changes to a new matrix. I cannot emphasize enough the benefit of understanding your accounting and the stories that are told by the numbers.

Speaking of stories told by the numbers, the balance sheet is perhaps more important than the profit and loss statement in telling stories. Hmm. Maybe not, but it is very important nevertheless. One can take two balance sheets and compare them and see what has changed over the time span between the balance sheets. This is an especially good way to see how cash was created and how cash was used. It’s called a source and use of funds. It’s like looking at the land from 1,000 feet in the air. You can see the relationships in a different way than if you were standing on the ground.

Now that you have a handle on sustainable growth, calculate your growth, your income and compare them to your goals. If they fall short, consider selling unproductive assets, selling receivables or incurring some debt to get you where you want to be. Think of these choices as fuel for increasing product or payroll for increasing service income. Remember to calculate the time that your customers will take to pay and the number of business cycles that you want to overlap. After you have done this, include the cost of the funds in your overhead and see if it makes sense to borrow money to grow. Sometimes it makes sense, sometimes you are better off just growing naturally or not at all.

If you have an even more complicated scenario or would like to talk about this more, then give me a call.

Bob Stackhouse, President, Asset Commercial Credit
© Bob Stackhouse – All rights reserved – June 2014

Execution Risk

Execution Risk is one of the lending decision topics that is deeply gray. Bankers have black and white scoring models for leverage ratios, cash flow and other measurable decision components. Properly evaluating the grey area of execution risk is more of an art form than statistical analysis.

Let’s get the jargon out of the way first. Execution risk is the risk that a business will not be successful if they implement their plan, or that they can not successfully pull it off.

Yes, some components of execution risk are embedded in the measurable lending criteria. Perhaps the business is too leveraged, or does not have adequate cash flow. One may look at non-traditional achievements to see part of my point. For instance if someone wants to climb Mt. Everest but does not have the equipment or conditioning, they will likely fail. If someone wants to play sports, but they are not trained in the nuances of the sport, the odds are against the person. The same holds true for businesses. Equipment, preparation, training, facilities and support are all likely components in a successful business plan.

If someone is trying to launch or grow a business without proper equipment or the company is under capitalized, the banker’s decision process is pretty simple. Bankers decline the request and refer the business to a collateral lender, broker, consultant, accountant or investment banker. What if the business seems to have many or most of the core components in place? How does the banker measure planning, conditioning, knowledge, training, and staying power, among others?

To help explain this grey area, I’ve taken eight examples from our five most recent credit applications. I’ve formatted them as rules to assist your loan application presentation.

  1. Your materials should be consistent and tell the same story. Inconsistencies communicate that you might not be telling the truth, or that you may fail because of a lack of attention to detail.
  2. Speaking of the story, tell one. Explain where you are and how you got there, not just were you are going. The context of the story will make any oddities in your plan make sense.
  3. Finalize your plan before you present it. I don’t mean be cocky about it. I just mean that focus and determination can become apparent if you have a finalized plan. Otherwise the banker wonders where you are really going and if you will really get there.
  4. Don’t overpay for a business, even if you can afford it. Many entrepreneurs will get overly excited about an opportunity and agree to things that they should not agree to. This communicates that you may make similar mistakes about other decisions in the future. The banker will tend to not trust your judgment.
  5. Always have a back up plan. Especially if you are getting approvals from cities, counties or other government entities. Government agencies often take longer to approve something than the typical business owner expects. Planning tells the banker that you have your eyes wide open and are ready to react to surprises. Indeed, Murphy lives.
  6. Understand your cash flow and how everything will affect it. You should be the expert on your cash flow, margins, terms, industry preferences, and collections. If you cannot talk fluidly about these items, then the banker will have good cause for concern. They will think … as an analogy … that you are flying a plane blindfolded.
  7. Be fully prepared to manage your growth. Too much growth has killed a number of companies, just like insufficient capitalization has. Tell the banker how you will keep from growing too fast. You want to find a way to get the banker to trust your judgment.
  8. Take the time to understand how financiers think. Also, know when to approach different types of financiers (banking, collateral lending, and fundraising) because they all have their own niche in financing businesses.

So, if you are guilty of any of these, fix them as soon as you can.

If you need more help, consider hiring a business consultant to assist you. My biggest caution on business consultants is that some of them veer from your real plan, substituting their plan. Do not let this happen. It is good to be trained and coached, and then implement your plan, taking ownership and responsibility for the entire plan.

If you need assistance in finding a good consultant, I am happy to point you in the right direction. Just drop me a line.

Bob Stackhouse, President, Asset Commercial Credit
© Bob Stackhouse – All rights reserved – March 2014