Issues & trends - solutions

Question:
I am a director/shareholder in a second-generation family Business. The ownership of the business is spread across the extended family and includes some shareholders who work within the business and some from outside.

One of the constant tensions amongst the shareholders is the expectation for dividends from those outside the business and the demands to manage funds prudently placed on those within the business.

Answer:
This is not an uncommon problem for any business but can be more acute in a family Business circumstance due to the degree of influence the family members can have - directly or indirectly. The responsibility of those within the business is to treat it accordingly and manage the cash flow for the best outcome for the business. What's best for the business will ultimately be best for the shareholders.

This means preparing appropriate cash flow budgets that consider the working capital requirements of the business and take into account funds required for expansion or reinvestment, taxation, new plant and equipment and any other strategic initiatives that are planned. Part of this budget should also incorporate planned and prudent dividends for shareholders.

Management should drive the business to this cash flow budget so that dividends can be paid as anticipated rather than working on a 'hope for the best approach'. This includes concentrating on debtor collections, containing spending in accordance with the budget and seeking external funding if appropriate.

Communication is the other important element to resolving potential tension with external shareholders. From time to time the business may need to retain extra funds. When this is part of the budget strategy it should be communicated in advance to shareholders so that they have a clear understanding of what they can expect. This can avoid surprises or disappointments. A good forum for this is through regular family meetings or Family Council if you have one. The communication should be two ways and an added benefit can be valuable feedback from family members.