Giant Killer

Giant Killer

Everybody, including senior members of the government, Chambers of Commerce, SME Federations and many SME owners believe that it is the fault of the banks that lending to SMEs is too low.

Banks are profit- making companies, just like any other trading company. They have a responsibility to their shareholders to make profits and pay dividends, which might well contribute to your pension fund. The directors have a responsibility in law not to engage in providing dodgy loans which are likely to damage the bank.

The government, and others, assess only the net lending by banks to small companies. However, that does not take into account that small business owners, in difficult economic times, will try to repay their loans instead of borrowing more. Hence the net level of borrowing becomes lower.

In many cases, the liquidity problem faced by small companies is caused by late payments, particularly by large corporations. Recent BACS research reveals that large companies owe £24bn to small companies, paying the small company 39 days over the agreed payment terms.

However, the government have provided a means to make a profit from late payments from companies, big or small that do not pay on time. The Late Payment of Commercial Debts (Interest) Act, 1988 states that a company with less than 50 employees is entitled to claim interest at 8% per annum above the prevailing Bank of England base rate on all overdue payments. That 8.5% is not a bad return on your investment!

You can claim this interest if the debtor exceeds the previously stated terms of payment. If you have not stated payment terms, the Act assumes 30 days as the terms. You can avail yourself of the Act, provided the debtor is a company, regardless of size. 

The book 'How Companies Really Grow' is available from my website at a considerable discount. The blog is all new stuff, not extracts from the book.

Pareto's Law

            Many people believe that 20% of their customers account for the success of their business and the other 80% of customers are unprofitable and need to be ditched. Speakers on business topics and authors of business books promulgate this little gem.

            If you sack 80% of your customers then they will feel insulted and aggrieved. Assuming that you are dealing with a particular market segment, it is likely that many of the segment members will know each other. You could well be on the receiving end of a negative word-of-mouth campaign, not confined to the market segment.

            The facts are that this piece of nonsense is based on research by Vilfredo Pareto, an Italian living in the late 19^th century. He concluded, correctly, that 80% of the land in Italy was owned by 20% of the population. That is why it is called Pareto’s Law or, sometimes, the 80/20 rule.

            It is not a law! It is not even a reliable rule. 80/20% only applies to land in Italy, over 100 years ago. In your business the distribution could be 99/1% or 50/50% or any other divisions of 100.

            A company that I worked with manufactured in India and distributed through UK retailers applied the 80/20 rule to their customers. They graded their customers by sales revenue and got rid of the smallest customers – 80% of all their customers!

            Unfortunately, grading by sales revenue is totally wrong. They should have graded by profitability. A better solution would have been to raise the prices to those customers contributing the lowest profit. The price-sensitive retailers would fade away and those who accepted the price increase would raise the profits of the producing company.

            The Black Swan put in an appearance – they lost their largest customer about six months later, who had decided to design and source their own stuff.  A little later, they lost another large customer. Needless to say, the company went bust 18 months later.

Who Owns the Brand

Most companies believe that the brand belongs to them. Consequently, they invent a brand and then present it to the market. That’s a variation on the inventor’s naive view: “if I were them I would love this product”.  To engage in mindreading in respect of your potential customers is a big, big mistake.

Inhouse or Outhouse?

Many people believe that you need a shed-load of cash to start up a business. Most believe that that the first step is to write a hopeful business plan and then go to the bank and raise a loan.

Unless your business is a legal practice I’ll bet that you do not plan to have a full-time solicitor on your staff. How do I know that? Because you have insufficient legal work to keep a solicitor busy all the time.