Monday 2 November 2020 – Mediation Today
Eddie speaks with Vesna Cvjeticanin – Mediation Today on FM Radio 98.3 about what he’s been up to in the mediation field lately.
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Business Mediation
Zombies
Zombies
Being in business is hard work. Sometimes, no matter how hard you work, the plans you put in place, the investments you make, it just doesn’t go your way.
In the world of fantasy, a dead body reincarnates somehow and becomes undead. A zombie. So too in business. To give businesses a chance and to get money to the people, the government provided support through a comprehensive fiscal stimulus package. A financial lifeline. The Government also changed the rules of the game around debt enforcement and insolvent trading.
It has been a game changer, and rightly so. Like any initiative, there are intended and unintended consequences. One unintended consequence has been the creation of zombie businesses. These are businesses that have financial challenges.
So much so, that a lot of them should be shut down. The only reason they continue to exist is because of the Government’s fiscal measures.
Your job in the current climate is not to become a zombie. It might be good to get the extra sales away but if the company you are dealing with is a zombie business, you might not get paid. In the worst case, you may become a zombie yourself.
COVID19 has taught us to be vigilant, take simple measures and take them well. Early intervention is the key.
Look after your business. Take care of yourselves.
Fighting a Losing Business | Tobacconist and Gaming business
"I was educated at Trinity and Knox Grammar schools and spent time in the defence forces. At 50, I wanted to own and operate my own business; not only to secure my financial independence, but also bring some flexibility to my lifestyle.
It was not so crazy at the time, but I bought a profitable tobacconist and Tattersalls gaming business. I made some money from that business and had a lot of time to myself and my family. The business was doing well until the Victorian Government decided to change the game and open up competition, they removed the monopoly held by Tattersalls. I literally lost one third of my revenue overnight.
Now that's not on me. But how do I manage that? I did believe Tattersalls when they told me new gaming options would be made available to me soon, and that this would lift my trading back to normal. I continued to operate my business…. and I continued to lose money. The only way I could pay my bills was to borrow money on the house and dip into my superannuation fund.
And that's what I did.
I then tried to negotiate new lease terms with my landlord, and that didn't go down so well either. There are two factors which influenced my decision to stay in business. The first is failure, I considered a decision to close my business would be the signature of my failure as a business person and because of this my family would think I'm a failure also. After all, the business employed my kids. The I'm not failing syndrome is all persuasive and blinding to the reality around you. The perception of whether any decision can be made against an existing structure is so confusing. Trinity and Knox Grammar were institutions where rewards followed effort. In my mind, results would follow from my hard work. Failure was not an outcome. In the defense forces failure was not an option. So why wasn't I warned about failure as an outcome in my business. No one told me. I felt guilty I was using my family wealth to keep a loss-making business afloat it was stupid. My wife told me to stop, she was tired of using her money to pay for my business expenses. She made me face the reality, Tattersalls aren't going to look after you she said and they aren't paying your bills and the landlord still wants his rent.
So I took a decision, I met a specialist in managing difficult business situations. He helped me sell out and to wind up. And yes, I should have done it years ago." - A tabacconist and gaming business owner.
There could be any number of reasons you would want to exit your business. It could be:
- part of a succession plan
- you’re received an offer to good to be true
- a dispute between participants
- changing market conditions
- poor performance
- solvency or crisis issues
- or it’s just time
Let's connect for a coffee a discuss your exit strategy.
A Complete Contract – Why Disputes Happen
Why Disputes Happen
Economists define a complete contract as one that eliminates opportunities for shirking by stipulating each party’s responsibilities and rights for each and every contingency that could conceivably arise during a transaction (Economics of Strategy, Dranove D, Besanko D, Shanley M and Schaefer M, 7th edition, p105).
A complete contract therefore sets out courses of action during a transaction, providing rewards when objectives are met and penalties when they are not. The idea of a complete contract comes from the notion that the activities, actions and outcomes under a complete contract would mimic all the steps that a firm would undertake if it conducted that activity inhouse. With a complete contract you would be indifferent if you did the activity yourself (make) or you outsource the activity (buy).
The agreement must be enforceable such that an outside party, such as a judge or an arbitrator, must be able to observe which of the contingencies occurred and whether each party undertook their responsibilities. Finally, any specified damage must be capable of being met by the shirking party, otherwise what’s the point, right.
Suffice to say in a commercial context a complete contract does not exist. All relevant contingencies must be covered off, all actions agreed, rewards and penalties clear. During the contract negotiation process, parties must agree on what makes for satisfactory performance and parties must be able to measure this.
So then most contracts must be incomplete – check out the Lululemon controversy.
There are a number of reasons why contracts are incomplete.
Problems with complexity – how is it possible to consider every contingency in every transaction, a concept otherwise known as bounded rationality.
There are also problems with specifying or measuring performance just like in the Lululemon case. Was the see through yoga pant due to lack of specificity of the sheer or a design issue? How many times have you seen the word ‘reasonable’ or ‘best endeavours’ in an agreement. See this Lululemon summary.
Then there is the old chestnut of asymmetry of information, where parties to an agreement do not share or do not have equal access to all contract relevant data or information. A caveat emptor for example or quality control for example; did the supplier of the Lululemon yoga pant follow specifications, was the sheer even specified?
A well-developed body of contract law such as in Australia or the USA makes it possible for transactions to occur smoothly when contracts are incomplete. Some agreements specify standard provisions, for example real estate transactions. Even within these transactions there are broadly defined terms which make matters contentious. Just what is reasonable notice? So we have to create guiding principles outside agreements to help what’s in the agreement.
Matters escalate to litigation which is a costly way of “completing” contracts, not to mention time delays, uncertainty and more often than not relationships, which cannot be mended.
Relationships are developed by way of interactions in the market place. For example, when goods are produced or services delivered they are provided on the basis of some key performance measures – timing for example, sequencing, technical competencies, colour, condition, quality etc. Contracts tend to manage these relationships. Some contracts may even enable assignment of certain activities others may not.
Confidential or private information adds another layer of complexity. Patents go some way to help with protecting processes or intellectual property, but they also suffer from similar issues such as bounded rationality or what detail the patent actually intends to cover or protect. Employees for example may be trained or educated and this cannot be taken back, so they are managed through non-compete agreements. Again for reasons noted these agreements are also incomplete.
Economists describe these interactions as transaction costs.
Take transactions between parties which involve relationship specific assets, that is assets required specifically to complete a transaction. These assets could be technically trained staff in a specific area to manage client demands or geographically positioning a business, or assets acquired or developed either specifically for a client, for example specific plant to fulfil a special client order or you create an asset to serve a specific client, say the casting of a particular mould. In this setting you can see how business disputes arise pre, during and post contract development.
A number of possible outcomes exist. One outcome could be that both parties attempt to negotiate safe guards into contracts. The upshot is parties enter into time consuming and costly contract negotiations and re-negotiations.
Parties could take up post contractual bargaining positions. For example either party may enter into plan B’s – a buyer may hedge against a contract hold up (deliberate or not) or a supplier may bargain with a standby provider. Both options create market inefficiencies.
Distrust may arise in so far as more and more safeguards are written into a contract or information is withheld impeding information sharing and raising the issue of asymmetry of information, creating further costs.
Finally, parties may reduce exposure or risk by under investing in facilities and relationship specific assets. For example, a supplier may not invest in maintenance of its plant, again reducing efficiencies which efficiency was the reason for using the supplier in the first instance.
The issue with market inefficiencies is that it reduces productivity which will in and of itself escalate conflicts.
There you have it, some reasons why dispute resolution steps need to be followed, when disputes come about.
Find a Facilitator Before a Dispute or Conflict Gets Out of Control
Find a Facilitator. Facilitation is a process that makes life easier. Using a third party to neutralise and help parties achieve collective outcomes.
You can use the process of facilitation at any stage. For example facilitation can be used in pre-conflict situations. This is not to say conflicts haven’t already erupted or there are no existing underlying tensions. Find a facilitator before any conflict escalates and becomes entrenched so that parties can work together in a collaborative way to achieve common objectives.
Facilitation can also be used during conflict as a tool or mechanism to manage conflicts. Of course the facilitation process can continue after matters have resolved to ensure new habits take hold.
As a business facilitator, I would oversee the progress of meetings and attempt to alleviate as much tension as possible, get personal agenda’s off the table and focus on group work. I recently worked with a group where initial discussions with two sets of lawyers and one accountant had recommended to wind up a company and have assets sold to settle their dispute. Working through a facilitated process we were able to have the parties agree to certain steps to resolve issues.
One essential element of facilitation is the involvement of all parties internal to the entity. With this in mind a facilitated outcome could be as simple as one session at board level or a more complex set of scheduled meetings over an extended period of time. It is important to note a facilitator does not become part of the decision making entity or process. The agenda must be owned by the parties.
Similarly, rules of conduct must be set and agreed to by the parties. The meeting facilitator can be engaged to run meetings, or simply keep a record of the meetings or act as a watchdog to make sure the group does not stray from the agreed agenda and rules of conduct. The facilitator creates an environment where internal stakeholders continue to manage and make decisions about their affairs.
There is a lot of work which goes into facilitation up front; meetings, including where to meet, how often, agendas to be agreed, surveys and establishing rules of conduct, who will look after what (from meeting notices, survey preparation, mail-outs, typing of minutes, etc), how participation is to be determined, who will represent different stakeholder groups, decision-making protocols, deadlines and resources for work to be done.
Then there is the conduct of the meetings themselves. Facilitation methods should be structured with the participants in mind and an environment created where everyone feels included and encouraged to participate. In this regard, rules of conduct must be observed.
Group record keeping is another important function of the facilitator. This can take various forms, with agreed outcomes or minutes being the base line record keeping tool. The best facilitated meetings demonstrate group interaction as the meeting progresses.
Another important task (and skill) is managing and maintaining the group. Managing tensions and ‘feelings’, following the rules and ensuring the agenda is playing out. Understanding body language; are people paying attention, is a break needed, are there distractions from within or outside the group (messaging and emails for example) and are they hearing what is being said.
Summarising, reopening and agreeing at appropriate times is also a necessity.
Find a Facilitator for conflict management situations before they escalate. I’ve seen a lot of groups survive tensions and grow into self-managed groups after an extended period of time using a corporate facilitator.
For the trusted adviser it translates to client retention and growth.
Working with those in business to stay in business
This document below discusses many solutions to your business problems , including start up funding, working capital and cashflow. The information is also available as downloadable PDF about the tools of business.
Why businesses fail and how you can keep it from happening to yours.
Business Failure.
This is a phrase that strikes fear into business owners and entrepreneurs, and for good reason. Simply put, a lot of businesses do fail.
Why? This could be your product, your market, or uncontrollable and unforeseen economic events - or this could be you.
Ouch. That is not an easy thing to hear.
As an entrepreneur and business owner, you do not want to fail, and if this does happen, you want it to be despite your best efforts. You do not want it to be because of something you did or did not do.
Yet a lot of the time, that is exactly why failure happens. The person running the business does not understand one or more basic fundamental business principles, so they are not able to take the necessary steps for success.
Don’t let that happen to you.
How to avoid being the reason your business fails
In the over 30 years’ experience of helping business owners, I have yet to come across a truly unique way of going bust. In the interviews conducted with business owners and entrepreneurs who have personally experienced business failure, I see the same problems over and over.
Understand the reasons why businesses fail, and take the steps to make sure that yours does not. Get control of the fundamentals.
Let’s back up a bit and go over some numbers.
What the statistics tell us.
Statistics tell us that experience, planning, and capital management skills are major factors for why businesses succeed or fail. See page 6 to see research results on business failures.
Although statistics like these are helpful as a starting point for understanding what could go wrong, they do not tell you the whole story. They certainly do not give you a way to identify and overcome the problems that may crop up in your own business.
That is why I’ve written this business fundamentals primer. Entrepreneurs and small business operators need to be able to find and fix leaks in the pipes before they become gushing rivers of lost money.
I have many years of experience working with struggling businesses, helping them to get back on track, and I have found there are seven big elements that determine success or failure.
Whether you are starting a business and want to get it right straight out of the gate, or you have become worried that maybe everything is not as it should be with your existing business, tackle these elements one by one to make sure you are on the right track.
- Lack of experience
- Poor location
- Poor financial control
- Ineffective strategic management
- Cash flow planning
- Lack of experience
- Insufficient capital
- Poor location
- Poor inventory management
- Over investment in fixed assets
- Poor credit arrangement management
- Personal use of business funds
- Unexpected
Statistics maintained by the Australian Securities and Investments Commission in Australia reveal the reasons why businesses fail.
Within the last couple of years, the US Small Business Administration cited these as the major reasons businesses fail.
Here is a record of the top 5 reasons for business failure from the Dun & Bradstreet Business Failure Record, 1981.
- Inadequate line experience
- Inadequate managerial
- experience
- Unbalance experience
- Incompetence
- Unknown
Gustav Berle in The Do-It- Yourself Business Book adds the following two reasons.
- Competition
- Low Sales
What I've gathered from years of working with struggling businesses.
Get these elements right, and you are well on your way to a thriving enterprise. Get them wrong, and well… you end up talking to someone like me to try to avoid disaster.
Following are the top seven elements.
Startup Funding
Startup funding is all about the money you will need to start a new business. Here are some of the issues you face when you make these decisions.
How much will you need? Expenditures fall into these three areas.
- One-time expenditure
- Operations
- Growth and expansion
Step One: Estimate your costs
This workup should give you a good idea how much cash you will need.
- Formulating your business idea, product or service
- Validating your business idea, product or service
- Licenses and authorizations
- Legal costs
- Accounting costs
- Insurance
- Rent
- Materials / inventory
- Business coaching
- Marketing
- IT systems
- Staffing costs - salaries and other payroll expenses like workers’ compensation
You have probably heard the old startup adage “Halve your revenue predictions and double your cost estimates.” The point is, you should always expect something to come out of left field and surprise you, because at some point, it will.
Most businesses scream out under capitalization or lack of startup funding – money is tied up in their working capital. When the cash is tied up, it leads to further problems. You delay production and your scheduling falls behind. That means you now need more money to cover overhead costs you had not budgeted for, which in turn reduces your profit. When your money is tied up like this, you tend to start relying on bank financing and avoid paying your creditors or taxes.
Next thing you know, you are a business failure statistic.
Step Two: What will be the source of the capital?
What will be your mix of startup funding – equity or debt?
With both forms, you can raise money from traditional or other sources such as:
- Banks
- Friends and family
- Angel investors
- Government grant funding
- Crowd funding – internet sites that facilitate funding for projects by collecting small contributions from the general public
- Large venture capital investors
Equity
This means taking a stake in your business. You will only get a return on your stake if you make enough money to pay all the bills and have some left over; that is when you make a profit.
The more equity you give away, the more control of your business you lose. If the business is wound down, you will likely lose the lot, unless of course you sell your business for more than what you invested in it.
Debt
With debt you borrow money on a promise to repay the loan. The repayment comes with conditions. You will be required to pay interest and probably provide some form of security, whether it is in the form of the business, your personal home, or in many cases, both.
The more debt you take on, the more debt you have to repay, and if you get in over your head, the higher the probability that you may risk bankruptcy.
Whilst you make the loan repayments you are in control of your business. Miss the loan repayments and you will lose control of your business.
Working Capital
Working capital is the money used in the day-to-day trading operations. It is a measure of the current assets of a business less its current liabilities.
Working Capital = Current Assets - Current Liabilities
Current assets include cash, debtors and inventory. Current liabilities include any items which are due to be paid within the next 12 months.
Simply put, you need to have enough cash to keep the business liquid; that is, enough to pay the bills as they fall due.
Here is the tradeoff.
"Hold high levels of cash and stock, and you will remain liquid, but with lower profits. Hold lower levels of investment, and profits may be higher, but with greater risk of liquidity."
Get this wrong and it will destroy you. Working capital is a complex mix of time and money, and you should have defined policies for it.
Policies around working capital
- What level should you have
- How to manage inventory, receivables and payables
- What level of investment
- How much of each – inventory, receivables and payables
- Who to have accounts with, what are the terms of trade
Ways to fund working capital
- Cash reserves – subject to what return business owners want
- Overdraft – usually repayable on demand, with an interest cost
- Fixed term loan – usually long term, with a higher interest cost
- Trade creditors – subject to terms offered by suppliers
Again, there is a trade off between risk and reward.
"You could fund your whole operations with long term funding, and whilst you will be liquid. It will cost you more, so profitability is lower. Using short term funding to cover the whole of your operations trades profit at the risk of liquidity."
________________________________________
"Try to match short term funding with short term needs and longer term financing for your stable working capital and longer term asset needs."
The Cash Conversion Cycle
Making money is one thing and converting it into cash is another.
The cash conversion cycle is the number of day’s cash sits out of the business (inventory and sales of account) less the days you can have with the cash in your business (how long it takes you to pay your bills).
How quickly can you convert the capital you invested from a spend, to putting it through whatever you are doing, to a recovery back into your bank account?
A very simple practice to get cash back into the bank is to make sure your customers pay on time. If you have given your customers 14 days to pay the amount you are owed, then you should make sure the amount is actually paid within 14 days.
Letting this blow out to 21 days or more just means you are giving your customer a loan without charging interest.
Here are some issues that will affect how quickly you can convert your investment in working capital into cash.
What sort of trade terms are you getting and how long does it take you pay?
The more time you can get from those to whom you owe money, the better. Paying accounts is a little tricky. How long you get to pay your accounts will depend on your supplier and the deal you negotiate with them. Risk your reputation if you don’t manage this well.
How long is it taking you to convert raw materials into items you can sell?
Take into account waste, inefficiencies, and losses. How long does it take to make the goods? How long does stock sit on shelves? Improving these times will shorten your cash conversion cycle.
How much time are you giving people to pay, and how long are people actually taking to pay you?
Let’s say your average debtor days equal 55. The more time you give customer to pay, the longer it takes to convert to cash. You can play with the number of days customers have to pay – you could offer 45, 30 or 21 days. The better you manage this process with follow-up and enforcement, the shorter this period becomes.
Cash or Profit
Understanding the difference between profit and cash is critical. Cash is the money sitting in your bank account. Profit is the difference between revenue (sales) and expenses.
Profit = Revenue - Expenses
Revenue may include such items as a gain on the sale of an asset. Some revenues are not cash, such as gains in value of a stock.
Expenses may include depreciation or amortization (these items are not cash either).
Payments that do not go into your profit calculation include your principal loan repayments, tax payments, and asset purchases.
Just because you have cash in the bank, does not mean you can spend it all. Some cash must be kept in reserve to cover deferred expenses.
The most obvious deferred expense is tax. Businesses have collapsed because they spent the money that should have been kept in reserve to pay their taxes and other large periodic expenses.
Just because you make a profit, does not necessarily mean your business is in good shape. If you do not collect what is due to you from your customers, or if you spend on investments or non- core items such as luxury motor vehicles, that profit figure is meaningless.
If you take the cash out of the cycle by spending it on items other than the ones for which it’s been set aside, it needs to be replaced. That replacement may be in the form of borrowed money, which then increases your interest expenses and erodes your profit, or additional startup funding, which means you lose more control of your business to others.Strategy
Research, plan and document, but maintain some flexibility. In other words, make a plan, and expect it to change with circumstances.
Validating your business may be the only planning you need to do. We all make assumptions about our business. Validating is a process of testing those critical assumptions about your business, such that if the critical assumptions fail, your business would fail too.
Assume that things will go wrong; some of those things will involve factors that are outside your control such as economic and technological factors, or change in trends. There are some elements you can control, such as the people you employ and the client base you target.
Have a robust system of review and analysis, and try to keep a good, authentic support system around you (we will address this further down).
Here are the elements your strategy needs to address.
- How you use your startup capital (see the first two sections on page 9 and 11)
- How you position yourself in the market
- What you sell
- How you sell
- Your competition – who else is in the game and how to play against them
You need strategy to manage these elements. It is easier than you think, and it does not have to be perfect, but you do need a plan.
Management
Just because you love or are good at doing something, does not mean you will be good at running a business, nor love it. There are a few different skill sets that need to be in place on a successful management team.
- Product development and production
- Human resources
- Capital management
What we often see with struggling businesses is a manager or team that has strong technical skills but poor capital management experience. Without that critical element, it doesn’t matter how good your product or service may be. A business, which by definition exists to make a profit, needs good money management if it is to be viable.
Good money management means:
- Balancing your start up capital – how much startup funding do you need, what is the source, and what is the mix between equity and debt?
- Getting your working capital right.
- Understanding what is cash and what is profit – how much of your profit gets invested back into the business and how much goes to stakeholders.
- strategic planning for all of the above.
Business life cycle
How much capital you need, where you position yourself strategically and how well you need to understand business will depend on at what stage you business is positioned in its life cycle.
- Pre-startup – product/service validation
- Startup – the business is unstructured, simple bookkeeping, simple product/service lines
- Survival – the business is gaining some traction, channels firm up with increase in sales
- Growth – market gets broader, but still simple product/service lines, start to develop systems and more management skills needed
- Expansion – products/services broaden, systems become more sophisticated
- Maturity – you are the top of your game
You will face different business issues at different points in the life cycle of your business.
For example, a pre-startup will be grappling with its product and testing its validity.
Compare that with a business in its growth or expansion cycle, which is about funding growth of the business or introducing new product lines or markets.
Simply making it from one cycle to the next does not increase your chances of survival. In fact, the old cliche “The bigger they are, the harder they fall” is true. A more mature operation has a lot of resources invested, and so has a lot at risk.
If you do not have proper management, you will simply fall harder.
Advice, support and sharing.
Sharing, seeking advice, and getting support makes good business.
Just searching and reading this primer shows you are looking for advice and support, which puts you ahead of everyone who is trying to go it alone.
Surround yourself with others who are facing the same problems and issues, and not just those in your own industry. Diversity is a bonus, because it lets you see a common problem from a fresh perspective, and that allows for solutions that you may never have considered had you stayed within the boundaries of your own niche.
What to do with this information
Now, you do not have to be Einstein in dealing with these critical business elements. You do need to be aware of them, address the key fundamentals, and have a plan in place to deal with them, so you do not lose control. Reading this primer is a good first step, but there is a lot more to explore.
Here is what to expect next.
- A series of emails that will explore the seven factors more deeply. These will include checklists and short tutorials, so you can take action instead of just reading about it.
- Regular updates.
- Detailed information around key business fundamentals.
- Stories from others in business, so you can see how other people have found solutions to their problems.
- Information about my latest training sessions and other learning tools, such as webinars.
I welcome the opportunity to talk to you one on one. Help me find out more about what it’s like to be in your business. And as always, if there anything at all that is causing you confusion, please let me know. I welcome your questions and feedback.
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