The need for flexible business and financing
Businesses looking to quickly tap into new market opportunities or avert risks need to make sure their business operations are flexible. The key is ensuring that cash flows and financing can be adapted as needed to accommodate the business’s changing needs. A growing number of small- and medium-sized enterprises (SMEs) understand and act on this. We asked Guust Jutte, Business Banking Manager at Rabobank in the Netherlands, to explain just what improving its flexibility can do for a business.
Why is it important for business owners to think about the flexibility of their business?
Jutte: 'A company can justify its existence by demonstrating that it can do things better, faster or cheaper than its competitors. But that same company can also lose that competitive advantage overnight. Yet the opposite is also true: you can build a market position out of seemingly nowhere. New technologies and procedures are making all that possible – just think about 3D printing or the use of robots, which have created opportunities for smaller-scale and flexible production processes. And then, of course, there’s the sharing economy, where consumers choose to use or lease products and commodities rather than owning them.'
Could you explain what 'flexibility' essentially means in a business context?
'Well, for one, we’re seeing that the physical location of a business is becoming less important, whereas technology continues to gain ground.
In specific terms, businesses need to ask themselves if it’s still worth investing in a building now that the sale of such properties has less significance.
Also, should a business own its own tools and technologies, or are they better off hiring them as a service?
Another issue is staff. The labour market is becoming increasingly flexible, which offers opportunities for many businesses to retain people who have the knowhow and skills they need. The final point has to do with the organisation itself. How can you set up your business in such a way that enables fast decision-making and ensures that all employees do their bit to provide customers with the best possible service?
I like the example of Ultimaker, a company based in in the Dutch town of Geldermalsen that specialises in the manufacture of desktop 3D printers. They operate based on an open-source philosophy and a co-creation production process. There are suppliers, distributors and customers (businesses and students) all over the world who have a passion for 3D printing and who all play a role in helping Ultimaker to create technologically sophisticated products. I would certainly describe that as a highly flexible form of doing business.'
How does flexibility relate to financing?
'The relevant question you need to ask is: what is the value of a machine purchased by the business? Is that the exchange price, or is the machine something that allows the business to make money? In the latter case, it’s important to companies that they can use the machine, without actually needing to own it as well. If you start looking at things in this perspective, you’ll find that it opens up new avenues. The same is true for property: if you purchase a building by way of security and not to make a profit from it, you’re undermining your company’s flexibility. You see, if your assets are all tied up in your building and other exciting opportunities come along, will you have the flexibility to take advantage of them? And how flexible will you be when there’s a sudden drop in revenue? Will you be able to scale back your expenses at that point?'
And how does all this affect banks?
'For many years, banks would base their financing strategies on predictable cash flows and collateral values, but all that has changed. Business risk has increased across all industries over the past decade, and at the same time cash flows and collateral values have become a lot less transparent.
In a parallel trend, regulators require banks to adopt much stricter credit terms.
All these changes have given rise to new forms of financing, of which crowdfunding and various types of investment funds are just two examples. Leasing is another form of financing that has been around for a while and is used for business assets such as machines and vehicles. Businesses that lease their assets still have enough credit available for other future investments.'
It sounds as if there’s no shortage of opportunities, but what, exactly, is demanded of businesses?
'In coming up with the right financing mix, they first need to have a solid business plan. This is important because your level of flexibility is based on your plans and expectations. If you then combine various forms of financing, you will not only raise the funds you need but will also end up building relationships with the various parties concerned. Collaboration is essential when it comes to making your business more flexible. A good example of this is Michel Ordeman from Haarlem, who produces Jopenbier, a beer brand. When he was just starting out and looking to add an extension to his guest bedroom because he needed the space for his business, he was looking for funding and decided to involve fans of his beer. His company, Jopenbier, continues to pay dividends to the holders of Jobligaties, the corporate bonds he issues, in the form of bottles of beer.
He invites all the ‘brand ambassadors’ to meet up for the day and they all have a great time together. So essentially, Mr Ordeman was in the crowdfunding game before the term was even coined.'
'If you then combine various forms of financing, you will not only raise the funds you need but will also end up building relationships with the various parties concerned.'
What can businesses expect from banks?
'Since we’re talking about funding that goes beyond a straightforward bank loan but is actually a hybrid form of financing, business owners can expect to have all their questions and concerns answered by the bank, along with support and advice. I just mentioned Ultimaker, the 3D printer manufacturer. Since 3D printing is still somewhat of a novelty, raising funds for this type of business can be problematic.
Rabobank helped this particular customer by acting as a ‘linking pin’ in sorting out the different forms of financing: factoring for financing the debtors, Rabobank Stimulus Capital for investments in mainly R&D and product development, Innovation Guarantee Credit to finance the new production site and a sophisticated ERP system; and, finally, regular bank financing in the form of a credit facility provided by Rabobank in order to fund capital and inventories.
At the end of the day, businesses mostly just want certainty about the financing they need. Sure, businesses need to be flexible, but they are entitled to expect the same from their bank.'