Labour Turnover

This measures the rate at which employees are leaving a business. The following formula is used.

number of leavers per year x 100
average number of staff

High labour turnover may be a result of
 low morale
 economic growth creating numerous opportunities for workers
 remuneration levels that are not competitive

High labour turnover may affect a business in the following ways

 reduced productivity because a major part of the workforce will always be on a learning curve (there is also a possibility of total production disruption should be the employees resign en masse)
 increased recruitment and training costs
 the business will not be able to build a reliable team

Bankers or financiers in general are not very comfortable dealing with businesses with high labour turnover given the possibilities of reduced productivity or disruptions in operations.

Red flags are not derived only from the financials but also from other aspects of the business.
Listed below are some of the many red flags that are often characteristic of troubled companies.

1.Accounts payable (creditors on hand )balances increasing whiles the sales are flat or declining. Accounts payable balances increasing with sales flat or declining is a certain indication of a problem. Company will be increasingly taking longer to pay its creditors which most likely will be a symptom of cashflow problems. In a such a situation, company will endeavor cover the basic operating with all cash from inventory just to keep a semblance of normalcy.

2.Accounts receivable(debtors on hand) balances increasing with sales flat or declining. This is a classic indication of a major problem in collection practices. Alternatively, this may be an indication of severe competitive pressures i.e., company will be extending more credit so as to retain its share of the market. This can lead to severe cashflow problems.
3. Company with track record of constantly missing its goals and objectives. Typically, companies in a deep crisis will rarely follow their own plans(or worse still have no plans at all).

4. A company whose life or operations depends on one key manager or executive with no viable succession plan in place. If the key person dies or is incapacitated , the business will be headed for a disaster.

5.Company surviving on non trading income. For example, company may be surviving sorely on returns from investments or from sale of fixed assets. This may indicate that company’s core business is in a crisis and is not able to generate income. This may be to failure to produce or to sell the products.

6. A sudden rush by senior executives or managers to sell company stock. This may be indication that they be aware of a quickly approaching storm and will be cutting their losses.

7. High rate of employee turnover. This has 2 aspects to it. It can an indication that people do not have confidence about the long term prospects of the company. Secondly, this means that there will always be a sizeable portion of the workforce that will be on learning curve and this may disrupt operations.

8.Related to 7 above, bankers are not keen to deal with companies whose workforce has a reputation of going on industrial action several times during the year.

9.Poor financial analysis. Management are in the dark about which product, unit, section, service or branch is the most profitable. Company will be carrying a lot of parasites and management will not know this. The result will most likely be very poor decision making will be done with regard to allocation of resources. Even in the absence of sophisticated data systems, manual methods can be used to compute profitability.

10. Company under investigation by the police or tax collectors. The potential dangers are obvious in this case.

11. Uncharacteristic delay in the publication of financial results. This may most likely be a deliberate delay to mask a problem or some problems. Furthermore, in such a situation, ‘massaging the books’ will be a real possibility. There is however, the remote possibility of incompetence in the company’s finance department.

12. Company owners, senior executives/managers with serious personal problems especially in cases where the issues get a lot of coverage in the press. There is a fair likelihood that the affected person may concentrate on their personal problems at the expense of the company.

13.Abrupt resignation of a senior executive or manager may be an attempt to distance themselves from an impending messy situation.

14. Company with pending lawsuits. Lawsuits may end up with substantial payments being made from company’s coffers which may paralyze operations. A company with several lawsuits is a definite time bomb. No financier will want to get near it.

This occurs when a business expands operations without the necessary additional finance thereby putting a strain on working capital.
Overtrading can have adverse effect on a business’s reputation. Management can get overly enthusiastic and take in a lot of orders from customers but fail to deliver because of working capital deficiencies.
Increased demand may create the need for additional cash to fund additional raw material or stock. In the absence of additional funding , the business may put more pressure on its debtors while at the same time try to delay payments to its creditors. This will ultimately be detrimental to the business’s survival.

Overtrading tends to be a problem for small businesses in high growth sectors. Management will be trying to play ‘catch up’ with the big players.

To a banker, one of the most common signals of overtrading is the hardening of an overdraft facility. This means that overdraft usage will be at its peak ( even with some occasional limit overruns) throughout the month without any fluctuations in the balance. In addition , cheques made out to creditors will be for round amounts. This will most likely be made to delay making the full payment but to at least pay the creditors something and keep them quiet.
Worse still, difficulties may experienced in paying regular expenses such as wages and rent.

It is advisable that expansion plans be discussed with your banker so that an appropriate financing packaging can be worked out for your situation. Once a business’s reputation is gone, it will be very difficult to pick up the pieces.

Business bankers prefer to deal with people who are in good control of the business and have very firm grasp on issues affecting their sector or industry. Bring to the fore all the challenges you will be facing and the plans you have in place to deal with these challenges.

1.Have your business financials ready i.e. balance sheet and profit
and loss statement preferably for previous 3 years.
2.Also prepare cash flow projection for the next twelve months or
for a longer period(usually prepare for longer periods in cases where
you want the bank to finance capital items).
3.Ensure you are familiar with the contents of your financial
documents and you can explain significant shifts in the trends.
4.Ensure you can justify the need for bank finance and also defend
your assumptions about the projected future cash inflows from which
the loan will be repaid
5. Submit your loan application to your banker with your financial
documents and business plan(strategic plan) at least 3 days before
meeting with banker. This will ensure that banker has adequate time to
go through the documents.
6.On the day of appointment ensure your make own copies of the
financial statements. Be in the company of your accountant or finance
manager or your second in command. Bankers need to be assured of
continuity.
7.Answer all queries honestly and be frank about the challenges you
may be facing . An experienced banker will assist to find the most
appropriate solutions. Sometimes it may even turn out that the bank funding you were
requesting may not be necessary.
8.If loan is approved, ensure that a you get the letter stating the
conditions and read it thoroughly and where you do not understand,
seek clarification. In case of need you may need to refer to your
solicitors before signing.

There are times when it will necessary to submit a business plan to your banker or potential customer (e.g when you submit a tender bid). Here are some tips that may assist.

1. Give the plan a professional touch
Have a cover page with company logo, address, phone number and table of contents

2. Executive summary must capture reader’s interest . Ideally the reader must develop interest within 2 minutes. Remember that the plan may be competing with several other plans.

3. Be brief and to the point. Readers of your plan are only after the facts and nothing else. Focus must be on structure of the information and not the substance. Avoid being too verbose.

4. Projections: The assumptions behind all projections (especially sales and profit projections) must be backed by facts. Also state the best case and worst case scenarios.

5. Competitive strengths. Clearly spell out your competitive strengths. What is it that makes your business different. Avoid motherhood statements like ‘Excellent customer care’ or ‘strong management’.

6. Critical areas
The following areas must get some decent exposure
-market research
-marketing strategy
-management team
-financial information

7. Plan is owned by management: management must prepare the plan and be in a position to answer an queries pertaining to the plan.

8.Capture the story of your business. How has the business evolved over the years. State the major achievements and the main stumbling blocks.

9. Plan must have shelf life. It must not be quick fix to a certain situation or requirement. Long term vision must be evident in the plan

Parting note

As you develop your plan it is important to remember that at the back of mind that your banker will perform 3 main types of analysis.
(i) business analysis -factors affecting the performance of a business , both internal and external

(ii) financial analysis- review of past, present and future (based on projections) performance of a business

(iii) lending analysis-looking at the purpose and structure of lending proposition

As part of an assessment for a loan application, a business banker will also be interested in the assumptions used in the projection of client’s sales figure. The banker takes a keen interest in that these assumptions to satisfy himself that the assumptions are realistic things because the profits from the sales are a source of repayment for any borrowing facility that the client would have availed.
Competition
A company is considered high risk when it is in an industry where there is stiff competition. When there are lots of players jostling for market space , it very difficult to forecast sales figures. The more when the static or is shrinking. The analysis of this aspect will also cover the size, positions and number of key competitors.
Ultimately a position will be taken on whether company has solid competitive advantages and also whether or not company has resources to carry out any market posturing activities that may become necessary.
Bargaining Power
This is regard with to the extent to which company is able to influence prices and costs. A high risk company would be one that has not got bargaining leverage with its
clients. This usually happens when a small company is selling to much larger companies and is selling a product that has many substitutes.
This situation can also be exacerbated when the company is has little influence over its costs. The company’s suppliers will not be offering any discounts or concessions resulting in high purchasing costs. Under such circumstances, company is likely to have very low profit margins or worse still incur losses.
Demand Risk
This aspect refers to the extent which company can influence the demand. Is a company is a position to launch an advertising campaign which can stimulate demand? If company has no control over demand, it is also very demand to forecast performance especially in a volatile market.
Concentration Risk
A company is said to have high concentration risk when its products are sold to one or two customers. The risk lies the fact that once the company’s clients are in financial difficulties, this will adversely affect the company.
Concentration risk also applies in circumstances where the company serves clients from a particular geographical area. If the area is hit by a natural calamity such as earthquake, company’s sales performance will suffer.
Bankers prefer clients who have a diversified customer base.