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Risk Management

Seven Signs Of Trouble That Can Threaten A Business

Is your business performing as well as you’d hoped? Review these seven challenging business conditions to determine if your company needs a rescue plan.

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Understanding more about the financial performance of your company will help you see trends as they are developing and not wait for a crisis.

Some problems are acute — they happen suddenly — and some are chronic — they go on for years and you learn to live with them. Here are seven situations that should put up red flags.

1. Little or no revenue growth

Early-stage companies normally experience substantial growth as customers find you and your market enthusiastically.

Then there is a leveling-off period when growth seems to slow and then stop. It may work to spend a short period at that plateau while you allow your business systems to grow to handle the volume.

But then you must look at ways to get back on the growth path.The reasons not to do so are understandable.

You may be working 50 to 60 hours a week just to handle what you have and there is little time to find new clients, even if you thought you could handle their business.

But growth is a necessity — because even with a reasonable level of inflation, flat revenues really mean a loss of revenues in terms of real rands.

And, as you know, the costs to operate your business never go down. Rent, utilities and telecoms are always going up. And wages too, including your own.

As your employees become more experienced, you will want to pay them commensurate with their contributions, so raises are understandable, in benefits as well as salary.

You may have added insurance and additional leave time. All of this has a cost. And you need to replace and update equipment as well.

So what effect does flat growth have with this scenario? It lowers your profit. Costs become a greater percentage of revenue and ultimately profits become smaller.

It may begin to create a serious cash squeeze and imperil your ability to pay debts and keep up with needed equipment purchases or repair.

2. Deteriorating capital base

Periods of flat growth in revenue can cause a negative cash flow. You need a steady stream of profit to allow cash to pay principal debt service and allow for reinvestment in new technology, equipment, or new project development.

After a fairly short time, you will find yourself in a double bind. You aren’t generating enough cash to fund any meaningful growth and this lack of profits may prevent you from borrowing to fund it as well.

If you have reached this point, chances are your alternatives are few. One may be to look to outside investors for funds, although you may have to give up a good bit of control to get the capital you need.

The other possibility is to sell off assets to raise cash. This may be a dangerous strategy, without considerable thought.

You don’t want to sell something you will need later on. Selling slow-moving inventory at a loss will affect profits as well as solvency.

3. Equipment failures that threaten productivity

Not having positive cash flow will not just jeopardise growth; it will also affect current operations.

If your equipment is not operating properly, your production may be slower, or quality not what you need or expect.

In addition, total breakdowns will stop production and cause employees to stand around not accomplishing any work. This will raise your direct costs and lower profits even further.

4. Poor employee morale

Look around at your employees and give close consideration to what you see.

  • Are they angry, disillusioned, or confused?
  • Are they short of inventory, working on substandard equipment, or always fending off threatening phone calls?
  • Are you communicating with them?

Surely you know that having good employees is a contributing factor in the growth and success of your venture. So it makes sense that when (and if) they feel negative, this will have the opposite effect.

The most immediate result will be diminished productivity. People who don’t care, show it. They take more time off and seldom think of ways to accomplish the task at hand more quickly or more efficiently.

And remember as well, your employees are often the public face of your company. If they have gripes, that’s where they may air them.

5. Unpaid taxes

No business owner sets out to get into trouble with the tax collector. Most of us have enough sense to know how painful that can be. But it may start accidentally and grow quickly.

It often starts with a single payroll when the money isn’t fully available. Paycheques are issued with the expectation that withheld taxes will be covered as soon as customers begin to pay outstanding invoices. But by the time these payments are received, other bills have to be paid or another payroll is coming up.

Before you know it, taxes are owed and the money just isn’t there. Now you’re on dangerous territory.

6. Failure or closing of major customer

Most new businesses are warned about becoming dependent on a single customer or even a few. That’s easy in theory, but often difficult in practice.

When a customer offers you a lot of business, it isn’t easy to turn it down. If you’re in an industry where there are only a few players of any size, this may be your reality.

If it is and one of these major customers cuts back operations, files for reorganisation, or closes, your entire business may be jeopardised. So pay attention to what is happening within the industry as well as with your customers.

If payments get slower, take some action. If the company is big enough, the accounting side does not talk to the purchasing side, so you won’t lose the business.

Anyway, if you’re not going to get paid, you don’t want the sale. I had a client who was a small electrical contractor who allowed a major company to get so far behind that my client had to file for bankruptcy. Minimise your exposure.

If orders slow down, don’t wait until they stop: Get out and look for new business. At the same time, keep your lines of communication up with your customer. These are the times when you have to work hard just to stay even.

7. New technology creating pricing pressure

The years bring new technology: If older companies cannot afford to keep up, they’re likely to be unable to compete.

Labour-intensive businesses must be able to avail themselves of labour-saving devices. Pricing pressures come from those domestic companies that can afford to do so in addition to the offshore operations that use low-cost labour. Staying in business without making a profit makes little sense.

These are not the only serious problems a company can run into. I could write a book about the perils of the dot-com companies, their overuse of venture capital and underuse of business models.

Regardless of how new an idea is and how clever the folks who thought it up, business is now and will always be about revenue exceeding costs and creating profit. This is not a theory; it is a reality and you must have a stream of income.

The latest and greatest idea may come and go, but at the end of the day, it’s hard work and good dealings that secure the future for most businesses.

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Risk Management

Are You Focusing Too Much On The Little Details (And Forgetting The Bigger Picture)?

To what degree do outside influences impact your business’s success? As a business owner, should you be focused on your business, or taking a macro view of the world?

Nicholas Haralambous

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Entrepreneurs live in the daily grind of their businesses. This is unavoidable but can often be fatal. Day to day we think that the little things matter more than the very big things do. A little thing like the floor of your office or store being mopped daily can become a huge issue if not done.

Sure, these things are important because they create a culture of care and pride, but what you might be missing while you watch your team mop the floors is the macro-economic climate shifts that happen more rapidly than you think.

Step back to move forward

Early in the life of a new business the only way to survive is for the founders to do absolutely everything. From designing a logo and launching a strategy all the way through to writing tweets and emailing customers when there are issues.

This makes sense when you’re building a business, your team is small and your cash is tight. However, as you grow, it becomes important to let your people do their best and take on the day to day work.

Related: Expanding At The Speed Of Stress

As an obsessive entrepreneur it’s often hard to let go of these little details. Day to day operations will always be integral to the growth of your business and an important part of someone’s job in your organisation. However, it shouldn’t be yours if you are taking care of the big picture.

As the leader of your business you need to take a step back from the grind and look at the world around you.

To truly understand the positioning of your growing business you need to understand your country, continent and world.

You should understand the economic position you’re in as well as that of your province, country and even the markets that might directly influence your sales. Get a good understanding of the political stability of your country and the world.

Finally, you should figure out if there are any large- scale impending disasters. If disaster is imminent, like Zuma pillaging a nation and tanking an economy, then you have to get your head out of the floor mopping and into the high-level strategy of survival and preparation for disaster.

Move the needle

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Every day there are 24 hours that you can fill. You can choose to work during that time and faff with the things that were once important, or you can figure out what is going to move the needle in your business.

What is going to really help you survive and grow in the years to come? Founders, CEOs and leaders need to be thinking about the next three, five and ten years. Let your team worry about today. Let the smart people you work with make today and tomorrow and next week work.

Chances are, the things you are doing in the hours/minutes aren’t saving your business or moving the needle. It’s the things that you plan for the next six months that affect the next five years.

Related: 8 Rules To Build Wealth When You Weren’t Born Into Money

Don’t live in a bubble

It’s easy to fall into the trap of thinking that you live in an isolated country or region that isn’t affected by world events. Unfortunately, no matter how hard you close your eyes and hide your head under the pillow you can’t avoid the fact that your business exists in a globally connected environment.

At Nic Harry we were affected by the Brexit events that unfolded in the UK and Europe. British shoppers were scared and didn’t spend their money when they were on holiday in Cape Town over the peak holiday season. I was so busy preparing for the seasonal uptick that I missed the link between a huge global event and my sales.

You live in a world that is filled with online shoppers and tourists who visit your business whether you know it or not. Prepare for the world to start having an effect on your business more and more.

Broaden your view

I am always fascinated by the narrow view of the world many entrepreneurs display. I may sell men’s socks, accessories and style but that doesn’t mean that the mining sector doesn’t affect my business.

Related: How To Plan, Prioritise And Get It Done Now

Even if you were an entrepreneur building a business in Antarctica I would urge you to read about oil prices, political world events and the intricacies of overfishing in the South American seas. Being well rounded and having a broad view of the world and your business can only make you a more robust thinker who sees more angles to exploit, protect against and thrive on.

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Risk Management

Why Adversity Is Actually The Best Thing For Your Business

There’s been a lot of talk about privilege lately: What is it? Who has it? Who doesn’t have it? I have a slightly different take on privilege and prefer to frame it as the privilege of adversity.

Allon Raiz

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Studies across the globe show that the minorities in all contexts have higher rates of entrepreneurial activity than the incumbent majority. There are a host of reasons for this, but one of them is that adversity creates resilience and self-reliance that are vital for entrepreneurial success.

Every successful and exponentially successful entrepreneur that I have met or read about has transitioned through a baptism of fire. They have overcome insurmountable obstacles and used the lessons gifted through their experiences to rocket their business to the next level.

Related: Approach Adversity Head-On

The Five Gifts Of Adversity

A sense of where your true limits are. These are always far beyond what your belief system believed them to be. The experience of testing your limits breaks the preconceived notion of where your limits are or were.

Confidence. Once you have overcome an issue, the experience of overcoming it builds a high level of confidence that should the issue reoccur, you will have the ability and resources to overcome it. For example, if you lose your biggest client and manage to keep your business afloat, the next time you lose a big client you will not panic or become despondent, but will instead kick into action and claw your way out again.

Insight. Insight as to which of your non-financial resources you can tap into. When the chips are down and money is nowhere to be found, it’s amazing how many resources you will now perceive around you that can potentially help you transition to success. These resources come in the form of advice from friends, access to new markets through networks, credit from suppliers, and free promotion through networks, to name a few.

Your relationship with your own resourcefulness. The experience of not having resources but somehow manufacturing some out of thin air, recalibrates your sense of your own resourcefulness, which in turn builds a level of confidence that should you be dropped off in the middle of the desert with only a matchbox and a magnifying glass, you will survive.

Related: Learn to Adapt In The Face of Adversity

Faith. A level of faith and a belief system that there is always a way to overcome a problem. This is true no matter how overwhelming the problem may be. The more you overcome impossible problems, the less you’ll believe in the existence of impossible problems.

So instead of worrying about who has privilege, who doesn’t, or what privilege actually is, use the lessons gifted to you when overcoming insurmountable obstacles to propel your business forward.

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Risk Management

The Principles Of Cession: A Powerful Business Tool

Relinquish your rights with these quick and easy tips.

Nicolene Schoeman-Louw

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In terms of South African law, the legal concept of cession was defined in Johnson v Incorporated General Insurance Ltd 1983 (1) SA 318 (A) and in FNB vLynn1996 (2) SA 339 (A), as:

“…an act of transfer to enable the transfer of the right to claim to take place.F Accomplished by means of an agreement of transfer entered into between the cedent and the cessionary and arising out of a justa causa, from which the intention of the cedent to transfer the right to claim appears or can be inferred and from which the intention of the cessionary to become the holder of the right appears or can be inferred.”

In simple terms, according to the online Oxford Dictionary, cession is ‘the formal giving up of rights, property, or territory by a state’. According to the online Free Dictionary, it is ‘the act of relinquishing one’s right’.

Related: BBBEE Employee Share Schemes – Should I Or Not?

This means that cession is clearly distinguishable from contracts because it does not create obligations and is also distinguished from delegation and subrogation, which do not involve the actual transfer of rights.

Valuable tool for business

Cession is a valuable business tool because it allows businesses to cede assets that can be ceded by transferring them − completely or not − when there is no cash available to secure a transaction or assure performance. However, it is essential that the parties involved understand and express their needs rather than blindly signing documents that do not enshrine their true intentions.

Legal requirements for a valid cession

According to van der Merwe et al 2002, the following requirements must be met to affect valid cession:

  1. A right inhering to the cedent
  2. Agreement between the cedent and the cessionary to give and accept transfer of the right
  3. Compliance with any formalities set by the law.

1.1. A right inhering to the cedent

Existing rights versus a spes

According to FNB v Lynn 1996 (2) SA 339 A, our courts have to date followed the approach that only existing rights may be ceded, and not rights which amount to nothing more than an expectation or spes. The determining factor in this approach is whether or not the right falls within the cedent’s estate at the time of the cession.

However, according to Muller v Trust Bank 1981 (2) SA 117 N, there is another theory that deviates completely from this approach and deserves a mention. In terms of the doctrine of cession in anticipando, cession of a spes may happen provided the cedent and cessionary conclude both a contract (obligatory agreement) as well as a transfer agreement to affect cession. Upon the materialisation of the right, when the right actually comes into existence, cession may take place.

There is no formal objection to this approach and our courts have not indicated that they are completely adverse to it. Nevertheless, there is no precedent to date that guarantees cession can be enforced based on this common law doctrine.

Personal right

Accordingly, any personal right may be ceded provided it already falls within the cedent’s estate and is capable, in law, of being ceded. Therefore, this even applies to rights that have not yet come into force or effect − such as vested rights (for example: the rights of the beneficiaries of a family trust before its dissolution); contingent rights (rights which are subject to a condition); and/or the right to receive your pension pay out upon reaching the age of 65 years.

Related: The Correlation Between Cash Flow Challenges And Risk

1.2 Justa causa (or intent)

A causa, or reason, for the cession taking place essentially determines the nature and extent to which the right is transferred between the cedent and the cessionary.

In the case of out and out cession, or normal cession, the right is usually transferred to the cessionary while the cedent has a reversionary right to cancel the cession and (re)claim the right, should it become necessary.

Whether or not total transfer of rights takes place in the case of security cession, or cession in securitatem debiti, has been widely debated for some time now. But, legal uncertainty prevails to a certain extent. The question remains as to whether security cession is only a ‘sue do’ or ‘theoretical cession’, where the cession is treated like a pledge of the right. In this case, no actual transfer of the right takes place.

The only logical explanation for this theory is that the cedent retains ownership but only relinquishes his ability to exercise or enforce his rights. Although the courts have, in fact, confirmed this construction may be theoretically unsound, some continue to apply this model based on the notion of an established legal precedent that has been applied for over 70 years. This was confirmed again in Grobler v Ootshuizen 2009 ZASCA 51, where the Supreme Court of Appeal held that security cession is nothing more than a pledge.

There is an opposing argument that this type of cession, regardless of the difference in causa, is treated as an out and out cession and transfer of rights. This theory is further supported by the case of Picardi Hotels v Thkweni Property 2008 ZASC 128, where the court held that a cedent who has not exercised his reversionary rights lacks locus standi in the enforcement or exercise of the right so ceded.

2. The agreement

Although an agreement for cession need not be in writing, a written agreement is always preferable. The only requirement set according to Botha v Fick 1995 (2) SA 720 (A) is that ‘mere consensus is sufficient to effect a cession’.

In addition, the cession must also be lawful and the rights of debtors should not be prejudiced. This does not imply that the debtor must be notified or that the debtor will become a party to the cession.

Formalities

In most cases, there is no need to comply with any formalities to affect cession. In some instances, however, certain formalities are prescribed by law. In the case of a mortgage bond, for example: it must be registered at the Deeds Office.

Conclusion

Cession is a valuable tool in business. That said, it is of utmost importance that the cedent and cessionary both understand the legal nature and consequences of their transaction, or cession, before entering into an agreement.

What’s Next? How to Protect the Future of Your Business.

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