Abonar’s Blog

The Canadian Small Business Loans Financing Act (CSBFA) is a Federal Government program that is meant to make it easier for small businesses to access the money they need to grow. This program provides a level of insurance against default by the borrower, which protects the lender. The insurance is provided by the Federal Government and is administered by the banks. CSBFA insured loans are available to businesses that have less than $5 million in gross annual revenues. A business can have a maximum $500,000 of these loans outstanding at any given time, with a maximum of $350,000 tied up in equipment or leasehold improvements.

Examples of eligible items include:

• buildings and land
• commercial vehicles
• hotel or restaurant equipment
• computer or telecommunications equipment and software
• production equipment

Ineligible items include:

• goodwill
• working capital
• inventories
• franchise fees
• research and development

The advantage of this program over normal financing is that 90% of the purchase price of eligible items can be financed. A bank would finance a much lower percentage of the purchase price if the loan wasn’t insured. There is a cost for this increased level of financing however, as the government requires 2% of the loan amount as an insurance premium. This can be financed as part of the loan. Interest rates are higher compared with other loans with floating rates at prime plus 3.0% and fixed rates at the bank’s residential mortgage rate plus 3%. A portion of this interest is paid to the federal government as part of the insurance premium.

Collateral for the loans is the assets being financed. If you are borrowing through a company, the bank can request a personal guarantee in amount up to but not exceeding 25% of the loan amount.

Detailed receipts must be provided for all items and services being purchased as the bank must prove that only eligible costs were financed. This can be quite a hassle, especially in the case of leasehold improvements which can create a lot of receipts for materials and labour.

CSBFA loans can be a good source of funds for the first time entrepreneur because the higher financing percentage means that less start up capital is required. It’s important to shop around for a CSBFA loan. Some banks don’t have a desire to do these loans due to the increased administration required. Make sure that you find a bank or credit union that is enthusiastic about the program and does a reasonable volume of CBFA loans. It takes some expertise to approve and set up these loans so it is best to deal with an Account Manager that has a lot of experience with them.

Today I gave presentations to Grade 9 and 12 students at Carlton Comprehensive High School for career day. I told them about what I do and I gave them a couple of questions to try out being a business consultant. When I was asked to do this, I thought about myself in high school and how I got to this point in my career.  What would I tell myself if I had the opportunity to give 18 year old me some advice? I wanted to make this as inclusive as possible, as I didn’t know these kids or their backgrounds. So I came up with four rules for them to find their best career choice.

A shot of me giving career advice.

Rule #1: Do what you like.
This seems rather obvious but I see young people pressured into following in the footsteps of their parents, friends or older siblings. Life is too short to do things you don’t want to do. It was at this point that I told them that video games were a perfectly good use of their time and build skills for lots of modern careers. I might have caused some trouble for some parents because of this, but oh well.

Rule #2: Education is mandatory.
Many young people are enticed by fast money doing labour in a booming business. They may see the benefits of education being far away and payback for work being instantaneous. The trouble is,  the marketplace always changes and today’s thriving industry can be tomorrow’s disaster. Without credentials, it is extremely hard to break into new industries.

Rule #3: When you find a potential career, contact somebody that is currently doing that job.
Ask them questions about the job. Most people I know are happy to share their experience with young people. This will also help students decide if they want to pursue the career further.

Rule #4: Don’t chase money for money’s sake.
A number of the recruiters at the career fair try to entice students with how much money they can make. The trouble is, if you do a job strictly for the money, you won’t be good at it. You will have a hard time advancing and will be considered lazy and unmotivated. The money you were promised will never match your expectations and will never be enough.  If you find something that you like, you will be better than most at it. You will find it easier to advance and the money will find you.
Do you have any advice for young people? We’d like to hear from you in the comments section.
PS — One question I posed to the classes was based on the TOC section of the website. All three classes answered the question right where we find seasoned managers choosing the wrong answer quite regularly. Are we teaching out common sense in business school? I’d best leave that for another blog.

Whether you’re planning a wedding, building a new house, or managing a work project your first step should be to draw out a plan. Outline your vision and clearly state your goals and objectives. Otherwise you’ll likely be unorganized and position yourself to make last minute decisions with little thought and lots of stress.

It’s easy to underestimate the importance of planning but project failures can often be traced back to deficiencies in planning. Your work plan should provide step-by-step instructions for project deliverables and corresponding timelines, responsibilities and resources needed for completion. What are the risks and how will you manage them?  What are your expected costs, who is part of the project team, when will you start? Your plan should answer all these questions and more. It seems like common sense, but planning often doesn’t get adequate attention. Remember, details are important. So don’t rush into something, plan!

CDHT3SDNHRBK
Organizations use benchmarking to try to achieve a number of goals. Lots seem to make sense. It seems sensible to find out how you are performing against competitors. You will find out where you are outperforming your competitors and will find where they have the jump on you. A number of companies provide this service and do a great job of collecting and presenting data. The trouble is managers, lacking a coherent strategy, will use benchmarking as their strategy.
This is prevalent in commodity industries where the strategy for many companies is to be the low-cost supplier in their industry. Others, when they see who the top performing companies are, will try to emulate them. In some cases, they will try to poach key managers in the hope that the new talent will transfer the success of the front-runners to the company. The best this strategy will accomplish is to slow down the demise of a company. It won’t turn around a struggling company and it surely won’t propel a company to the top. Why do companies use benchmarking? Mainly because benchmarking:

• Is simple. Benchmarking reports give the impression of companies as being neat, easily quantified players in a game with established rules.

• Feels safe. With the rules laid out, managers believe that they can improve their business by improving on the measures in the report.

• Looks like strategic planning. When people are gathering data, doing analyses and presenting findings, it looks like they are developing a strategy. If it walks like a duck and quacks like a duck….

Here’s the problem. Benchmarking can shed some light on how you measured up against your competition in the past, but it can’t guide you to success. Some reasons are:

• Business isn’t as simple as benchmarking implies. Companies constantly change and are improving all the time. By the time you match the best in class, they have already passed that point. 
• Benchmarking strategy assumes that improving the parts will improve the whole. This is almost never the case.
• Benchmarking concentrates on easy to measure variables. Most of the time, that means cost. Just like cost accounting, it gets managers to concentrate on the least important variable for success: expenses.
• Benchmarking strategy really means trying to copy the best. If you can copy the best, what’s to say that your competitors couldn’t copy you? Any competitive advantages will dry up almost as quickly as they appear.
• Benchmarking can allow managers not smart or brave enough to implement bold new directions to buy time. This hurts the company in two ways: it delays real progress and muddies the situation.
• Benchmarking distracts from the important strategic issues. Things like finding new markets and building products or services to meet them. Also, finding out how increase throughput through assets. How about unlocking the potential of employees through pay and retention systems.
• If you outsource benchmarking and use it as your strategy, you are essentially outsourcing your strategy. This is the kiss of death for any business.

Would you let these guys set your strategy?

I could go on and on about the evils of benchmarking as strategy, but Tom Peters sums it up quite nicely in this youtube clip.

Finally, I’m not saying that benchmarking is bad.  It can be useful if you are comparing companies you wish to buy and not manage.  Just don’t let it be your basis for strategy.

This post about overdrafts & operating lines is part of our banking series.

A standard operating account has no overdraft protection; meaning that if you write a cheque for more than your available account balance (total balance minus funds held) it will be bounced due to non-sufficient funds (NSF). Some institutions give their Commercial Account Managers small amounts of discretion to allow these cheques to go through but financial institutions have been reducing this discretionary authority over the years. Unless you have a borrowing relationship with your financial institution, it is unlikely that you have been assigned to a Commercial Account Manager.

It’s always a bad idea to put your account in an NSF situation. Your cheque will likely bounce but even if a Commercial Account Manager decides to pay your cheque you’ve likely just weakened your relationship with the bank. Bank employees put their career at risk when they decide to pay these cheques and they grow frustrated with people who cannot balance their cheque book. Even if your NSF cheque is covered by the bank, you’ll being paying 21% interest on the amount your account is overdrawn.

Overdraft protection products come in two flavours at most banks.

1. Overdrafts
2. Operating Lines

The process of applying for an overdraft is pretty straight-forward. The form will be simple and they won’t require detailed information but it’s best to take along your financial statement and a personal financial statement so you have the information at hand. The decision will be based largely on your personal credit score. This means that if your business is incorporated you’ll be providing a personal guarantee. They will also take a general security agreement (GSA) over the assets of your business. The interest rate on this will be high and there may or may not be a monthly administration fee or application fee. Most banks limit this product at about $10,000.

An operating line application is a more complex process. You’ll want to take in your last three years of financial statements, a personal financial statement and your last three personal tax returns. The personal documents are required for each shareholder.

Most banks have have a two tiered application process. For amounts under $250,000 or so, the application process will be a small set of forms and will likely be decided upon by a computer algorithm that takes into account a number of financial criteria and your personal credit score. Sounds simple right? Not so fast. If your business doesn’t fit neatly into one of the boxes, you’ll be declined. If this happens, I recommend applying at a credit union because they may take the time to evaluate your situation and make a personal decision.

Security will be the same as an overdraft but pricing might be lower due to the larger amount borrowed. If you offer up cash or real estate as security, your rate will be substantially reduced. There will likely be a monthly fee and an application fee.

For amounts in excess of $250,000 a more detailed process is used. You’ll have to provide aged lists of accounts receivable and payable in addition to the documents needed for lower amounts. A commercial account manager will take the time to get to know your business because it is likely that the decision process will be made by the commercial account manager and the bank’s risk management department. This decision process will take longer but the good news is that you stand a better chance of being approved if your business is a bit unusual.

Security will be the same as a smaller operating line but the bank may take your accounts receivable and inventory as security. Banks generally use 50% of inventory and 75% of account receivable in its calculation of lending value. Inventory that is perceived as unsalable and accounts that have receivables that are more than 90 days old will be removed from the lending value calculation. The lending value must be greater than or equal to the operating loan limit or the limit will be reduced to match the lending value. The limit will be tested monthly for most businesses but those with a longer operating cycle may be tested quarterly or annually.

To perform this lending value calculation, the financial institution will ask for a monthly listing of inventory and an aged list of accounts receivable and payable. It is important to provide this information on time as your account will be considered out of order and the operating line could potentially be frozen until the information is received. The bank will charge a fee for this monthly calculation (called margining) ranging from $25 to hundreds of dollars, depending on the size of the operating loan limit. There will also be an application fee in the range of 0.25% of the limit applied for.

An operating line is a solution for many businesses who have insufficient working capital to handle a long cash conversion cycle. It’s important to remember that operating accounts are not band-aids. Too often business owners apply for operating lines when the issue is really someplace else. Make sure an operating line is really what you need.

If you have any questions about this topic, please comment below or use the questions box.

This quote comes from Thomas Corbett’s book “Throughput Accounting.” Corbett quoted this from the godfather of Theory of Constraints (TOC), Dr. Eliyahu M. Goldratt. This is a bold statement but is true. Cost accountants and business managers are not stupid, so how can this be? This blog explores these questions and proposes a solution.

Why use cost accounting?
Ever since people have owned businesses, there have always been a need to measure how they were doing. As businesses have become more complex, it became more difficult to see if the business is doing well or in serious distress. An ideal cost accounting system would:

• show how the business is performing
• where to make true improvements
• make things clearer, rather than make them murkier.

Unfortunately, traditional cost accounting falls down on all three requirements. Here’s why.

Problems with cost accounting
There are a number of problems with typical cost accounting. Here are a few of the worst problems.

Based on 100 year old assumptions
When we look at the financial statements of companies, things like labour and utilities are included in cost of goods sold and inventory. This was a good assumption in the industrial revolution, where these were truly variable costs. Now manufacturing is more dependent on machine uptime and speed than the number of people working. We don’t send people home when the factory has downtime, but cost accounting assumes that is exactly what we do.
Back in the industrial revolution, managers didn’t have access to information to the extent we have today. They might know a little bit about what was happening upstream and downstream, but nothing else. The strategy of being as productive as possible in each step of the process therefore was the best one available.

Arbitrary allocation of overhead
Instead of explaining this, let’s look at an example. A company has three divisions and a head office. The following table shows the year’s results.

If looking from a purely cost accounting standpoint, division A is losing money and is a candidate for closure. If we close the division but keep the same overhead, the following would result.

So by shutting down the money losing division, we have decreased the profit from $17 to -$3. But wait, it gets worse. Now division B is not profitable. What happens if we shut this division down?

Although this example is very simple, it shows how cost allocation can lead to wrong decisions.

Encourages local optimization
Managers for a department or a facility inside a large organization will normally be measured and paid based on their individual department performance. This will lead to the manager to decrease costs inside their department. The one way all managers will try to decrease costs is to produce more. This makes sense because you can spread your fixed cost over more production, making your costs look lower. The obvious problem with this logic is if the extra production is not sold, it goes into inventory as work in process (WIP). In fact, the only place that this strategy works is in the constraint of the business. That is usually only one step in the process. If the constraint is sales, this is an especially disastrous strategy.

Encourages building inventory
In addition to the local optimization problem, cost accounting gives the wrong impression that more inventory is better. The reason for this is how inventory is measured and counted in financial statements. If inventory is not sold during a reporting period, the cost of the raw material along with the other costs are reported as WIP on the balance sheet. Inventory is an asset and a higher asset base is usually associated with a healthier balance sheet. If costs were unusually high during that period, this WIP value is higher. Some managers may not want to sell this inventory out of fear of the balance sheet and income statement implications. Talk about bizarro strategy.

Is this your cost accountant?

Obscures the real picture
Perhaps the biggest problem with cost accounting is it does the opposite of what it sets out to do – make decisions easier. The allocation of overhead, local optimization and the over-valuation of inventory make it difficult to see what is really happening in a company. Worse, it hides how to make improvements.

There is a much better way
Fortunately there is a simpler and much better way to measure company performance. It is called Throughput Accounting. [continue reading…]

My hockey team lost in the finals yesterday. I hate losing, most people do. But I’m proud of my team and the fact that we chose to compete at the highest level we could play. We could’ve entered less competitive divisions and greatly increased our chances of winning a championship. But what would’ve been the fun in that? I believe that its not just about winning, its about how you win and the road you take to achieve success. Putting it in simple terms, high risk = high reward, low risk = low reward.

Now, this made me think about how people approach their careers. Think about your job and what you’re doing today, what you’ve done over the past few years, and what you envision yourself doing for the next 10 years. Does your job make you happy? Does it excite you? Is it what you really want? There are far too many people out there who dislike their jobs, are bored with what they do and wish they could do something else. Do you have a passion or idea and wish you could make it into a business?

Well, the only way to find out is to actually go out and do it. I’m not saying quit your job, jeopardize your financial situation and go blindly after your endeavor. People have obligations, families to support, and bills to pay. I understand that. But you can still work your 9-5 job and pursue your dream at the same time. Work hard, spend time with family and friends and then make time for your passion. I never said it would be quick and easy. If you want to make something successful you have to work at it, put in the long hours and be patient. Do your research, get advice, set goals for yourself. If you don’t have adequate capital, then save money and put yourself in a position to go after your venture at some point in the future. Nothing comes easy. But we have one life and only one chance to do it. So take a risk and go after your dream. My motto has always been, “if you’re going to work hard, why not work hard for yourself?” Success isn’t guaranteed, but if it wasn’t hard, then everybody would do it.  That’s what makes it so satisfying when you reach the end goal.

So if it’s something you really want, then take that risk. No excuses, pursue your passion. Twenty years down the road you can tell yourself that at least you gave it your best shot. You didn’t choose the easy route. You competed at the highest level you could. Work hard, play harder! Good luck with your ventures.

We all know the archetype of the salesman. The alpha male, type 1 personality that who’s motto is “Always Be Closing.” Conventional sales training emphasizes five key skills:

1. Opening the call. Find ways to connect with the buyer and make some initial benefit statements.
2. Investigating needs. Use open questions to get the buyer to describe their needs.
3. Giving benefits. Once the needs have been established, traditional training tells you to describe the features of the product that will hopefully meet his needs.
4. Objection handling. Here is where you deal with the buyer’s objection to your offer by restating it in a way that allows you to meet their needs.
5. Closing techniques. The ability to close has long been regarded as the most important skill for a sales professional.

An excellent salesman.

These aspects of selling have been taught and applied to all types of sales. They appear to be very sensible and and many sales people believe that being proficient in these five areas will translate into success. Anyone that knows me knows that I believe that theories are fine, but without backing evidence, they are just hot air. What if somebody decided to test the effectiveness of closing techniques?
Meet Neil Rackham. He is the president and founder of Huthwaite Inc. He has made it his life’s work to test with scientific experiments what is important in selling. His book, SPIN Selling explodes the myths that are closely-held beliefs. He found that the rules for small sales do not hold for larger sales. More specifically:

1. Call opening skill has very little to do with success in the larger sale.
2. Open versus closed questions won’t help in the bigger deal. Investigating needs is extremely important in larger sales, but it is more complex than just asking questions in the correct form.
3. Providing benefits that a buyer objects to or doesn’t care about will decrease the chance of landing a large scale. It won’t increase it.
4. Teaching objection handling is like training your security force to beat up John Wilkes Booth after he shot the President. It is much more effective to prevent the objections before they arise.
5. The closing techniques lauded in small sales impedes success in larger sales.

No wonder selling is hard. Why are large sales so different from smaller ones? There are many reasons. In general, the larger sales are more complex, require more people to make the decision, take more time and are more important to the buyers. These decisions can be very risky for the buyers and the companies they represent. If they are pressured into a quick decision, they will be more inclined to refuse the offer. In addition, buyers that make large purchases are normally seasoned professionals who have seen all the tricks of the trade. In fact, many buyers are insulted that sales people try these rudimentary techniques.

[continue reading…]

It’s obvious that having the right contacts is beneficial for personal and/or business promotion. But when you’re out networking how do you know you’re talking to the “right” person? It’s a good idea to be on the lookout for businesses that compliment yours. For example, commercial lenders and accountants are professions I keep an eye out for. They have something in common with me. They consistently deal with entrepreneurs and small businesses and have the potential to send me numerous referrals over time. Having said that, here’s my advice on networking in large groups. Talk to everyone! Don’t worry too much about talking to the “right” person. It’s good to keep an eye out for individuals in certain industries, but unless you have a detailed list of each individual in attendance and can scope out nametags and find the individuals you’re looking for, you probably won’t talk to the “right” person every time you’re out networking. Even if you do meet the “right person” there’s no guarantee that you’ll “click” and develop a mutually beneficial relationship. So just take your time, relax and talk naturally to those surrounding you. You never know, the “wrong” individual you’re talking to might end up knowing the “right” people.

Here’s a tip for those individuals who don’t feel comfortable with networking. Its okay if you’re an introvert and shy when meeting new people. Take your time and attend networking events on a regular basis. Many individuals will come up to you and introduce themselves. Overtime you’ll find an approach that you’re comfortable with and find something that works for you. At the end of the day, just be yourself. You will “click” with certain individuals and you won’t with others. Remember, networking involves building a relationship. And like any relationship, networking takes time but it’s worth the effort.