China – “Due diligence or not too diligent, that is the question” – Sorry Will.

May 17, 2012 by

It is nearly 12 months since I last penned my thoughts on China. Why you might wonder has it been so long between drinks? Well, truth be known, there was not a lot else of great significance that I could add to my previous musing. There is so much information added to the many sources available today that I think it needs to be something that I believe you, dear China reader, can use should you want to, or indeed be undertaking business in China.

However, I have been struck recently by how much money a number of very experienced major investors and fund managers, mainly the latter, have lost, or are losing in China. Therefore, I decided I might be able to impart a few ideas that could be worth your consideration.

In the case of private investors, I don’t really worry myself too much because they are most likely to be using their own hard earned dollars. In the case of the latter, it is more likely they are applying the age old investment strategy known as “OPM.” (OPM = Other Peoples Money dear reader, yours’ and mine). They have done a bundle in the west and are now ‘experimenting’ with this simple strategy to invest in China.

I use the term ‘experimenting’ because once you understand why so much hard earned money (yes it belongs to the average punter via their Pension contributions) is being lost, the only conclusion one can reach is that it is an experiment! China is a big laboratory for financial experimentation. Only thing is the monkey keeps escaping because someone keeps leaving the lab door and windows open and unattended!

I marvel at how some of the worlds most renowned fund managers have lost such enormous, and I mean ENORMOUS amounts of OPM in recent times. Not only bad bets, but poorly implemented investment strategies in China. The amounts, in only a few cases, you can count on one hand, exceed US$1bn and that does not count all the poor souls that have lost money through fraudulent trade in China.

In three cases, the numbers go something like this, -$400m, -$230m, and -$460m. No small biscuits! Why, I don’t really know other than a rush to jump on the China growth band wagon led to poor analysis and investigation of investments. Yes, I realise that most readers are unlikely to be investing this much money. It is however, all relative. Can you afford to lose $40,000 through a badly implemented strategy? I know I can’t.

You will recall in my previous missive on China that the approach needs to be founded on a long term commitment and that that requires (indeed necessitates) a great deal of patience and persistence. A part of the exercise is to maintain, a disciplined approach throughout.

Have the patience to build deep rooted relationships. Keep as much of your powder dry until you are ready to move. Sure, there are many stories of people that have gone to China and started trading immediately. Note, I said ‘stories’. You can choose to listen to the stories and follow suit (I would rather go to the Crowne Casino in Macau. More fun and less to lose) or be your own person and stay the distance. Identify companies with a board of directors, and management that will be prepared to make $2 or $3 over the longer term rather than go for the quick buck today.

Okay, okay I hear you, so you want something now!

Presuming enough ground work through your professional searches, appointments, associations and other interactions, has been done that you now have good network of dependable domestic Chinese expertise, then you are ready to move as a team on consummating your financial investment in your target ( I do hope you do not turn out to be the unwitting target!). If all is well on this front then it is time to consider due diligence.

This is not a choice, it is critical. I am not going proffer as to why this aspect has been so problematic for so many investment forays into China. I can only surmise that has to do with the excitement of the project, poor risk management, or simply laziness. Problem is you are not going to know for a while after the investment is made whether you have been diligent enough or not.

So, how much and what is the due diligence likely to involve? There is, of course, the standard due diligence approach. Any half decent corporate or legal adviser is going to have an ‘off the shelf’ due diligence check list. Review the check list, if it looks similar to one you might encounter in the West then I suggest you might have to reconsider your advisers position. This is China, remember what I said last time around, ‘Think Global, act Chinese’.
Go DEEPER than you have ever gone before. You are venturing into your ‘Mariana Trench’. There could be nasty things there you can not even imagine right now in all the excitement and they will bite you right on the arse if your not wary. Here are a few things to think about;

 Operating site visits – crucial in remote locations. I have visited sites where I have been around a factory that has buildings that are supposed to house operating equipment, raw materials, or finished goods. For whatever reason we can’t gain access. A big red flag!

Remember the investor that visited a very busy plant his company was investing in. There were hundreds of people milling about; trucks were moving in and out. The activity was frenetic. After the investment went pear shaped the Managing Director of the Company recalled visiting the factory.
He was corralled into the main office building were he was fêted in a plush board room and offices by the Company and local Government officials.
He left thinking; at sometime he would ‘…got back for better look.’ In the end, it was all a well managed charade. All the ‘employees’ were locals hired for the day to put on a show.

 Operating assets assessment – make sure EVERY piece of equipment operates as you expect so inspect it yourself. If there are three shifts, visit a different shift on different days without notice. If this is difficult to agree with your target, why?

 Access – is access available to the business to facilitate operations, supply, and dispatch, i.e. can the access roads handle the likely traffic said to visit the business?

 Market research – if your product is going into China ensure that the research is genuine and soundly based (See Project RED below). The ‘China syndrome is still alive and well. Acknowledge the reality of your market and competition. Trying to outsmart the Chinese on their home turf is just plain dumb.

 Are the Company’s customers and suppliers as described to you – visit materially important suppliers and customers YOURSELF and ensure that discussions take place with the owners. This is particularly important where no Government entity is involved. Faking clients, (including client offices), invoices, bank accounts etc, is not unknown.

 Locations – COUNT every location/office your target says they own or from which they operate. If you are in retail and you miss this step, go directly to jail and do not collect $100!

 Check orders – always check that any orders you place match what you expect to receive when it lands. You will have heard of the farmers that ordered fertilizer, paid for it when it left China and found the container filled with soil on arrival at its destination. Why? No due diligence to cover the risk.

These are, but a few cautionary suggestions. There are many more. Having the patience and discipline to understand and manage the risk of investing is the key. Business in China is only now beginning to grapple with western style governance. The West doesn’t have it right. Give your target the benefit of your governance experience through sharing the skill you have developed. On reflection if one is not taking these precautions anyway in acquisitions or investments generally, it is no wonder so much investor money lost.

Project RED
In 2008 Calcorp was invited to participate in the financing and building of a small beverage plant to bottle and distribute Australian wine. The Chinese Partner was a Shanghai listed company that at the time had approximately 3,000 distributors throughout China. With such a captive distribution network, how could we miss? After all, we only need a fraction of the distributors to support us for our project to be a winner.

The total capital investment was A$10m, all of which needed to be contributed up front. This is a standard government requirement and that needs reporting against once the project is operational

The project fortunately did not proceed. Our Chinese Partner did a great deal of market testing among their distributors. While there was acknowledgement that our products might have some traction, the distributors unanimously agreed that their market demand did not warrant the investment. We all agreed to pass, remain friends, and keep monitoring the situation.

We invested hundreds of thousands of dollars (note ‘invested’) in the experience. This is chicken feed compared to what we and our investors and partners could have lost. The saving grace, a partner with whom we had built a trusting relationship, they were domestic Chinese, really understood their market and let us in on their distributor feedback. Their support of our due diligence was incalculable. In Master Card terms, ‘Simply Priceless.’

Every time I visit China, I dine with or spend the day drinking tea and eating in the many tea houses close to where my friends live and we continue to discuss whether we think the market has shifted. One day we might do something. In the meantime, we enjoy each other’s company, at least I do theirs, and discuss how we might solve the worlds problems, sound familiar?

Respect and humility at all times is essential. Assume the worst but don’t show it. When it isn’t so, be delighted and send me an ‘I told you so’ note, I will accept in good humour. Try not to become a statistic. I fear though, that to earn your stripes in China you probably need to have an unfortunate experience. Make it as painless as possible and then don’t give up. Most of all keep having fun.

Your always curious China (opportunity) miner,
Neville
Neville Calvert is involved with various investments into and out of China as well as advising business. He can be contact at info@calcorpcapital.com

Possible Issues with Business Software and how to avoid them

April 22, 2012 by

Today, software is an integral part of any business from small to medium enterprise levels. Though for many of you, it is often viewed more as a thorn in your side rather than the powerful tool that will take your business to the next level.

There are a lot of factors, that influence how well software meshes with your company and business processes however, so in line with our last post “Head in the Clouds”, we’re going to talk with Cloud9insight, a UK based provider of ‘Cloud’ solutions for SME’s, about some of the common problems people face in business software so you can hopefully avoid them or at the very least be more informed.

Integration

TX; “What is the big test facing SME’s today?”

C9i: Not any mathematical integration today, but software integration; business software really shows off its full potential when you can integrate all of your systems into one location. This can include your CRM (Customer Relationship Management) software, document management, ERP (Enterprise Resources Planning) software and even your phone system.

TX: What are the main advantages?

C9i: The advantage of this is that it cuts out the hassle of going between systems, saving time and increasing productivity and probably most importantly, it cuts out the mistakes which can be made when reading information from multiple sources. This can make you look more professional as a company and keep the important clients on board.

Adaptability

TX; As an SME how do you choose what is the best system for my business and not spend heaps?

C9i: This is something that may often be overlooked, but it could be one of the most important factors; find software which works with your company that all your staff can benefit from, if people don’t want to use the software, its unlikely to take off and giving people a product that works well for them is far better than forcing people into something which only works well for management.

For this reason, having a package which you can adapt to your current business as well as change with your business as you develop is vitally important. There are many robust ERP and CRM software packages out there, which can go from the smallest business all the way up to enterprise level, so there’s no reason to use something that will soon get overloaded.

Scalability

TX: Seems to me that no sooner has a company installed software than it is out dated. It is never ending!

C9i: Some smaller software packages work very well on the small scale, but can then flounder as the amount of information they need to cope with becomes overwhelming. Equally though, for a small business, having enterprise level software would be overkill and likely result in convoluted processes to look at your data. What is needed here then is going back to adaptability; picking a system which works with your company size now, but can adapt and change as the business develops.

A great tool here is to use cloud based systems such as cloud based CRM. Such systems are hosted by a third party who take care of the day to day running of the servers, updating software and hardware as well as keeping the system secure. This means there’s no need to keep your own tech support on site to manage the system, which can be a big cost, especially for a smaller company.

So if you’re in the market for business software, keep these things in mind; look at how the software works with every aspect of your business (not just management), integrates with all the other systems you use as well as ones you might use, is flexible enough to change with your company and can expand with your company as well. Easier said than done like most things, but well worth spending the time to get right!

Your as always, floating on Cloud9 business journo

Neville Calvert

PS; Cloud9 Insight is solely focused on helping businesses like yours reduce IT cost and complexity
by delivering class-leading Microsoft applications securely over the internet. Cloud9 services are currently available only to UK based businesses. You can reach them via their website www.cloud9insight.com or register your inquiry via email at info@cloud9insight.com. There is no connection between The Small Business Toolbox and Cloud9insight.com

Head in the Clouds?

March 13, 2012 by

Today readers please forgive me if a run a little longer than normal. It is just that this blog is a subject matter with which you do need to get comfortable. It is going to change your business forever!

“You’re a dreamer son, always got your head in the clouds!’ How often I heard that expression when I was growing up. Mind you, it did suit a young boy constantly on the look out for the next adventure rather than focusing on the here and now. Today heading to the CLOUD has an entirely new meaning and more importantly potential impact particularly, for and on small and medium enterprises world wide.

The reason is simply the drive for greater efficiency. Cost reduction is a priority; particularly post the GFC, if SME’s are to remain competitive. More money must be allocated to sales or product development to remain competitive. The question is where does this cost saving come? Well there is an answer, or at least the beginnings of one. Before I go there though, some background mainly for those readers not around ‘back in the day’.

Since the mid 1980’s business has become more reliant on IT, computers and now software. The evolution of these processes has resulted in instant communication across the world. For business the delivery of quotations orders, invoices, banking transactions and conferences are now instantaneous. For all business though, this transition has come at a significant cost.

Initially, computers would be installed in a business and no sooner were they operating, a new up-graded version or entirely new more powerful computer would be available. The price didn’t go down in those early days! Some ‘magic’ formula ensured they were always around the same price as the previous model. Small business didn’t have a hope of keeping up.

Then along came the desk top with its DOS code, laptop with Lotus 123 and the eventually Windows. While the technology became more affordable, software was now the major cost factor. It required specialists to load the software onto business systems, licenses needed to acquired for a given number of users and restrictions around use limited the flexibility.

Again small business was not going to be in a position to benefit from the efficiency of this marvelous technology and the often ingenious business software (not Pacman or Mario Brothers) being developed that was held tightly inside a ‘black box’!

Fast forward to 2009/10 and the chatter really begins in earnest about ‘the Cloud’ and the opportunity this will for ALL businesses and more specifically I think for the SME sector.

SME’s will now be able to access software through the internet as if it were ‘on their own system’ without the inherent upfront and ongoing licensing costs. Today you can access software you need for your business when you need it and only when you need it.

No more buying programmes and down loading them or up loading a programme from a CD. All those boxes with discs, booklets etc all dispensed with. Never mind the money, what a space saver! Today this service has an acronym (isn’t there always one.). It is SaaS or Software as a Service.

No more high upfront capital expenditure); which results in a high cost of ownership. No need for skilled on-site or off-site software maintenance. This is now a very promising solution path for SME’s.

Now, you can afford the best software solution for your business without investing anything at all on the infrastructure or development platform or skilled manpower. The only requirement is a computer with browser, quite basic. SaaS is a recurring subscription based model delivered to customers on demand – Pay as you use.

Those of you who have been following us since we launched in 2008 will now recognise that we have been delivering to from ‘the Cloud’ since our inception. We didn’t even recognise this fact, certainly not in the early days.

Our services are provided as and when you the user needs them on a pay as you use model. All our business programmes are available instantly from any computer 24/7 literally globally. We store the information for you in a safe, secure environment for instant recall and updating. That is the beauty of SaaS. It is only going to get better.

There is a lot of other great business software out there e.g. CRM programmes, Accounting, training etc. We will be reviewing Cloud based software solutions over the coming months so stay tuned. In the meantime, I encourage you to get familiar with what is out there and ‘test’ the Cloud theory. We are and like us, it delivers!

Your, forever with his head in the Cloud, business guru

Neville Calvert
neville@thesmallbusinesstoolbox.com

How do growth companies survive in complex times?

February 5, 2012 by

Australia’s small and medium-sized growth enterprises face ongoing and increased stress in these challenging times. Business owners have to make difficult decisions constantly and demands come at you from every angle, all day long.

Successful entrepreneurs know, however, that there are enduring key principles that improve a company’s prospects for growth and continuing profits and make it stand out from the crowd.

“At Bibby Financial Services we are constantly interacting with entrepreneurs and fast moving companies. Fast movers are the growth engine of our economy, and this is a key reason why we continue to support the sector, says Greg Hardiman.

“We have observed time and again that staying calm in difficult situations and applying the following disciplines are key when a business is trying to get ahead of the competition.”

Disciplines for success

Cash flow is the lifeblood of a business. Cash flow can be the first casualty in a downturn. In tight times fast movers develop conservative cash flow budgets and ensure they get paid more quickly. They are diligent in collecting what they’re owed. Effective accounts receivable collection frees up cash and can reduce reliance on credit.

Always challenge certainty, especially your own. When entrepreneurs think they’re right, they also think to ask what is missing and search for improvement. Excellence is an unrelenting quest and striving for it is the surest route to enduring satisfaction. The best leaders and fast movers are forever challenging their comfort zone.

Emotions are contagious and feelings are infectious. The best leaders inspire. They are optimistic and ensure employees are just as inspired to succeed in their roles.

Understand basic finance principles. Fast movers ensure financial information and accounts are timely and critical documents are maintained and delivered on a set day every month.

Clearly communicate a business’ point of difference. Clear communication of a company’s point of difference and strategic direction to its customers is imperative. Fast movers view downturns as an opportunity to stand out from the crowd; they continue to tell the market what they do best and remain visible.

Delight customers. Fast movers make frequent customer contact, great service and rewarding loyalty a priority. Fast movers ensure customers are left in no doubt of their importance to the business.
Work smarter, not harder. The best fast movers don’t let running their business run them into the ground. They continually invest in time-saving systems, software and products to free up valuable working hours.

Form great relationships. Strong relationships with mentors, financiers, bankers, suppliers, clients and partners significantly help a business. These relationships endure in good times, when the business is running well and cashflow is well-maintained, and in tough times, when cash flow is tight.

Meaning isn’t something to discover, it’s something to create. Entrepreneurs derive meaning from finding a way to express their unique skills and passion in the service and products they deliver. Figuring out how best to contribute is a lifelong challenge, to be taken one step at a time.

Take responsibility. In a fast moving company no one is left in any doubt as to who takes responsibility for the key decisions. Right or wrong, the buck stops with the leader.

Greg Hardiman

Bibby Financial Services is one of the world’s largest independent providers of debtor finance spanning Australia, Asia, Europe and North America. Debtor finance is designed to improve business cash flow and support business growth by releasing cash tied up in unpaid invoices. Unlike other funding arrangements, no real estate security is required, making it more accessible for small and medium-sized business owners. For more information on Bibby Financial Services please visit www.bibby.com.au

Service Please

January 30, 2012 by

So here we go again! Another year and another dollar to be earned. Same old same old! Well not really. This time around folks there is a new paradigm it is called service. Maybe it’s an old paradigm revisited.

If you want to remain in business or more importantly generate a profit to stay in business and contribute to your community then you had better catch the Service Bug together with the package it is hidden in.

The delivery of traditional services is changing as more and more people take to the internet. People tell me they don’t like it. ‘It is so impersonal and you don’t get to meet the person you are dealing with. Brother how wrong can you be. Great service is great service regardless of how it is delivered.

I am a great one for over servicing my customers, in fact anyone associated to my customers and me. It is all I have going for me. Okay so may be that’s a bit crook. But really can you ever do enough for your customer?

Here’s a testimonial I was privileged enough to be shown very recently that proves my point. I have changed names to protect the various people involved however if you would like to deal with the service provider (Travel Agent in the story contact me and I will put you in touch). I have not otherwise meddled with the testimonial as it was written. You just can’t make up this stuff, it is great!
———————————————————————
From: Rod and Lyn [mailto: @internode.on.net]
Sent: Wednesday, 18 January 2012 1:50 PM
To: travel.com.au
Cc: ‘Agent’
Subject: GREAT SERVICE FROM Louise Kerr

Hi Mark. I want to let you know about a great level of service I received from Louise over the last few days. After a poor level of service from my normal TA (retail shop-front in Brisbane), I did a web search and contacted a couple of on-line agents.

My request was for two RTW business class flights on the Lufthansa mixed alliance ticket which I have used previously in conjunction with European cruises. It turned out to be quite difficult to find seats on all the various legs particularly as I was quite specific which airlines I wanted to use within the available groupings. (need to maximise my points and status credits for One World and Star Alliance).

The other agents were good with service/response, but could not get me on my preferred Singapore – Munich leg. Louise not only was able to achieve this, but also provided me with options to hub through Frankfurt, or Munich direct at higher price.

She worked closely with me to achieve exactly what I needed, albeit at a higher price than the base Lufty RTW fare. Those were my decisions, and it was great to have the various pricing options explained. Nothing seemed like too much trouble to Louise, despite my many questions/suggestions/change of mind etc. She is now helping me with all my accommodation needs on this trip.

This is exactly what I desire in a TA, and you have a gem in Louise.

Due to her great service, your firm has gained a $20,000+ booking, and as we travel a couple of times overseas each year, a good future client. I also intend to recommend her to my similar age (retired baby boomers) friends, who all travel overseas regularly. We all seem to struggle to find consistent great service in a TA.

I worked in a service industry all my life, and know how critical good staff are to the success of the business.

Just wanted to let you know.

Kind Regards.
Name Withheld
———————————————————————

The aspects that are an inspiration for us all are that Louise focused on:

Developing a close working relationship with the customer – she understood not only what he needed but importantly what he wanted;

Providing options even though they were at a higher price (up sold);

Nothing was too much trouble – over serviced to the customers delight!

Not bad when you think this was all achieved without the customer or TA ever meeting face to face. Technology delivered the channel but in the end it was great service that delivered the result and then some.

My next trip will be booked through this TA and Louise in particular. While she is working for a TA she is building her own ‘Brand’. Wonder if her boss has worked that one out yet?

Your, ever pleased to be of service, business coach

Neville Calvert
neville@thesmallbusinesstoolbox.com


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