I bumped into Dan Brown at a ballgame. Dan is a partner in Manchester Consulting Engineers, a firm with forty professional staff. When I asked how things were going, and Dan said, “I feel like it’s the best of times and the worst of times.”

“I don’t understand.”

“Our profits are fine, but I’m worried. We’ve received a signal from our bank that they’re concerned about us.”

“What kind of signal?”

“They wrote us a letter last week telling us that they were going to limit the amount they loaned against our receivables.”

“That’s ominous.”

“Exactly. And it comes at a time when our profits are at an all time high.”

“Have you talked to your banker?”

“That’s a bit of a problem. We have a management committee now, and I don’t want to step on their toes. It’s their position that this is just a whim of the bank manager, but I’m afraid the bank sees something about our business that I don’t.”

Letty Gordon of Gordon Heating and Air Conditioning was having lunch with me when he said, “I’m taking a marketing course at the university.”

“Really? How’s that going?”

“Very interesting. The key point the professor has made is that the basis of all marketing is differentiation. In fact, differentiation seems to be the main drive of every major business.”

“That’s a fascinating thought,” I said, “because in my experience most businesses are more similar than different.”

“It’s a matter of perspective,” Letty said. “You could say that all people are similar. And they are, in some ways. But we develop a special relationship with one person -- and the differences are far more important than the similarities.”

“A special relationship sounds like … romance.”

“That’s right.”

“Are you saying you can develop a relationship with your customers that’s so intense that it parallels courtship?”

“Of course not. It’s just that focusing on the similarities doesn’t help you much. Humans are set up to notice differences, and businesses should hone in on that fact. In my experience, a business can be unique even if it’s just 10% better than the competition.”

Norman Laughton, the owner of Middletown Heating and Air, came to see me last week. “We’re expanding,” he said. “We’ve been grown sales at about 10% annually for the last three years.”

“That’s great,” I said.

“It is, but out trucks have are really run down. Right now I have four trucks on the road and it looks like we need to lease another two.”

“Why are you leasing?” I asked.

“I like the idea from a cash flow perspective. Some time ago you mentioned that you personally favoured purchasing. I was speaking to another accountant who told me that from a tax point of view, there’s not much difference between the two. If that’s the case, how come you have such a strong opinion?”

“That’s a good question,” I said, “and the answer is complicated. First of all, let me say that I agree with the accountant who told you that there isn’t much difference from a tax perspective. One clear advantage that does exist for buying is that you pay GST on the purchase price, but not on the interest paid if you finance the purchase. When you lease, you pay GST on the entire lease payment -- both the principal portion of the payment and the interest portion.”

About a month ago, I stopped by Evan Thomas Consulting Engineers to discuss the company’s performance. A secretary brought me a cup of coffee, and after a few moments Evan entered the boardroom. “I just received our quarterly results,” he said, “and they’re not very good.”

He tossed me a copy of the report and I glanced down the figures. “Your sales have increased, but your profit margins are down. For 2001 and 2002 you had margins of about 14%.”

“Exactly. We’ve been running pretax profits of 13% to 15% for the last four years. But last quarter we were down to 12%. This quarter we’ve fallen to 10%.”

“Why do you think that’s happening?”

“We’ve underpriced some work. We hired Joe Gurney, a sales manager, about nine months ago. He’s very eager to prove his worth -- and he’s been able to bring in a couple of very large clients. But I’m afraid that he’s done that by lowering our prices too far. Of course whether or not the client is profitable, the sales guys still get their commission.”

“How can you be so certain that’s the problem?”

Jim Anderson came to see me last week. Jim and I had never met before, but he read some of my columns on retirement planning and they had grabbed his interest. Jim explained that he founded Anderson Litho fifteen years ago. He was about to celebrate his 62nd birthday, and he thought it was about time he began to think about what would happen to his company and his finances as he began to work less. He also told me that the company had eight employees and pretax income of $400,000. Jim said he needed about $200,000 to live on. He invested the rest.

“How much money do you have saved now?” I asked.

“About $500,000. Most of it is in mutual funds.”

“It seems like you haven’t been saving for long based on putting away $200,000 per year.”

“I’ve been saving for about five years. Before that I was putting kids through school and I couldn’t set aside much money. But after taxes, the money doesn’t grow very quickly.”

While Jim was explaining this, I reviewed the company’s financial statement. That’s when I noticed something that was a surprise. “I see there’s no taxable income in the company. And the corporation’s retained earnings is $375,000 which is the amount of your receivables and fixed assets.”