Business Diagnostics Blog

Glowing pre-G 20 summit reviews of Canada’s fiscal health, planning and forbearance has cast this country’s banks, regulators and best business minds in a remarkably positive light.

A June 20 Associated Press article titled “Canada’s economy is suddenly the envy of the world,” goes so far as to suggest the rest of the world could learn from Canada’s prudent approach to debt management and long-term planning:

Canada thinks it can teach the world a thing or two about dodging financial meltdowns.
The 20 world leaders at an economic summit in Toronto next weekend will find themselves in a country that has avoided a banking crisis where others have floundered, and whose economy grew at a 6.1 percent annual rate in the first three months of this year. The housing market is hot and three-quarters of the 400,000 jobs lost during the recession have been recovered.
World leaders have noticed: President Barack Obama says the U.S. should take note of Canada’s banking system, and Britain’s Treasury chief is looking to emulate the Ottawa way on cutting deficits.
The land of a thousand stereotypes — from Mounties and ice hockey to language wars and lousy weather — is feeling entitled to do a bit of crowing as it hosts the G-20 summit of wealthy and developing nations.
“We should be proud of the performance of our financial system during the crisis,” said Finance Minister Jim Flaherty in an interview with The Associated Press.
He recalled visiting China in 2007 and hearing suggestions “that the Canadian banks were perhaps boring and too risk-adverse. And when I was there two weeks ago some of my same counterparts were saying to me, ‘You have a very solid, stable banking system in Canada,’ and emphasizing that. There wasn’t anything about being sufficiently risk-oriented.”
The banks are stable because, in part, they’re more regulated. As the U.S. and Europe loosened regulations on their financial industries over the last 15 years, Canada refused to do so. The banks also aren’t as leveraged as their U.S. or European peers.
There was no mortgage meltdown or subprime crisis in Canada. Banks don’t package mortgages and sell them to the private market, so they need to be sure their borrowers can pay back the loans.
In Canada’s concentrated banking system, five major banks dominate the market and regulators know each of the top bank executives personally.
“Our banks were just better managed and we had better regulation,” says former Prime Minister Paul Martin, the man credited with killing off a massive government deficit in the 1990s when he was finance minister, leading to 12 straight years of budget surpluses.
“I was absolutely amazed at senior bankers in the United States and Europe who didn’t know the extent of the problem or they didn’t know that people in some far-flung division were doing these kinds of things. It’s just beyond belief,” he told the AP.
The Conservative Party government of Stephen Harper that took over from Martin’s Liberals in 2006 broadly stuck to his predecessor’s approach, though he cut taxes and, when recession struck, pumped stimulus money into the economy, with the result that Canada again has a large deficit.
But it is recovering from the recession faster than others, and although its deficit is currently at a record high, the International Monetary Fund expects Canada to be the only one of the seven major industrialized democracies to return to surplus by 2015.
This month Canada became the first among them to raise interest rates since the global financial crisis began.
George Osborne, Britain’s Treasury chief, has vowed to follow Canada’s example on deficit reduction.
“They brought together the best brains both inside and outside government to carry out a fundamental reassessment of the role of the state,” Osborne said in a speech.
It’s a remarkable turnaround from 1993, when the Liberals took office facing a $30 billion deficit. Moody’s downgraded Canada’s credit rating twice. About 36 percent of the government’s revenue went toward servicing debt.
“Our situation was dire. Canada was in a lot of trouble at that point,” Martin said. “If we were going to preserve our health care and our education system we had to do it.”
As finance minister, he slashed spending. A weak currency and a booming U.S. economy also helped Martin balance the books. In the 1998 budget the government estimated that about 55 percent of the deficit reduction came from economic growth and 35 percent from spending cuts.
“The rest of the world certainly thinks we’re the model to follow,” said Martin, who was prime minister from 2003 to 2006. “I’ve been asked by a lot of countries as to how to go about it.”
Don Drummond, Martin’s budget chief at the time, says the U.S. and Europe won’t have it that easy, because the economic climate was better in the late 1990s than it is now, with large trade gains and falling interest rates.
“There’s a lot to learn from Canada but their starting conditions are worse,” he said. “Even though we were on the precipice of a crisis we weren’t in as bad a shape as many of them are.”

The same lessons learned on the international stage apply to the small and medium size business environment.

Proper planning, prudent budgeting and sizing up your business to determine health and wealth and future prospects is crucial.

If you do not know what you have now, how can your react to opportunities and challenges in the future?

The financial health of a company is the crucial component of the business’s survival and success. Without a clear picture, and proper planning, owners work themselves into a corner, eventually having nothing but debt and a diminished capacity to react to new business opportunities.

“Business Diagnostics was written to help business owners and business managers avoid scenarios such as this,” adds co-author Rich Mimick. “Business Diagnostics provides a pragmatic framework for sizing up the health of a company and proper financing and planning strategies.”

Business Diagnostics provides business owners a step-by-step process on how to size-up their internal business operation and assess its relative strengths and weaknesses. The internal size-up drills down into the company’s performance, evaluating its relative health from different viewpoints – financial, marketing, operations, human resources, and technology.

A recent article in the Financial Post section of the National Post notes that many small business owners and start-ups turn to the Internet to download free business planning templates.

That is what the founders of Smiths Falls, Ont.-based Maple Lane Equestrian did when they launched in 2005.

“We did a financial business plan on paper when we set up our business, and we used a template from the Internet and one from a program I had taken,” Marsha Houlahan, co-founder and president of Smiths Falls, Ont.-based Maple Lane Equestrian, told reporter Alexandra Lopez-Pacheco. “It [the template] covered the financials as well as how to market and what products we should bring in at the beginning–that kind of thing.”

In the same article, Theodore Homa, managing partner in consulting at Business Development Bank of Canada, said the main purpose of a business plan is to obtain financing. The better organized, thoughtful and comprehensive the plan, the better the ultimate pitch the startup will make to the banker.

However, with free, boilerplate-style planning forms, you usually get what you pay for says Mike Thompson, co-author of Business Diagnostics, insisting that start-ups – and more mature operators – need to carefully plan and prepare their proposals using well-structured, professionals guides and advice. A poorly structured financing pitch can set a new business back and damage long-term viability.

In the same article, Mr. Homa suggests business owners focus on two core areas when preparing a business plan:
The first is a market analysis. “Have you done market research? Why is there a need for your product or service? Who buys it? What’s your position in the market and why would you have success in selling your product?” Mr. Homa said.

The second is cash flow and profitability. “So how much are you going to spend on developing this product? How much are you going to earn from selling it? What’s your expected profit and your break-even points?” he asked.

Mike Thompson says Business Diagnostics was developed to assist business owners in these specific areas. Business Diagnostics is a manual, guide and reference for current and aspiring business owners. The book provides a unique framework that helps small and medium size company owners and managers evaluate their corporate health while providing indispensable insight and reference for small business start ups.

Essential for everyone in the small to medium sized business sector, authors Rich Mimick and Mike Thompson are highly regarded management, accounting and commercial banking experts and have compiled a remarkable resource of information and guidance on raising equity, obtaining financing, implementing growth strategies.
Business Diagnostics can be reviewed and purchased here.

Glimmers of optimism continue to appear in Canada’s retail, housing and resource industries. Some have suggested the recession has ended and a return to economic growth is not far off.

For many business owners who have maintained the status quo or even reduced operations in late 2008 and through much of 2009, they now face the daunting task of preparing a Business Plan to attract new equity investment or obtain a line of credit from their bank.

Investors and lenders often receive voluminous presentations that are invariably never read in depth due to the sheer volume of content and the absence of a clearly defined message. Business Diagnostics de-mystifies the Business Plan preparation process and provides some practical tips on ‘standing out from the rest of the crowd’.

This is an abridged chapter from the book – Business Diagnostics-2nd edition – authored by Richard Mimick and Michael Thompson, offering insight on the Business Plan preparation process. Additional information can be obtained by visiting the authors’ website – or by ordering Business Diagnostics – 2nd edition.

Know Your Audience

External Audiences (investors, bankers, other lenders) will typically receive an initial overview of an investment or banking opportunity by way of a short and simple ‘Business Opportunity Document’. This will be supported by a formal Business Plan and, if an investment opportunity is being pursued, a public offering and/or private placement process may be initiated via another set of documents, the Offering Memorandum and/or Prospectus.

Internal Audiences ( senior management, employees, Board of Directors or Advisors) will also have the opportunity to review the Business Plan, which acts as a foundation document. It is then followed by a Strategic Plan along with a detailed Budget and Forecast.

The Written Proposal
The Business Plan structure can be summarized as follows:

• The Executive Summary
• Company and/or project description
• Marketing plan
• Production and Operations plan
• Financing plan
• Management plan
• Appendices

Seven Ways to Create an Effective Business Plan

Focus on the Market

• Strive to be market driven (meeting customer needs) rather than technology driven. The potential of the marketplace and resulting revenue/earnings is far more important than the product’s technical features.
• Demonstrate the users’ benefit rather than promoting the product’s virtues and innovation. If the product can provide significant cost savings to clients (e.g., a pay-back period under two years), this translates to a significant user benefit.
• Document booking orders with supporting data indicating the number of customers who have committed to purchase. This allows you to provide a convincing projection of the “rate of acceptance” for the product or service and the pace at which it is likely to be sold.

Anticipate Investors’ or Lenders’ Requirements

• Investors: Are they friends and family, angels, venture capitalists or strategic corporate investors?
  Primary objectives will be a defined exit strategy (cashing out) and setting an appropriate price and percentage ownership.

• Lenders: Why is financing required?
  Amount of funds required?
  Repayment: Over what timeline and from what source (ongoing earnings,sale of assets?)
  Security: What company assets are available?

Emphasize Management Depth

• Does your management team have:
  Proven industry experience?
  Previous start-up experience?
  Track record in bringing new products / services to market?

Clearly Define Your Customers and Competitors

• Customers
  Segmentation – Which are the most attractive segments?
  Targeting – Who is buying from you?
  Preferences – What do they buy from you?
  Timing – When do they buy?
  Criteria – Why do they buy?

• Competition
  Demonstrate your knowledge of the competition, how you are keeping track of them (latest product offerings, price discounts, etc.) and how you differentiate yourself from them.

Obtain Feedback

Show drafts of your business plan to business advisors, senior management and other key employees. Ensure that your lawyer has confirmed that the plan meets all necessary regulatory issues (especially from an investment standpoint).

Prepare Realistic Financial Projections

Investors and lenders will focus on the accuracy and integrity of your financial numbers.
Projections and revenues, gross margins and earnings have to be carefully supported by assumptions that are reasonable and that can be defended. Complete ‘best-expected-worst case’ scenarios.

Complete the Executive Summary (last)

This is the most important section of your Business Plan. People will read it first and formulate their initial impressions based on these critical pages.

More small-business owners are relying on plastic to start a business or fund an existing operation because other sources of money have dried up.

According to a study conducted for the Kansas City, Missouri-based Ewing Marion Kauffman Foundation, the high cost of credit card debt can quickly drag down growth at a young firm and increase the chance that it will fail in its first three years.

For every $1,000 in unpaid credit card debt, a start-up business increases the probability that it will close by 2.2% on average compared with having no such debt, economics researcher Robert H. Scott said in an August 2009 report.

Almost 6 out of 10, or 57.9%, of the nearly 5,000 firms in the study used credit card debt to get started. The report looked at credit card use by the businesses in 2004, the year they all got going, through 2006.

“Relying on credit card debt is very expensive and makes these businesses financially unstable,” said Scott, assistant professor of economics and finance at the Leon Hess School of Business at Monmouth University in New Jersey.

In an August 18, 2009 Los Angeles Times story, it was suggested that the negative effect of using plastic to finance a new business’s operations is probably greater today because credit card interest rates and fees have climbed dramatically while credit limits have been chopped. Even mainstream card companies are charging rates of 30% or more in some cases.

In the same LA Times story, business consultant Sharon Peterson suggested that for many small-business owners, relying on credit card debt can turn into a death spiral. “They are stuck in an endless cycle,” she said.

In early August Peterson met with a business owner with almost $100,000 in credit card debt who wanted to get a loan to pay it off. However, even if the owner had been able to qualify, many lenders don’t let a borrower use more than 20% of the loan amount to pay off other debt.

Proper planning and financial evaluation will help many small business owners and business start-ups avoid these financial icebergs and “death spirals,” says Business Diagnostics co-author Mike Thompson.

According to Thompson, a proper financial evaluation includes:

• Financial Statements – an overview of the Balance Sheet, Income Statement, and Statement of Cash Flows, along with a brief summary of the types of financial statement presentations that are available.
• Financial Goals and Ratio Analysis – analysis of the six key indicators of your corporate financial health, including ratio analysis.
• Financial Projections – an overview of pro forma Balance Sheet, Income, and Cash Flow Statements that forecast anticipated financial performance in the future.
• Managing ‘Cash Drivers’ – working capital and cash cycles.
• Break-even Analysis – relationship between revenue and fixed/variable costs.
• Capital Budgeting – review of longer term investment decisions.

The financial health of a company is the crucial component of the business’s survival and success. Without a clear picture, and proper planning, owners work themselves into a corner, eventually having nothing but plastic credit to cling to.

“Business Diagnostics was written to help business owners and business managers avoid scenarios such as this,” adds co-author Rich Mimick. “Business Diagnostics provides a pragmatic framework for sizing up the health of a company and proper financing and planning strategies.”