finance Colin and Wendy, together with shop assistant Max Bothen, have adapted the business to keep up with the state of the market, including obtaining a retail license to sell LED light bulbs, light fixtures and fittings just before the housing market was affected by the economic downturn. The business has had to scale down from eight members of staff to three, but Colin explains that these are signs of the global recession hitting Gibraltar. When you look back over the last 20 years it is easy to see that Colin and Wendy have been very cautious, as there have been numerous opportunities that were presented to them that would have resulted in their turnover growing substantially. During the last couple of times that I’ve spoken to Colin, he must have said “Turnover is vanity, profit is sanity” at least half a dozen times. For those of you who watch Dragons’ Den will be familiar with this saying, although do you really know what it means? So let me explain what Colin is saying here — we can spend large amounts of time chasing that elusive contract that will see our turnover significantly increase, we become blinded by the chase, the thrill of signing another deal, or the sight of the first payment into our bank account. What is very easy to overlook is that an increase in turnover almost inevitably means an increase in costs. There is a requirement for extra staff to deal with the increased demand, additional resources in machinery and systems that the increased workload make necessary. So in any business it is far better to concen-
GIBRALTAR MAGAZINE • MAY 2013
trate on the item that really matters, the profit margin. Even after you are satisfied that this new order will be profitable, have you got sufficient cash in the business to see through the order right until you get paid? Many businesses go to the wall while apparently posting healthy profits because they have not got cash flow management in order. Forecasting is the key to avoiding this. My key message here is just be careful not just to fund your increased working capital with a bank overdraft, because if this is going to be a permanent feature, then it should be financed by long term capital — otherwise you run the risk of the business running out of cash, and this is called overtrading. One of the possible solutions to this problem of overtrading is to reduce the level of revenue, although in practice, very few businesses will
One of the possible solutions to this problem of overtrading is to reduce the level of revenue, although in practice, very few businesses will take this action as they have worked really hard to secure those orders
take this action as they have worked really hard to secure those orders. Another solution is to ensure that you are managing debts effectively and proper control will help. You could set new payment terms, but that’s easier said than done, as your success will depend on your bargaining power. The same could be said for having these conversations with your suppliers, or maybe offering discounts for prompt payments. The message here has to be that you must fully understand just how those new big orders will affect your cash flow and if it’s a temporary blip then get the bank overdraft in place and if it’s more permanent then you will need long term capital. The fact remains that Colin and Wendy are obviously doing something right with their business, especially as they are looking to expand the export opportunities for the business, while using Gibraltar as a gateway to the rest of Europe. The main concern for Colin and Wendy is what will happen next? The ideal situation would be to sell the business to someone who will be able to take it forward; someone with business and export expertise. However, while the younger generations of Gibraltar continue to focus on building a career in the financial, legal and accounting professions, I fear it’s businesses like WestEx that will fall by the wayside. n Paul Wharton is writing in his own capacity and none of the above is intended to express the views or opinions of Barclays Bank PLC.
Published on Apr 29, 2013
Published on Apr 29, 2013
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