You know how frustrating it is when your financial reports never seem to make any sense?
Back in 1988 when APB’s Cofounder Russ Stephens was running his first business, he thought he was doing pretty well.
He had his bright red Porsche out the front to show everyone just how successful he was…
But that didn’t show the full picture.
Because the business he was in required a tonne of cash, he had to hold a lot of stock and give payment terms to my customers…
Which meant that in order for the business to grow, Russ had to continually leave the profits in the business…
Not ideal when you are in your twenties and want to buy apartments and flash cars and live the life.
The problem was, all of his friends were employed by large companies so they got to spend everything they earned whereas Russ didn't get to see the money he was earning.
Burying Your Head In The Sand Will Destroy Your Business
So he did what any owner of a small business did at the time, he ran an overdraft so that he could pull the net profit out of the business and spend it on investments...like a pension scheme, an apartment...and of course a Porsche.
It was easy, the bank manager was taking him out to lunch and telling him how good of a businessman he was...He’s embarrassed to even think about it now!
However, everything changed in the summer of 1988. A new bank manager took over at the local branch of the HSBC and he wasn't so impressed with Russ’s business acumen.
Russ remembers the day he came to see him in his warehouse and asked to see the financials…
So he printed out the profit and loss report and the balance sheet for him…
Russ had no idea what he was looking at, he was just pleased with himself because he was able to print out what the bank manager was asking for…
In Russ’s mind he was a computer genius, because he used accounting software. He thought he was so ahead of his time, how could this man be anything other than impressed?
Your Business Could Already Be Underwater And You Won’t Even Know It
But unfortunately he wasn't impressed at all. Because when he looked at the balance sheet there was just £15,000 of equity to support a business with revenue of over £1,500,000.
The entire business was being propped up by the bank's overdraft…
And they could pull that facility anytime they wanted.
“We're not here to fund your lifestyle,” he told Russ in no uncertain terms.
Russ could not believe what he was hearing. He was the customer here, a good one. He paid interest, bank fees, and he had £150,000 in stock sitting in his warehouse.
He was successful! Or so he thought.
But the man from the HSBC quickly brought him down to earth.
“I don’t like what I’m seeing here, £150K overdraft... the bank is very exposed here. What do you think will happen when interest rates go up?”
Russ shrugged his shoulders, interest rates were already at 10%, they couldn't go up too much more, surely…
“I’ll only be offering a facility that is 50% of the retained equity in the business going forward.”
Seriously, in one meeting he was going to effectively close down Russ’s business!
And he could, because he was the one funding it. By ripping out the profits and relying on the bank for finance Russ had effectively given them control of his future.
What followed was a bit of backtracking and a bit of begging, but he did agree to give Russ a sporting chance to save his business.
And it would require a 12-month financial plan supported by monthly reports delivered in person to his office covering up-to-date profit and loss and balance sheet reports.
He was going to take a fixed and floating charge over both Russ’s stock and his debtors which meant he would be following the numbers closely.
You Need To Take Ownership Of Your Company’s Financials
Russ knew he was serious and at any moment he could pull the pin and effectively end my business...So he had to learn quickly.
He immediately bought two books, Accounting for Non-Accountants and Accounts Demystified.
Weirdly enough, Russ really enjoyed reading them.
Double-entry bookkeeping, creditors and debtors, assets and liabilities, sales cycles, it was fascinating and he loved it.
Once Russ knew what the bank manager was talking about he went to work and produced a detailed plan for the year ahead.
Revenue, cost of sales and every single expense was budgeted for.
Don’t Rely On Your Accountant To Do This For You
The thing is, Russ was no longer in charge of his own business, he was effectively reporting to a manager each month and giving him a full report on what was going on inside the company, and he loved it!
It gave him a level of accountability that he had never experienced before…
And as interest rates rose from 10% to over 17% in the next few months, Russ can honestly say, the bank manager saved his business.
One interesting thing happened at the end of the 12-month period.
Russ had delivered on what he’d said he would, in terms of revenue and retained net profit.
And in return the overdraft was set at 100% of equity rather than the 50% that he originally wanted due to the significant reduction in risk to the bank...Which saved his business.
However, the bank manager still expected that ratio to reduce down to 50% over the next 12 months, which was fine as Russ wasn't too keen on paying 17% interest any longer.
But it was the forecast versus actual expenses that got Russ really excited.
He remembers sending the man from HSBC a fax, because that was how we sent messages back in the day... his message said, “Did you see how close I got to the forecast, 0.1%?”
Russ thought it was amazing that a number he had forecast 12 months earlier had been well and truly nailed.
He thought the bank manager would be so impressed with his business skills...but all he said was, “Yes I did.”
Russ never really liked that bank manager as much as the previous one who used to take him out to chinese restaurants for lunch, but he has probably been the most influential person in Russ’s business career and has helped to shape the way he does business planning, even to this very day.
Understanding Your Financials Is Easier Than You Think
Right now, we want to help you to steer your building company through the troubled waters ahead.
And you need to start by getting your financials bang up-to-date as of the end of last month.
Before you do anything else, you need a very clear picture of the current financial health of your business. Don’t rely on your accountant, this is something every single builder can, and must do themselves.
Which is why the Association of Professional Builders has mapped out everything for you step-by-step, without any jargon.
Click on the link below to learn more.