Could a coach help a business in financial difficulty?

There are approximately 32,000 SMEs in Luxembourg and they play a vital role in the country’s economy. They promote entrepreneurial spirit while developing dynamic sectors and generating employment. However, their journey is strewn with challenges and they sometimes run into financial difficulties. This is where coaches come in. Axelle Feider, Corporate Adviser at BIL, explains the benefits of turning to a financial coach and how to choose one.

What difficulties can SMEs face when managing their finances?

Just like large companies, small and medium-sized businesses have substantial cash-flow needs to meet recurring operating costs such as wages and rent. They also need to invest in executing public and private contracts, which sometimes entails considerable working capital.

In the current economic landscape, rising costs and lower revenues are commonplace. Among other issues, we often hear about wage pressures, soaring energy costs and a labour shortage, which are already a huge challenge for SMEs. SMEs also face longer payment terms, a lack of stock rotation and, as one would expect, an increasing need for working capital. Such situations can lead to genuine cash flow issues.

Companies must be able to plan their income and expenditure over the long term, and cash flow gaps are the main financial difficulty encountered by SME managers. This may result in them seeking out additional bank financing to cope.

How do business leaders respond to these challenges?

In most cases, business leaders manage to stay on track. This is usually not the first hurdle they encounter in the life of their business. But this resilience is sometimes counterproductive. All too often, we find that they turn to their bankers when it is too late, i.e. when they urgently need financing for working capital.

All too often, managers turn to their bankers when it is too late, i.e. when they urgently need financing.

Some companies try to avoid bank financing at all costs because, 10 or 15 years ago, it was commonly believed that having bank debt equated to having an unhealthy balance sheet. This is not necessarily true, but some companies find it difficult to shake off this preconception. Managers hold back when it comes to submitting loan applications. They expect the bank to turn them down, whereas, on the contrary, banks should be their first port of call when warning signs appear, or even before.

At BIL, we advise clients to contact their banker as soon as they become aware of an upcoming cash requirement. This will give their contact more time to advise them before the problem escalates. The sooner you speak with your banking partner, the more leeway you have to find a good solution.

What are the risks associated with poor management?

Poor management can lead to business insolvency. Even a company with a functioning business model and a healthy order book could go under if cash flows are generated too late. The Working Capital Requirement (WCR) must be tracked and managed, and the following three components must be monitored: stock, the “customers” item and the “suppliers” item. Whenever one of these components varies, there is a risk of cash flow stress. This is why companies that are theoretically viable from a strictly accounting point of view can, in some cases, end up succumbing to illiquidity or insolvency.

Banks can intervene before this happens. BIL has many short-term bank loans on offer to companies to help balance the books. Enlisted at the right time, these solutions can put a company’s finances back on track.

Poorly managed companies also run the risk of missing out on opportunities. With good management, surplus cash can be invested in other projects to improve the growth of the business. Managing an SME’s cash flow well means knowing which move to make today, while also giving yourself the means to look to the future with confidence.

Coaches are industry experts who provide entrepreneurs and managers with valuable external perspectives.

Why should you seek support from a coach?

Coaches are industry experts who provide entrepreneurs and managers with valuable external perspectives. They are experienced specialists who are called on to better identify the risks mentioned above, as well as to help the company seize new opportunities and innovate.

Such coaches also make it possible to develop and identify economic and financial indicators that are monitored continuously, as well as to define the often talked about Key Performance Indicators (KPIs), which companies must work on to boost performance. Drawing on their financial and banking backgrounds, coaches are able to address entrepreneurs’ concerns when they want to develop new ideas. They can also provide support with preparing loan applications.

Once again, timing is important here and business leaders should not wait to encounter difficulties before contacting a coach. The latter can provide invaluable support and identify performance drivers even when companies are running smoothly. They can also flag potential future difficulties in advance and propose an action plan before the situation becomes truly problematic.

Who can take on this role?

At a bank, this could be an adviser who is familiar with the company’s financial situation and who has helped it in the past with complex financing arrangements. There are also expert coaching companies with solid industry experience. They are self-employed professionals or active or retired bankers who want to share their experience or who have sometimes found themselves in the same situations as managers and entrepreneurs.

They will provide personalised assistance. Coaches can support managers by analysing balance sheets, for example, to detect risks and opportunities. They can also be on hand for specific projects, including during meetings with banks to discuss financing applications.

Managers should not be afraid to disagree with their coach.

How to find the right coach

A coach must be a trustworthy person with whom the client is comfortable and gets on well, because communication, information sharing and transparency are pre-requisites for effective support. The more information a coach has, the more they will be able to help a company. That doesn’t mean they are always right, though. Managers must agree to be challenged by their coach, but they should not be afraid to disagree with them.

How long do coaching relationships last?

There is no single answer to this question. Banking coaches are used to supporting clients over time. At external firms, assignments can vary from 1-3 months up to a few years depending on the client’s needs and projects.

What is the scope of the coach’s role?

The scope will depend on the level of transparency around the project they are supporting. Coaches are not part of the company, so there are aspects that they will not be familiar with but which nevertheless have a direct influence on how the company is managed and does business. They will not be able to act effectively if they are not briefed on these aspects.

Finally, risk-taking can also be a boundary as coaches will be more careful than entrepreneurs when it comes to considering new projects. That is their role, but that doesn’t mean they are right. Entrepreneurship also means taking risks.