Share this page

The Art of Understanding Money

At one point in business we owed £1,075M to the bank which amounted to a lot of money back then when it was a lot easier to borrow than to pay back. We had at the time kept most of the properties we had for passive income, however, there came a tipping point when a friend died at the age of 39. He had what seemed to be a great life, a super manufacturing business, including 6 shops. Leaving his wife to look after the business with 2 young children must have seemed an impossible task and after a 2-year struggle the business folded.

Our business at the time was no different and it made us think – what if….?

My wife and I played many parts in our businesses, wearing many hats, and if one of us was to go that would mean 50% of the key staff would go too and the other 50% would crack under the pressure. At the time we were the only ones who knew everything about the business; the managers had their areas of responsibility, and our daughters were busy with advertising. promotions and customer service, which left little time to learn the boring bit of how to run a business.

Dad’s Dead; what do we do now

Knowing that I would be leaving a debt I did not want my family to be left in the same position as my friend’s family so one day we played a game of ‘Dad’s Dead; what do we do now?’ I’d heard this game on one of my motivational tapes.

Questions needed to be answered – ‘would they keep the business? how would they operate? would they sell? and then what? One answer I got back was ‘they would carry on as normal’ so I said ‘ok, I will be dead today, run the business’. Within 5 minutes, ‘have we got enough money to buy more property?’ I said ‘I’m dead, ask someone else’, ‘have we got enough stock?’ ‘who do we have relationships with, who are our estate agents, who are our letting agents?’ ‘what banks do we use?’ ‘what is our plan for the business in the future?’

The game went on for some time and we soon realised that we needed to do something, making us aware of the need for key staff and partners to know more about the business.

I would urge everyone to play this game before it’s not a game anymore

Back to the debt, because of what happened to my friend we not only wanted to pay off our £1,075M debt but we wanted to pay it off within three years out of profits. Having said that at the time I didn’t think we had got a chance, but what the mind can conceive and believe can be achieved and we paid it off in 2 years and 9 months. Needing to clear the debt proved to ourselves that we were in control and we were not getting out of our depth with borrowing. It was a very good exercise but with me being so stubborn I did lose out on a couple of good deals which in hindsight would have paid the debt off with the profit.

What did we learn and how did we do it?

During the process I did find out that we had some insurance policies that we’d taken out each time we got a bank loan but we didn’t understand that we could have cancelled these when each loan was paid off, or, that the insurance could have covered the next loan, so you can imagine we were very pleasantly surprised when we eventually cancelled them because the premiums went towards paying off the loan and we got a return of £75K. On top of that I found out that we both had 9 pensions each which had been taken out over the years. I amalgamated and put them into property.

When you are new to business all you care about is the loan you need, not what’s actually being said or done, you’re signing paperwork, saving tax and not really thinking about pensions in 60 years time. Looking back now it’s amazing how many things we did based on trust of other people dealing with our finances……….. it all comes back to

you don’t know what you don’t know

Pay in a Day

I also came up with an initiative which I believe was the first in the trade and probably never been done since, was to pay in a day. We’d been getting between 2 and 5% discount by paying in 30 days, by re-negotiating the terms to pay in a day could we achieve a 7 to 10% settlement discount. All we had to do was persuade the suppliers to take up our offer and if they did we would save £200K. The majority came on board and we did achieve an extra £160K on the bottom line. Between 1995 and 1996 our profits rose from £323K to £484K making £161K extra profit without having to put up our prices to the customer.

Every week that went by we had less interest to pay on our loan. We were paying an average of 12%. By dividing the £1,075M into 156 weeks, paying off £6,891 a week we would save £15.90 interest, equivalent to £827 per annum. After 144 weeks we had paid the debt off, £992,000 out of profits and the remaining £83K from the interest that we saved.

Free of Debt At Last

The Art of Understanding Money