If all your (financial) eggs are in the same basket, they all break if someone drops it.
HOW DIVERSIFIED IS YOUR WEALTH? Do a simple wealth statement. List all your assets, such as your home or other property holdings, savings and investments, and your estimate of the value of your business. Deduct all your liabilities, such as mortgages and loans, and what’s left is your ‘net wealth’. Now see where that wealth is. For most of our clients, that may well show a valuable house with a high mortgage (often funds have been raised this way to set up or finance a business), and most of the net value being within the business. Many clients would see more than 80% or even 90% of their wealth tied up in the business value.
So 8 or 9 of your financial eggs are in a single basket.
Let’s take this one stage further. The business value may include property (offices, care homes, factories etc.) and the value of the underlying trading business, but all contained within one company. By having a holding company and subsidiary company structure, property and other assets can be separated from the day to day trading risk. Still 8 or 9 eggs, but now in two separate baskets.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE
We often see clients that have large long term customers that are key to their business, starting to go off track. Debts take a little longer to get paid. Order levels are slowing. Key contacts are a bit more elusive. 20 years of good relationships can blind people to obvious trends that show there is a problem. By the time it becomes inescapable, the debt balance has crept up and the consequence of the bad debt can be catastrophic.
When we look, we see a year or more of a clear trend that should have been addressed. Month one shows a slightly later payment, but with “They are a good customer, it will be fine”. Month three sees a late and short payment, with lower spending levels, with a response of “I’ll give them a call and chase them up. We haven’t had a problem in 20 years, it will be fine”. By month 10, the debt has grown, is stagnant, and a bad debt high probability.
As previous Great Ideas have reported, the ONS reports that the risk of business failure is the same in year 1 as it is in year 15. Bigger and older does not make your business any safer in a fast changing world, nor does it make your customers any more secure.
SO WHAT SHOULD YOU DO?
- Do a wealth statement. It may be painful reading for some, but knowing the numbers prompts the key questions…
- What can I do to reduce my risk?
- How can I grow my wealth?
- Consider how you might rebalance your wealth better.
- Should you borrow in your business in order to reduce personal debt? I.e. to repay your mortgage. Pros and cons and some important tax issues, but worth exploring.
- Would a holding company structure allow you to separate valuable assets from trading risk?
- Are there assets in the business that should be taken out? Cash surpluses, investment properties, intellectual property? Again, pros, cons and important tax issues, but worth considering.
- Are there key trends you should be monitoring so you can act quickly?
- Changes in the habits of key customers?
- A shift in sales of certain products, which might suggest opportunity or obsolescence?
- Performance of key people in your team. Sales performance trends don’t lie!!
The big message is that financial problems are an inevitability of being in business, at some point. The vast majority are outside your control (interest rates, taxation, minimum wage rates etc.). So it is critical to ensure your (financial) eggs are not all in one basket and that you are monitoring key data so that you can act on changes quickly and decisively.
As always, if you want to know more, give us a call.