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PROBLEM 8

Given: the issue of payment arrears inevitably looms when the difference between income and expenditure on the corkboard in your office changes sharply from positive to negative compared with the results of the previous operating month or quarter. The banking community is abundant with charlatans able to convince you consummately that all you have to do is take out a loan and all your problems will be taken care of by the bank’s capital as long as you are making timely interest payments.

Yes, there are some very talented entrepreneurs out there who are able to grow exponentially with a loan at 15 to 25% interest…

Question: but if the average profit in developed economies is less than 10—20%, how can one pay 15—25% interest rates? Only when the economy or a particular economy sector is growing, or perhaps a particular company has struck it lucky or come up with something that its competitors have not. But it is abundantly clear to the author that a business with a loan portfolio in excess of 50% of its annual turnover is inevitably heading for bankruptcy.

Solution: if a business executive or entrepreneur does not want to see a ‘black swan’ from the window one day, he should monitor the immediate future for the inevitable moment when it is no longer possible to increase the cash flow. Only a growing business can cope with borrowing, otherwise you are on a down escalator. If your turnover has stopped growing or earnings have begun to fall, the loan with its draconian interest rate must be urgently reduced or disposed of altogether.

We often believe that we are the ones to be spared. If the entrepreneur in Problem 7 (Example two – the bank foreclosed on an undervalued property for next to nothing) had sold some of his property even at a discount in good time, he would have been able to pay off the loans or reduce them considerably, and then use the remainder to invigorate his business again. But it is so hard to switch from a Mercedes to a more modest car, or to sell a country estate that is not needed at the moment! No stomach for it. And, inevitably, the entrepreneur loses the property in a court of law, with the creditors taking it away for a mere song.

Sometimes, instead of borrowing as a sole way to generate cash, you have to move your bad sellers even below cost.

Example: a friend of mine made profiles for dropped ceilings to attract customers rather than as a flagship product. He sold the profile cheaply in order to attract ‘anchor’ customers who would buy the core revenue-generating product in addition to the profile. In the end, he got so carried away with profile sales (the price was attractive and competitive!) that they far exceeded the sales of the flagship product.

The sales kept growing, but the share of loss makers in the company’s turnover shot ahead of the profitable product share.

Inevitably, a disaster called bankruptcy started looming. Before he knew it and could pull the plug on production of the unprofitable product in time – there was no money for regular payments; with the materials, rent, electricity, and wages eating it all away, while taxes and interest were piling up. The only way to stop the process was to declare bankruptcy…