Hope and optimism can blind you to the realities of business problems. Time and cash can slip through your fingers, while you cling to the belief that your latest scheme will avert trouble, but all the time…

Hope and optimism can blind you to the realities of business problems. Time and cash can slip through your fingers, while you cling to the belief that your latest scheme will avert trouble, but all the time…

I have often chastised myself for being lazy. Faced with a major crisis, when I’ve got to dig myself out of trouble, I can get down to serious hard work. Or I can become driven if I have the chance to hit a serious home run. But, the rest of business life can be pretty humdrum.

Like playing golf, if you want to be a business winner, I’ve discovered over the years that it’s a lot better to avoid trouble in the first place, rather than rely on miracle shots to get you out of the woods.

Plan when you’re not in trouble
Keeping out of problems means practice and planning in the periods when you’re not in trouble at all. For too high a percentage of my entrepreneurial career, I’ve allowed myself to drift into trouble and let time (and cash) slip through my fingers. Running a business with too little cash and too little time to redress the situation was not enjoyable. And it was very expensive both in terms of the stress I endured and the amount of equity I lost.

So nowadays, against my natural instincts, I work harder in the quiet times to identify and plan for potential trouble. I try to have action plans and criteria set in case hard decisions need to be made. In real life, as the business goes off track there is a huge pressure of inertia, created by hope and optimism, that with your latest bright idea all the business’ difficulties will be solved. And, unless you face some blindingly obvious crisis, the bad news keeps dribbling out for two, four, six or even eight months, accompanied by lots of soothing reasoning that you don’t need to worry because it will all turn out well in the end. Well, in many cases, you don’t know it, but your arteries are cut and your lifeblood is seeping away.

Diversification problems
Recently I was reminded of this basic but crucial lesson. I have been trying to help a company out of trouble in the last couple of months. The founder had built a successful business over the previous six years from scratch to revenues of about £5 million on the back of a £175,000 loan. The business had been profitable until the last two years when they “diversified” into complementary areas while continuing to invest in further outlets for the core business. The diversification was a mistake. The business did not have the capital base or sufficient profits to fund poorer results than expected in the new business areas while continuing to build the base. It was over-ambitious and within 18 months it turned into a £1.2 million mistake.

The founder had developed a clear plan to get the business back on track, broadly speaking, by divesting the add-on activities and refocusing on the core. But the plan had been developed too late. There was not enough cash in the business to achieve it. New capital was needed.

Delays hit a rescue plan
So a second plan was crystallised to raise the new capital on fair terms for the founder, based on the premise that the divestments would be completed before new capital was raised and the core business could show year one profits of over £500,000. The new money would cost him 25 per cent of the equity.

Well, the first divestment went through according to the timetable, but the second sale, which would introduce £250,000 as well as divesting the remaining unwanted business, was delayed a bit – not much.

Unfortunately, there was no buffer built into this plan and you can guess what happened next. The landlord of one of his shops gave 24 hours notice that he would foreclose and that crucial building block disintegrated. The divestment did not happen and the investment could no longer go ahead on the same terms.

Founder is left with just ten per cent
The terms moved against the founder. In the end, the investment could not be brought off in the timescale and the purchaser of the divested business (planned to be for £250,000) instead bought the whole company for the same sum of money, leaving the founder with just ten per cent.

If only the founder had acted earlier. One year ago this same plan could have been implemented without any outside capital needed. Six months ago it could have been achieved with some outside capital and a 25 per cent dilution. Two months ago it could only come off with huge doses of luck.

Unfortunately, in business you definitely take your luck when you get it, but it’s not good to use it as part of a downside planning toolkit. So failing to take the necessary decisions before the situation was critical and in this case, cost the founder 90 per cent of his business.

Turn time into your ally
So the tips that turn time into your ally rather than your enemy are:

• Ensure there is a solid contingency in your plan
• When you’re cash generative, build up that buffer to a good level then invest in further growth after that
• Set deadlines, ratios, decision points to downsize, sell, close under-performing activities – think of it like a stop-loss on an investment share
• When you’re in a good position, negotiate those personal guarantees away, raise a term loan with the bank if you feel your buffer is not high enough yet, and negotiate better overdraft facilities.

Peter Williams has raised over £13 million of venture capital for companies in which he has been involved. The first company he founded was listed in the Independent on Sunday 100 as the fastest growing UK private company over the previous five years. He sold the business to Reuters. Peter is now an investor and director of privately-funded, VC-backed and quoted companies and runs a mentoring service for CEOs.