15 Nov 7 Confessions of a Financial Sinner

At various points in our lives, we all bow down to temptation with a conscious recognition that various actions could be improved upon.  We then create a narrative in our mind to remind us that our actions were justified so we can soldier into the next day without a moment’s hesitation or a second thought.

It could be a weakness of eating chocolate, avoiding eye contact with a neighbour to evade a long-winded conversation around coastal weather systems, or failing to prioritise what is deeply known as important but failing to act upon it.

Business finance is littered with a long tail of habitual misgivings.  It is the least sexiest part of the business, yet one of the most crucial.  In stoical recognition of these humbling behaviours, I have listed the most common ailments either for your entertainment or sheepish and quiet acknowledgement.

1. Being too busy:  In this instance, your daily operational and managerial demands absorb too much of your most precious resource:  TIME.  Here you know you need to address some fundamental issues relating to your funding arrangements, but they keep getting pushed out into the horizon waiting for the workflow to clear.
2. Being too Inexperienced:  This is when you know that there is a knowledge gap between what financiers are looking for within a business, and what you think a financier is looking for within a business, but fail to act on it.  To take it one step further, not knowing that there is a knowledge gap between the two parties is even a more disturbing shortcoming as you cannot see the financial storm coming if one does arise.  The knowledge gap prevents your business securing the best possible funding platform as it also allows the financiers to control the funding outcomes (pricing, terms, structuring etc).
3. Being too Fearful:  Credit assessment and risk profiling is all about having an astute financial knowledge of where the risks lie within your business, recognising these risks, and what decisions you have made to mitigate these risks.  It is difficult for any business owner to articulate the risks inherent within their business for “fear” of discriminate reprisal by a financier.  By not recognising and articulating these risks will translate into a subjective assessment of managerial shortcomings from a financier.  Knowing the sensitivities around full disclosure is very important.
4. Being too Proud:  A general assumption would be to say that everyone is proud of their business.  They have survived hard times, put sweat and tears into the makings and have lived and died by the sword.  This stoic stance bodes well for resilience, but can create a misguided perception about the fiscal pliability and subsequent vulnerabilities that are inherent within the funding arrangements.   Being too proud is like wearing blinkers, you cannot see the broadside game being played on the peripheral.
5. 1. Being too Loyal:  There is a monumental resistance to negotiate with financiers when loyalty kicks into the managerial decision making process.  Nowhere does loyalty feed into the credit profiling of a client.  Feel free to research the library of APRA’s papers on risk but “loyalty” does not get a mention.  “We have been with our financier for 20 years so they know us well…”  What loyalty does is create is an umbilical cord of revenue for the financier’s shareholders by fashioning a licence to extract maximum pricing on their funding products.   Bank managers come and go, policy changes over time and even banks may become overexposed with your choice of enterprise from time to time, through no fault of your own.   Loyalty is not the same as professional courtesy, as it does not flow both ways unfortunately.
   2. Being too Confident:  Our behavioural thought patterns naturally default to past experiences in our attempt to predict future outcomes.  This is a natural disposition in formulating our fight or flight responses and primal survival, and works well in heeding caution during situations that historically had downside outcomes.  But for most borrowers, they have yet to experience the extremity of adversity when financial wrath is incurred on a business (and livelihood) by a financier.  This generates a false bias towards complacency.  If yesterday was a good day, then so will today.  Unfortunately, this complacency can accumulate into residual funding risk within a business.  This risk is all too real.
       
   3. Being Influenced by Marketing:  No-one ever wants to admit to this one.  It is the invisible elephant in the room.  But being invited to footy matches, BBQ’s or simply the colour of your cheque book may have subtle but profound consequences on your choice of financier.  This financier may not be providing the most cost efficient or flexible capital platform, but the “feel good” factor has worked its charm to keep your business.

    

   It would not be fair to counterbalance this narrative with 7 Essential Habits of a Financial Winner, but you must wait for an upcoming newsletter to delve deeper into these behavioural attributes.

   But I do hope it has provided intellectual fodder for inspirational activity and provocative thought leading into next years’ strategy.  Please call us at Robinson Sewell Partners if you wish to discuss these very topical themes in more detail.