Wanted a gut feeling for business

20th October 1984, Page 90

20th October 1984

Page 90

Page 90, 20th October 1984 — Wanted a gut feeling for business

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Contrary to popular belief, lack of finance is not the main reason for small business failures. According to Brian Warnes, managing director of the venture capital company of the Midland Bank, what is most often lacking is a 'barrow boy' understanding of business

EARLY this year the chartered accountants firm Robson Rhodes issued its report on the Small Business Loan Guarantee Scheme. This was the second report, the first one being made available at the end of 1982. A few illuminating comments were made, such as: "If our study is in any way representative of small businessman, there is a communication gap between what they need and what they get in the way of advice."

The report revealed that the "most common reason for failure was poor management . particularly lack of business planning, lack of strategy, inadequate financial control and poor marketing."

For anyone interested, A Study of Businesses Financed Under the Small Business Loan Guarantee Scheme and A Commentary on a Telephone Survey of Borrowers Financed Under the Small Business Loan Guarantee Scheme are available from the Department of Trade and Industry, price £9, and £5 respectively. Both these reports are worthy of consideration.

On the same kind of theme, Brian Warnes says that the British show a surprising lack of business understanding, including many of those who run businesses.

Who is Brian Warnes? He is managing director of Midland Bank Venture Capital Ltd (MBVC), part of the Midland Bank set-up. MBVC is willing to back companies with little or no track record from an early stage in their development, provided they have a proven product or service and that the management is sound.

"Our biggest problem isn't availability of finance, or propositions, or persons," says Warnes, "but finding people with a real, gut feel, 'barrow boy' understanding of business. One you've got that, the money side is usually not a problem."

Out of sheer experience, Brian Warnes has learned the hard way about business and business methods. Although he gained an Oxford degree in physics and went into a nuclear job after leaving university, he felt a strong urge to learn how businesses tick. So he qualified as a chartered accountant as a first step.

Then his practical education began. He worked for the Commonwealth Development Corporation (CDC), the British equivalent of the World Bank, where he got to know at first hand the workings of CDC's "Devees", local finance companies established specifically to fund small businesses.

Later on at the National Enterprise Board he acted as a deputy divisional director responsible for setting up a countrywide small company funding operation. He was also part of the rescue team put into an earlier UK development finance company, Spey Investments. Following this, in 1979 he established for Midland Bank a new-style, fast-acting development and venture capital fund, which he currently directs.

So strong are his convictions regarding basic business methods and bearing in mind the success thus far enjoyed under the MBVC operation over the past five years or so, he felt compelled to write a book outlining his ideas about business. He therefore wrote The Genghis Khan Guide to Business, published this year. The aim is to help existing businesses to become more successful and prosperous — and to prevent any shaky business from going under. Start-up businesses will also doubtless benefit from the ideas expressed to be guided into profitable and prosperous pastures.

The failure rate of companies today is distressingly high, though the recessionary trends have been a severe handicap. Nevertheless, Warnes suggests that many businesses fail because they are badly run, not necessarily due to incompetence, but merely owing to the fact that the managers are unware of basic business principles.

This is where the barrowboy technique enters the scene. You may have heard the story of the barrow boy who owned a mansion, plus a Rolls-Royce — and went on holiday each year to the Caribbean. On being asked how he came to be so successful, he answered: "Well, it's quite simple, really. I buy for £1, sell for £2 and live very well on the 10 per cent margin."

Another story tells of the sign displayed over the entrance to a leading American company. It reads: "Our job isn't making steel — it's making money."

What is to be learned from these pearls of wisdom? Two vitally important points emerge. First, there is far more to business than buying and selling products or services. It is gross margin — not sales — which constitutes the real income of a business: "buying for £1 and selling for £2 — or £3 or £4." Second, there is the question of break-even point. A business which does not regularly measure its break-even point for the particular conditions of the moment — can greatly add to its difficulties of operating successfully in its marketplace.

Companies whose management teams are cognisant of these fundamentalbusiness issues and put them into practice, sharply improve their chance of success. Conversely, if the issues are ignored — or not even appreciated — by a management team, then the business concerned will sharply diminish its chances of success.

"In itself the product or s( vice isn't important," sa' Warnes. "What is important the price-cost-demar relationship." The expressii "making money" does n mean making profit so much generating cash flow, althou, obviously the two are related.

Warnes stresses that it is ca flow — not profit — which is I life-blood of a company. example of this is that unl€ the wages can be paid on Frid and on every Friday, there v be no more Fridays on which continue in business, howeN attractive the product potenl and however expert the skills the management team. CC flow has got to be understooc or else ...

Taking a look at gross m gins, Warnes puts the point tr most companies achieving Ii than about 25 per cent gn margin are likely to be on road to failure. Companies gin to acquire real stren, when the margin gets over per cent, while high fliers into their stride with above per cent.

One vital exercise is keepin finger on the business pu This might be considered mentary, yet how many cc panies produce key data wee not more than two days a the end of each week?

He submits that if such dat got out less frequently t monthly (at the outside), c( panies so doing cannot be garded as well manag Managements who really derstand business would dare to wait as long, as they preciate that too much can wrong too quickly — wl might mean the death kne what is going wrong is sorted out speedily.

That's a broad outline, you can read all about it in Warnes book, publishec £19.95 by Osmosis Publicati. 8 Holyrood Street, London 2EL (te1: 01-403 7575). This is easy to read, practical contains no airy-fairy theory only the price of a good t ness lunch, • by John C. Vann