Mac Wrigley

, , , , , , , , , , , , ,

Is Your Business both Liquid and Solvent?

In Business Loans, Management, Risk on March 5, 2012 at 6:00 pm
Loans

Loans (Photo credit: jferzoco)

As a business owner, you’ve probably heard that tired old line “Banks only lend to businesses that don’t need a loan.” At times you might have even believed this to be true.  Yet businesses still borrow money from banks, which begs the question: Why would a business borrow money if it didn’t need a loan? There is a very simple answer to this question: Businesses borrow money because they need the cash to achieve a predetermined goal. That goal might be to purchase a building, another business, or even a piece of equipment. Perhaps it is a line of credit to supplement cash flow depending upon a variety of factors. The simple truth is that a loan is a tool (and not the only one) that helps a business with its cash position.

So if cash is so important, how do banks assess financial risk? In other words, how do banks determine which businesses to lend to? The answer is complicated as there are a wide variety of factors that must be included in the lending decision. The goal of the bank is to assess the likelihood that the borrower will repay the loan in cash as scheduled.

There are two basic considerations that a bank must assess when underwriting a business loan: liquidity and solvency. If a business is both liquid and solvent this does not mean the loan is approved (again, there are several other factors which must be considered in the approval process); however, a business that does not demonstrate sufficient liquidity and/or solvency might not be in a good position to borrow (as they might not be able to document their ability to repay the loan as scheduled).

Liquidity refers to a business having sufficient cash flow from internal operations to repay the loan as agreed. Repaying the loan refers to both paying interest and amortizing debt.  Solvency refers to the ability to generate cash from other sources (not from internal operations). This is most often from the sale of assets. Since this is not generally considered an “ordinary” source of cash, banks often look at cash generated in this manner as “extraordinary income” when analyzing the financial statements. In other words, this is cash generated outside of ordinary operations (Moody’s Risk Management Services, 1998).

When a borrower is both liquid and solvent, it makes sense to continue the loan process. Conversely, if a borrower is neither liquid nor solvent, they essentially lack the ability to repay the loan. In either of these two scenarios, a bank has a fairly easy decision as to proceed or not.

When a borrower is liquid but not solvent (in other words, they have sufficient cash flow to repay the loan, but lack the ability to generate cash through the sale of company assets) most banks will continue to assess the creditworthiness of the business coupled with their specific request. However, when a business is solvent, but not liquid (cannot repay the loan through cash flow from operations, but has assets it could potentially sell to generate cash to repay the loan) it is more difficult for a bank to determine the likelihood that the borrower will be able to repay the loan as scheduled (Moody’s Risk Management Services, 1998).

Liquidity and Solvency are just two of the considerations that banks must assess in reviewing a loan request for a business. Understanding these two topics is very important to any business owner because a liquid, solvent business is not only the type that banks want to lend to, they are also the types of businesses that are being successful in generating cash, which is the goal of a for-profit organization.

 

Moody’s Risk Management Services. (1998). Understanding financial statements (6th ed.). Walnut Creek, CA: Moody’s Risk Management Services, Inc..

Enhanced by Zemanta
Comment »

, , , , , , , , , , , , , ,

Do You Have a Unique Value Proposition?

In Sales, Social Media on January 26, 2012 at 7:00 am

Most of us spend our whole lives trying to fit in. In middle school, we cling to any type of social camouflage that will help us blend in and not be singled out. It’s Survival 101 during those awkward years. Somewhere along the line we outgrow this phase and seem to find our footing. However, this social pressure to blend in can hamper our efforts in business. If you’ve ever been asked the question “Why should I buy from you versus your competition?” you know all too well how important it is to be able to differentiate yourself from your competition.

There are some very literal ways we can stand out. For example, I’m tall, bald, and pasty. I stand out in almost any crowd, whether I want to or not. If you’re a business owner, chances are I’m taller, balder, and pastier than your banker. It’s become my calling card. It makes me unique and memorable.

For some, it can be difficult to stand out in a crowd. But more importantly, it can be difficult to stand out in your field. Many of us do not have a decent answer to the above question. We fall back to clichés such as “My customer service is better than theirs” or “My services cost less”. The former isn’t really a differentiator. Customer service gets you a seat at the table. If your service is poor, you’re probably not in business any longer—particularly in this challenging economy. The latter is a trap many of us fall in to. We allow our products or services to become commoditized and allow price to be the only differentiator. Often, we make this an issue and essentially teach our prospects to only differentiate on price, regardless of value.

This lack of differentiation is very common in almost any profession. If you are tasked with sales and marketing, however, this issue is of monumental importance. The real issue at stake here lies in what is known as a “Unique Value Proposition” (UVP). Your UVP is a succinct statement that tells your prospect what you do and why it matters to them. It also tells them how you are different. It can be as simple and short as a single sentence, or it may be a few sentences. The important thing is that it is clear and understandable to your target audience (your prospect or referral source) and that it sets you apart from the crowd.

I recently met with a group of professionals and discussed the importance of having a UVP. Each of us went around the table and offered up our own UVP to the group and received feedback. Most of us really liked our UVP’s but found that some changes needed to be made. We found that the best UVP’s had a few things in common.

Here are some important things to consider in crafting your Unique Value Proposition:

  1. Be clear and concise. Be careful not to use your own industry specific language that your audience might not understand.
  2. Explain what you do and why it is important to your audience.
  3. Differentiate yourself. What do you do different from your competition? Why does this matter to your target audience?
  4. Consider your UVP from your prospect’s perspective. Do they really value what you are emphasizing? If they don’t, it isn’t really a differentiator and your UVP is just a UP without Value.

Remember, your UVP is all about your prospect. It should be meaningful to them because it’s an ongoing concern for them or it should make them aware of a problem they might not have considered. It is also important to routinely check and update your UVP as your market and competition change. You may also make adjustments to the value you provide your clients. Any such changes may change your UVP.

Here is my UVP:

As a Business Banker, I provide banking solutions for businesses and their owners.

Many bankers are really just loan officers. In other words, their main tool is a loan. My clients have told me the problem with this approach is when your only tool is a hammer, every problem looks like a nail. While a loan is a very useful tool, there are also many other tools available to help businesses achieve their goals. Not every business problem can or should be solved by a loan. A banker who focuses solely on making loans views all problems through that lens.

By contrast, I am a client focused banker. I put the client at the center of everything I do. My success comes from guiding my clients to the achievement of their goals. I use a consultative approach in helping business owners resolve both routine and complicated problems and finding workable solutions.

Just as I believe not all banks are the same, I believe not all bankers are equal. What additional value does your banker provide for your business?

Related articles
Enhanced by Zemanta
Comment »

, , , , , , , , , , ,

Don’t Be an Oxpecker

In Change, Management, Sales on September 10, 2011 at 12:17 pm
Yellow-billed Oxpecker (Buphagus africanus), M...

Image via Wikipedia

If you’ve ever managed employees, or been a part of an organization, chances are you’ve come across an oxpecker. Almost every organization has them, and they can be a real nuisance. You might be asking yourself, just what is an oxpecker? Aside from being a fun word to say, an oxpecker is a little bird that lives in Africa and makes its living riding around on the back of large mammals (zebras, giraffes, wildebeests, etc.) and eats the parasites off them.  This might seem like a helpful bird, until you consider how they’ve also been known to dig at their hosts wounds as well. Ultimately, the oxpecker is just another parasite, albeit one who has climbed the ladder to “king parasite”. They have been blessed with the gift of flight, yet seem content to take the free ride instead.

This, then, begs the question: Does your organization have an oxpecker problem? These are the free ride/free lunch guys. In other words, those who do not take initiative, have no fire in the belly, or seem incapable of making good things happen.  In sales, these are the low hanging fruit guys. Those who might be great with what walks in the door (or eating the parasites that are right in front of them) but are not capable of finding the hard to reach fruit. Organizational oxpeckers wait for the phone to ring, the prospect to knock on the door, or some other even to happen. They don’t take the initiative to make things happen.

Sometimes, all it takes to fix the problem is for the oxpecker to become self-aware—to realize they are perceived as oxpeckers. However, most often the oxpecker has settled into this role over a long period of time. They’ve become accustomed to the path of least resistance. This type of employee can be extremely difficult, if not impossible, to turn around. The key is to take away that low hanging fruit that allows them to settle for mediocrity and never reach their full potential. If your oxpecker is in outside sales, but seems content to settle for whatever prospect calls in or walks in the door, the solution might be as simple as changing their incentive structure to disallow walk-in or call-in business that they did not develop.

Management is often the playing the role of agitator rather than micromanager. Stirring things up via change to incentives is often the most effective route to take. Managers might not be able to motivate an employee; however, they can provide an environment where in the employee might better motivate themselves.

Related articles
Comment »
Follow

Get every new post delivered to your Inbox.

Join 493 other followers