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Edition 114 – Strategically Critical

I’ve worked with a wide range of family businesses over a 30 year period. A great many of them know about business strategy. In my opinion, these businesses fall into the following four categories:

  1. The Impotents – they choose to not have a strategy for their family business which means they meander on their journey in business. Essentially, this is a job with debt.
  2. The Intransigents – they set a strategy for their business, but don’t stick to it. They play the game, but put in a half hearted effort. This is the dust gathering exercise.
  3. The Ignorants – they set a strategy, they stick to it, but don’t review it. These are the business owners who play the game, but don’t understand the rules have changed. These are the blinkered’s – not knowing what is going on either side of them.
  4. The Entrepreneurs – these are the true believers. They set the strategy, stick to it, review it and re-implement it. These are the business operators who truly believe that being in business is all about building wealth, establishing a lifestyle, creating a product or service and building a legacy.

If you fall into one of the first three categories, then you need to listen up. I have some extremely important news for you.

I caught up with a Business Banking colleague of mine recently over coffee in Melbourne. We were talking about what is happening in the business banking world, the impact the Banking Royal Commission is having and what is changing in the world of business from the Bank’s perspective.

The talk turned to Pharmacies. Traditionally a very profitable business, Pharmacies have undergone significant change over the past three years as changes to the publicly funded Phamaceutical Benefits Scheme has impacted the pricing of medicines. This change has lead to a drop in profits for most Pharmacies and, consequently, a drop in the value of goodwill attached to each Pharmacy the bank has lent to.

In essence, what has happened is the banks are now exposed to lending to businesses that are not worth what they were worth just a few short years ago. Some of these Pharmacies have dropped in value from 110% of the value of the debt to around 85% of the value of the debt.

In terms of banking, the bank doesn’t want to be exposed to any loss, potential or actual. The banks are putting plans in place to cover some of this drop in value via:

  1. Other property assets now being roped into the security mix;
  2. Accelerated debt repayment being talked about to encourage borrowers to get their debt inside the new limits.
  3. Interest only loans being converted to Principal and Interest – not a bad thing in my opinion, however when cashflow is tight, debt repayments eat away at what is left over to fund other parts of the business.

All this from a change in Government Regulation the industry saw coming, but most likely, most Pharmacies didn’t strategically plan for.

For a number of the Pharmacies with no strategy (or a poorly executed one), they are now on watch to bring debt back within the bank’s lending guidelines. For some others, I’m guessing that cash has turned tight. For others still, they’re possibly thinking through whether they want the financial strain and are considering their future options.

The owners of these Pharmacies are not doing anything different on a day to day basis. However, their businesses have been changed significantly by a change in Government Regulation, and consequently, the banks don’t want to end up the fall guys.

So, here’s my point. If there was a change in your business, whether it was the advent of an Amazon, the significant health event of an owner of your business, or a change in Government Regulation, what strategy do you have in place in your business, right now, to tackle that challenge head on?

This Week’s Tip

“One day is all it takes to develop a three year strategy for your business. One day is all it takes to develop a road map for where you are taking your business. So, which day is your one day?”