February is the month of collective romance, usually dominated by love letters to your valentine and hopefully good, solid results at the financial year-end generating more loving shareholders! This February was just the opposite for John.
Around the 14th, as it would happen, John received a notice in response to his January invoice that all operations on the mine in which he worked were ceasing until further notice. The mine cited Force Majour or an Act of God as the reason in that the stand-off with AMCU, the dominant union, had reached a stale-mate.
With neither party willing to budge further, the mine had decided to cease operations temporarily. Shocked at the news, John immediately thought of his outstanding invoice against which he had paid Vat and was relying on its payment to settle his other expenses for January, such as salaries which he had funded through his overdraft. Fortunately he had not yet paid rent.
There are many events that will affect your business. Preparation is therefore key to survival and eventual growth.
John started his business six years ago as the mines in the Rustenburg area had increasingly created and offered more opportunities to local communities and entrepreneurs within these communities.
The mining business makes for interesting suppliers. You start and if you deliver on the first contract, you generally get access to further contracts in fairly quick succession. The nature of the business of mining is that of big industry. Digging shafts and setting up the plant to safely and efficiently undertake the mining of platinum or any other mineral, utilises big tools, machines, infrastructure and services.
A supplier gets a big turnover fast and while margins remain fairly tight, the nature of the business means that you need people to support your business processes. It’s not unusual to find a mining supplier start-up that services core operations move from a handful of staff to 50 to 60 staff within a 12 month period.
In addition, the mining environment is obsessed with safety and for good reason. Training staff to the safety specifications required before you can pass the compliance regimes of the procurement department takes a big investment in your staff.
John was running a number of contracts with this mining client. Over six years he had grown his facilities management business to a point where his ability to outperform the service level agreements both above and below ground were consistently superseded. He had built a staff compliment of 196 people to deliver his services and this mine made up 72% of his turnover.
John stared at the notice he received from the mine and could feel the panic welling up inside him. Each staff member fed a small community of between ten to 20 additional mouths both in Rustenburg and the Transkei where many mining staff originate.
No pay meant that close on 2 000 people would be affected by John’s business alone. Like many of the entrepreneurs I work with, John felt a massive obligation to care for his staff. The weight of his responsibility weighed heavily upon him.
We met that evening to consider the options. Some very tough decisions would need to be taken. By the end of the week, we had devised a strategy.
We took a bet that the strikes would pass. How long it would take was uncertain. But we knew that when they did end, the last man standing would have fewer competitors, more business and the prospect of greater profit.
As an entrepreneur, you need to have your eyes firmly on both the present and the future. It’s a fundamental part of risk management. All risks emerge from either an activity today or an event in the future.
We agreed that the most important outcome was survival. The mining strikes would not last forever and once lifted, the opportunity to continue providing the services would present itself again and John was really good at what he did.
For John’s business, survival meant managing cash flow and together he and I developed a three-pronged strategy. These are some of the actions we took to secure his future.
GET PAID FOR SERVICES RENDERED
1. Keep good accounts.
- Without a good set of books and more importantly, timeous books that are easily and readily accessible, you will find out too late that current invoices are moving into 30 days or even 60 days.
- Time and risk have a direct relationship. As time goes by and no concerted efforts to collect monies outstanding are made, you might expect a lackadaisical payment effort from your customers too. Get the money in your account fast.
2. Maintain good relationships with your biggest customers.
- John immediately went to his contacts on the mine to secure settlement on his current invoices. He had provided the services and was due payment.
- Fortunately, he had developed good relationships and was well regarded. Irrespective of legal contracts, good relationships matter and can be the difference between getting paid, or delayed, or not paid.
3. Insist on contracts and purchase orders.
- Unless you are offering a COD service, get a contract in place. It’s called a service level agreement and it should specify the terms and conditions upon which a service is rendered and paid for. It should also specify payment terms.
- Often it’s hard for a SME to negotiate favourable contracts with a corporate customer so read the contracts that they offer you with care.
- If the terms are unfavourable, investigate the reputation of the big customer.
- Do they pay or don’t they. The trust-based belief that if you deliver a good service you will be paid carries a good dose of risk.
- Going further and thinking that you have a friend or relative within the organisation that is your client is also fallacious. Big businesses work through boards and committees and by sticking their necks out for you, your friend or relative could have their heads lopped off. Just get a contract!
GENERATE NEW CASH FLOW
1. Dilute customer concentration in the good times.
- When you have a large client that has collapsed and this impacts you, the practice of foresight says never let any one client make up more than 20% of your total revenue.
- While I recognise this is not always possible in the beginning of a relationship when you have secured a big client, it’s no excuse later on in the relationship.
- Chasing and landing a big client carries massive risk. If it means that servicing this client will consume all your attention and leave no time to build your business, think carefully if you want that client or are ready to take them on.
- If however, you have sufficient momentum (systems and people) in your business to take care of delivery and grow your revenues away from that client, then it’s a match made in heaven.
2. Diversify your customer profiles to spread your risk.
- As in an investment portfolio, don’t generate all revenues from clients that look exactly the same. If this completely homogenous client grouping goes bang, so too do you. John is already active in marketing his services to other customers in government, private business in the retail environment and property developers and management companies.
- Beyond that, John concentrated his marketing efforts beyond Rustenburg reaching into Mpumalanga and Gauteng.
- His credentials on the mines and relationships were important.
- References flow freely for him and the standards required by the mines are often more onerous than those required by private industry, meaning that his service standards represent a competitive advantage.
1. Stop the cash flow bleed as a fast as possible.
- The next day we met with his staff. They were familiar with the growing tensions in the environment and had seen friends and family in other parts of the industry lose their jobs.
- There was a surprising level of acceptance that a three-day week was the only option that John could offer.
- Why not a complete retrenchment? Firstly John could not afford it but importantly, he had invested training and skills development in many of his staff. He knew that he would need them when the strikes ended and work resumed on the mines.
2. Negotiate with creditors, don’t hide from them.
- Over the weeks that followed, John met with each creditor.
- The level of empathy was remarkable and John’s proactive action was respected.
- Don’t hide from people you owe money to. It makes them angry and breaks down trust.
- Business is about relationships. They too want you to remain in business because they also need to hold onto the relationships that serve them well.