Emerge Dynamics Podcast

Are you following the housing market? All business owners and managers should. While other industries only affect us if we are in them or related to them, housing affects all of us.

Will there be a housing crash in 2023? Or is the crash cancelled? Eric and David weigh in on where the year is going.

We conclude with some valuable insight on housing affordability from the Atlanta fed. It shows that all is not well, and business owners need to develop scenarios which encompass these possible future states of the world.

https://www.atlantafed.org/center-for-housing-and-policy/data-and-tools/home-ownership-affordability-monitor

This is a near-term future state of the world with a probability high enough that it should definitely be part of your scenario planning. For more on incorporating scenario planning in your financial models, be sure to also listen to Episode 21: Your Financial Forecast: Not A Tool To Predict The Future, But A Tool To Create It

During this episode, we begin our discussion about the 5 stages of a turnaround, specifically the many benefits of making changes in management.

The discussion on turnaround management continues today with a discussion on weak finance function. As a business owner, it is your responsibility to have integrity and to hire people to work in finance who will hold the line. It’s not just about the numbers, it’s about recording financial data according to fundamental principles with correct intention.

A strong financial function will have a role that defends and explains to the organization why things should be reported in a certain way. The finance team helps management interpret the data so that any problems can be readily identified, and solutions can be found promptly.

A strong financial function will help the business avoid internal temptation to mask problems which only serve to set the business up for more problems later on. The data should accurately represent the economic performance of a company so the management team can make appropriate, informed decisions, and also provide consistency on how the financial data is reported.

Without consistency, your bank loses confidence in how your numbers are being reported. Maintaining transparency and open communication with your bank are critical to build and maintain trust in that relationship. If you report accurately and have a plan for recovery, then banks and lenders will work with you to a tremendous extent. If you are inconsistent in the way your financial reporting is done, you jeopardize that opportunity.

This information applies to all sizes of organizations. While it can be tempting to change the numbers around in financial data to paint a certain picture, it always ends in disaster and it does not solve the problem. Consequences can be serious. Have integrity with your financial data so you don’t allow yourself or anyone else to be fooled about where your business stands financially.

Today we’re highlighting some adverse trends that indicate problems are arising in your business. If your business is struggling because you’ve hit a plateau, or your business is headed in the wrong direction, you’ll want to pay attention to these warning signs of decline.

Poor working capital controls will ultimately get your business into trouble. Working capital controls can get out of hand before the income statement does, and that’s why it is specifically important to pay attention to them. Get granular by tracking regularly in your day sales outstanding, days inventory, and days payable to get a more dynamic picture of the financial situation.

Declining reinvestment into the business is another red flag. Regular maintenance and sometimes even replacement for equipment is essential to sustain your assets. If the equipment doesn’t function, it cannot serve the business. While reinvestment can be dialed down or stopped temporarily, consequences will be dire if you don’t continue to reinvest.

On the more functional side of business ownership, turnover rate will indicate the health of the business. If company culture is poor, people will leave. The most talented and qualified people will find employment elsewhere, and you will be left with the individuals who are less desirable to other employers. Smart investors watch the turnover rate. Having a thriving company culture will prevent this problem.

These warning signs are intended to be a guideline for things to look at, but are by no means a comprehensive list. This list is designed to get you thinking about other potential red flags and to pay attention to the factors listed. The great news is these are all internal factors, which means that you as a business owner can take control and turn the business around.

Emerge Dynamics is all about how businesses can emerge from their peers, and businesses accomplish that when they are well-run. This is especially true during a downturn, so today we’re focusing on how you can guide your business through these challenging times.

There are so many bankruptcies happening in 2023. Why is that? It can be easy to throw the blame to the economy or the government, but the reality is that businesses is trouble now were unhealthy even when the economy was strong. There are some estimations that external factors only account for 21% of business failures.

In addition to the Z-score, which measures a company’s likelihood of going bankrupt, Edward Altman also created an empirical measure for how many businesses will fail in the economy as a whole. One of the variables in the equation is the money supply, which has increased greatly in the past few years. At some point in time, that’s going to stop. This equation may begin show even greater correlation during this downturn.

Despite everything going on in the economy, the main cause for decline is still bad management. When interest rates are so low, businesses may have chosen to borrow cheap money just because they could. If they had put some more thought into it, they could avoid the situation they’re in now that arose from over-leveraging.

Another factor causing businesses to have issues is having an “authoritarian leader.” There needs to be a balance between being a strong leader and taking input from others. If a business is declining and has this type of leader, it’s probably their fault.

Today we continue the conversation around your borrowing base. This episode dives deeper into why you may want to consider a borrowing base to finance your working capital so that you can help your business meet its potential. We also discuss the importance of having healthy accounts receivable, and how to use it in the right way.

The best time to use your borrowing base is to fund growth in your business. You can leverage assets for other projects, and you can also use it as a temporary means for a short-term slow down. It’s not a good idea to use it to fund losses within the business. If you run up this line of credit to the limit, you have already harvested the value of your business, so don’t go buying a yacht or making any impulsive purchases.

Size matters when it comes to accounts receivable. Most banks won’t provide a borrowing base if yours is under $1 million. They also consider whether or not you have healthy accounts receivable versus overdue accounts receivable, which is anything beyond the 90-day mark.

You don’t need the bank to do the math for you. In fact, it’s an excellent exercise in discipline as a business owner to run your own sample evaluation so you can understand your own AR outside of just letting the bank do it. It’s important to note that potential buyers of your business will also want to know the fully optimized business valuation to determine your enterprise value.

When things get really tight, you have options. If you have customers who are approaching the 90-day overdue mark, you can negotiate and open a dialogue. It’s also a good idea to drill down into other strategies. Look at your competitive advantage and business culture.

On today’s episode, we’re discussing the mechanics of a borrowing base. This is an episode that will have value in the current economy, and will still have value in future economies. Discussion will involve current events, but ultimately, the goal is to provide solutions that will be applicable in any economy. This is a tactical and technical episode to explain how borrowing base works (and can work) for you.

Although borrowing base doesn’t sound as important as other issues in regards to business ownership, it really deserves its own episode. In a tough economy, it will provide the opportunity for you to help your business survive. It is most important to understand the discipline behind it, and to utilize it in the right way for the right reasons.

Essentially, banks will lend an advanced rate against your assets. Their lending is based on your inventory and accounts receivable. In this way, you can leverage the dollars that are trapped in your business to use wherever you need them. This is a real advantage for businesses who are trying to survive in today’s economy.

The advanced rate the bank will provide is based on the type of asset you are leveraging. They typically require weekly or monthly self-reporting and operate on an honor system in that reporting. The inventory must be raw material that can be sold in the case of debt recovery.

You can leave this line of credit open in perpetuity, but you have to be very careful with how you use it, or your borrowing base could become an upside-down loan. This can lead to a downward spiral if you keep paying for losses in your business.

Today we’re broaching a topic that’s been on everybody’s minds, which is inflation. This is a crazy time we are living in, and it’s no different in the business environment. For the first time, the Federal Reserve has actually publicly warned that there is a mild recession. The prices we see increasing every day are a product of the inflation of the money supply.

The economy is slowing down, and inflation is coming up. This is a unique situation. Typically in an economy, you either have a lot of growth or you have inflation. Currently, we are experiencing both simultaneously.

What does this mean for the average business owner, and what can business owners do? There are a few strategies to consider. If you’re in the market for new equipment, you’ll want to compare old versus new, or maybe reconsider altogether when it comes to those big ticket items. You can always retool your business or consider restructuring. Look into new technologies that will support your business in a cost-effective way; technologies that could save you money.

Although the interest rates are not historically high, they are higher than they were a few years ago. If there is a slight dip in interest rates, consider locking that in and getting a fixed rate. This will help protect you in case rates increase again.

The rate increases could slow down, or possibly even reverse, but there is no specific timeline for that potential outcome. Your business will face financial challenges, but you can learn to manage them by preparing ahead of time and knowing what to do when your business faces adversity.

Today’s episode continues with a discussion about what servant leadership is and unpacking exactly how to be a servant leader. We’ll get to the core of how important it is to be the best version of yourself in order to create prosperity in your organization.

Humility is the cornerstone of a servant leadership mindset. In our western culture, we have a tendency to lean toward thinking on an individual and personal level, but to be a servant leader you must be “other-centric.” Creating a servant leadership culture takes effort, but this process will create value in the organization, rather than trying to extract it.

There are several ways to express your servant leadership. Employees will in the business will be looking to the owner of the business for how to behave. As the leader, you set the bar of expectation on the rest of the company for the proper way to engage in your work-life balance.

Materially signalling to your organization that you are a different type of leader who is non-superficial and authentic is an example of servant leadership. Not being overly flashy with material goods sends the message to everyone that your leadership is not about money. Prosperity and wealth is for all and not simply for the benefit of the leader.

Design incentive programs to focus on giving back to employees, being customer focused, and using “we/our” language instead of “I/my” language will all be indicators to your employees that you have gratitude for those who choose to be a part of the company’s culture of humility. It will also help those who lead create a winning situation for themselves, their colleagues, and their customers.

Here’s a link to the book Lead Like Jesus that we discuss:

https://hpb.com/products/lead-like-jesus-9780785228905

Today we’re getting into what it really means to be a leader in your organization. People have a tendency to look at the actions and consistency of their leader. You may not even realize how much of an influence you have on the culture of the organization. If you don’t focus on this, then another person or group in your organization is going to create the culture for you.

When a phrase is said or an action is taken by a CEO, it reverberates. Therefore, it’s very important to carry yourself in a certain way. It’s less about being careful with your words, and more about setting yourself up with the right disposition as a leader. If this is done correctly and you’re there for the right reasons, you’ll probably say the right things naturally.

Leaders should enable their people to become the best versions of themselves. Think about setting the tone of the organization for the purpose of serving it, not for your own glorification. You may find that your most rewarding times in life are when you are helping someone else accomplish something.

Step one is just acknowledging whether you’re a servant leader or a narcissistic leader. Sit down and reflect on if your approach is wrong. If it is, remember that we all make mistakes, and we can all improve.

Also, keep in mind the distinction between management and leadership. Managing is more task-oriented, and leading is about relationships. It’s about setting tone and the way that you do things as opposed to what you do. We cannot lead well unless we are looking internally and being honest.