"Put the money you have use for for the next 3 years into short-term products. Tax the rest of the accumulated money and take it out of the company and invest it as a private person."
I'm sure you can guess how things turned out last year. You may even know exactly how much you made.
Money. Chewbacca. Mergles. The lubricant of your business.
Let's optimistically assume that 2022 turned out great and you have more in your account than you currently need. What to do with this surplus? To keep inflation from stealing it?
These were the questions that had been circling around in my head for quite a while. Then it came. Why don't you just ask someone who's always within your reach? And so I invited Michala Janatova from JAMICO Investment Office. to join the podcast. What was I wondering?
🔸 What mistake are we making in business regarding finances?
🔸 What is the projected economic scenario for the first two quarters of 2023?
🔸 How to save money for 6 months to 3 years?
🔸 How to protect accumulated funds in the long term?
🔸 What does a proper financial plan look like in terms of company finances?
TRANSCRIPT OF THE INTERVIEW
Martin Hurych
Hello. I'm Martin Hurych and this is Zahžeh. Today's Ignition will be about finances and, as I hope very much, mainly about the ones you earned last year and now you may not know what to do with them. If we're going to talk about finances, it's with Michaela Janatova from JAMICO Investment Office. Hi, Misha.
Michala Janatová
Hi, Martin.
How is wealth management going at the Janat's?
Martin Hurych
How is the wealth management at Janat's, how are you doing?
Michala Janatová
It is true that inflation has also had a big impact on our spending, which has risen perhaps even more than the official inflation. However, since we plan properly as wealth managers, no dramatic things have happened and we are managing with moderate savings quite smoothly.
Introducing Michala and her path to finance
Martin Hurych
Let's have a little introduction. Come tell us what you've been through so we know what angle you're going to take to advise us on business finance. How did you get to where you are right now?
Michala Janatová
I have been involved in finance and especially investing for almost my entire professional life, even though it was not my original choice. I wanted to do marketing, or tourism, but I went to the University of Economics, National Economy. However, I was more attracted to marketing and I got into finance more or less by accident because a friend of mine who worked at CSOB bank threw me a rope. He gave me an offer, which at that time was supposed to be a temporary job, but I liked it there and I was so interested in the field of investment banking in particular that I started studying it at the American Institute. All my further professional steps were also within ČSOB in investments. I worked in an investment company, then again as an investment manager in Private Banking and finally I landed. I decided that I would put all the knowledge and experience I had gained in 14 years in the bank to good use in my own business and I went freelance.
Martin Hurych
This is a unit of temporality that we know from elsewhere. So what are you doing today?
Michala Janatová
Today, I'm an independent investment advisor, independent in all the right ways, because the word independent has been a bit of a misnomer. The independence is mainly that I have my own license from CSOB, so all my strategies are my own. I don't have to adapt to a bank or a financial institution and of course the independence is that I am paid directly by the client. This allows me to always try to be on the client's side when advising them.
How does Misha live in a business that doesn't have the best reputation?
Martin Hurych
When I have someone from an industry that doesn't have a great reputation, I ask how those people are doing in it, or how they're doing in it. How do you make a living in a field that doesn't necessarily mean the best field in the world for everybody?
Michala Janatová
The way I approached it was that I just made it my goal to change it and I took it as a great challenge to learn how to work in it, how to function in it, how to gain respectability and gain respectability for the industry as well. My long-term goal is to teach people who have the knowledge, the experience, and know how to invest, know how to work with it, and have the necessary education, so that they too want to go into the industry and not be stuck somewhere as portfolio managers or analysts. So that they actually want to work with those clients because that's where I think it's most needed.
What mistake are we making in business regarding finances?
Martin Hurych
I'll keep my fingers crossed. As I said at the beginning of the Ignition, it's the start of a new year, maybe we're starting to get a sense of how the last year went, maybe we know exactly, hopefully we've made some money. That's why I wanted to talk about corporate finance today. Before we get into what with a surplus, come tell us from your experience what the most common mistake entrepreneurs make with funds.
Michala Janatová
The most common mistake is not planning.
Martin Hurych
What do you think makes them do that? Do you think they're happy to have earned something and want to put it in a pillow or an account somewhere?
Michala Janatová
I think there's this feeling that it's too complicated and too imaginary. A lot of people don't want to plan because they think the world is changing anyway and if they plan something, it's going to be completely different in a month. So there's no point in planning at all. They're going to do it intuitively and they're going to adapt to what's happening right now.
How to plan corporate finances properly?
Martin Hurych
That's a great unplanned donkey bridge. How do I plan now? With what's going on just east of our border right now, it's very complicated. So how do I plan when the first, second quarter is somewhere in the mist, not to mention the longer outlook?
Michala Janatová
I, on the other hand, think it should be planned for 20 years or more. But, of course, these plans have a certain level of detail, so a 20-year plan will be very different in detail from a one-year plan. Planning should consist primarily of not guessing what will happen, but preparing for all possible scenarios that may arise. I will imagine the worst-case scenario and prepare for that. It's good to have a plan B in case the basic scenario I'm counting on fails and everything goes to hell and to know what I'm going to do and what the last resort is.
What is the projected scenario for the first two quarters of 20223?
Martin Hurych
So let's talk about the worst-case or likely scenario for the first two quarters of this year.
Michala Janatová
The worst-case scenario for me, as a trained economist, is that inflation continues and there is a recession. That is, we will not be able to tame the inflation with the recession we are already heading into. We would be facing stagflation, which would lead to the fact that sooner or later there would have to be a recession much worse than the one that is now expected, which could still turn out relatively well. The expected scenario is very hard to predict, but I'll try to look at it a bit optimistically. We won't avoid recession, which I don't think is a bad thing, at least in the Czech environment. It will solve a lot of economic problems, especially in the labour market, which was overheated many years before, and it will also succeed in slowly reducing inflation. What is called a shallow landing in the American economy is perhaps the dream scenario, or the one I would ideally like to see. A shallow landing means a slight recession, an increase in unemployment from the current 3% underemployment to around 4%, a maximum of 5% and stagnation or a slight decline in economic growth.
What leads the peace to view the crisis?
Martin Hurych
I don't see any cooling at all in my bubble towards the end of 2022. Everybody's worried about what's going to happen, everybody's talking about the worst quarter, the first quarter of this year, but the situation in our heads and the press was worse than the actual situation in that bubble. What do you think it is?
Michala Janatová
Sentiment plays a huge role in these economic cycles, so if we didn't expect a recession, it might not even come. We are actually causing it ourselves. A lot of people, in their fear, start to wonder if it makes sense to fight and continue to do business and close up shop rather than keep fighting. Because they hear all around them that it will be bad and they are afraid that they will fall into even deeper losses. That is why I react very negatively to negative news and negative media appearances by various economists and the like. It is not that I do not believe that it cannot happen, but it makes the situation worse.
How to save money for 6 months?
Martin Hurych
So we're actually going to think through the crisis. It's been like this several times before. They always said there would be a crisis, but in the end it was even worse than it could have been. So let's not be snarky, let's be positive about it and still think we made some money and now let's go through a few scenarios. If I make something as a business owner, I may need that money for your 20 years and very likely maybe even for myself. But then there are scenarios where I'm saving for some investments within the business, or I need to hedge cash flow and I need to hedge that money against inflation for 3, 6, 12 months. Let's go step by step from your position to advise what I should do if I need that money in 6 months. What about making sure inflation doesn't take a bite out of it every month?
Michala Janatová
What is positive here is that the Czech National Bank, in its fight against inflation, raised interest rates quite sharply in the old composition of the board, and they are now at 7%. This will be reflected in those products that are designed precisely for short-term money storage. Today, there are fixed-term deposits for those six months, which of course will not save money from inflation, but will significantly reduce the real loss. Today, depending on the volume and so on, we can get 5 or 6% on those fixed-term deposits. There has also been a huge wave of so-called repo funds, or money market funds, that have transformed themselves into repo funds. These work by taking money from investors and depositing it with the Czech National Bank at the current repo rate, and then paying out the proceeds to the fund's shareholders after deducting fees. These funds are also available to legal entities and the liquidity is better than on a fixed deposit. They are available at any time, or maybe once a week, once every 14 days they have those trading days when you can withdraw from those funds. So that can also be a solution for short-term storage of money.
Martin Hurych
What is the repo rate today, how much can I actually get under these repo funds?
Michala Janatová
The repo rate is 7% and those funds have different fees, so you can get to 6.5% on the best ones that have some higher minimum volume. Then there are other retail, regular funds that are around 6.25% or 6%. You have the money available for that week, 14 days, and you don't even have to worry about any big fluctuations because the money is used that way. At most, it's supplemented by some short-term bonds or treasury bills, but nowadays depositing with the Czech National Bank is really the most advantageous strategy, so most funds use it that way. Then of course there are some classic savings accounts, that's for the very shortest time. It has to be said that with such a short horizon, inflation is not such a big scare. Inflation is the bogeyman in the long run. The other thing is that if we see inflation of 15% today, actually more like 18%, it probably won't be 18% next year. In a normal scenario it might be something like 10%. So on a six- month horizon, you're going to lose 5%, which realistically isn't that much of a disaster, rather than inventing something that then doesn't work out, and unnecessarily the loss will be much greater.
How to split the available funds between the current account and longer-term instruments?
Martin Hurych
I understand that. After all, if I had a desire not to give a percentage to anyone, how much of my spare funds do you think I should save for these longer-term, albeit still short-term, things?
Michala Janatová
It depends a lot on financial plans, but for example those savings accounts are liquid overnight and so are the funds I mentioned here. So there's no reason to have money that I won't use within the next week, 14 days, somewhere in a checking account that carries nothing at all.
How to save money for 12 months?
Martin Hurych
Now I save money on a yearly basis. What changes for me?
Michala Janatová
Nothing. The annual horizon is like a six-month horizon, it's similar. I would say there's virtually nothing changing within three years. Of course, that's for some classic financial products, now I'm not talking about investing in a company or anything like that. In terms of classic financial products, nothing changes within three years.
How to protect accumulated funds in the long term?
Martin Hurych
So what to do when I have extreme success or when I have been successful for a long time? I've been buying some resources that the company doesn't need at the moment. What do I do with it?
Michala Janatová
This is where the long-term, 20-year financial plan that I was talking about comes in. Every company has an owner, it has some shareholders, and that owner or shareholder should determine what the main objective of that company is. Whether it's to generate cash flow on an ongoing basis, or to maximize cash flow, or to grow, or to have some impact, and so on. That goal should be the basis for what we do with the free cash. Whether we're going to invest it in the company or whether we're going to pay it out as dividends to the owners. The type of that particular company is also important, how much uncertainty there is, how much money needs to be kept in reserve and when the lack of cash can bring the company down. Covid was a beautiful school of what can happen unexpectedly and from that you can derive what the reserve should be to protect against some similar situation.
How to take money out of the company economically?
Martin Hurych
Let's say I'm in a situation where I need to invest in another company and I want to start something else, I don't want to connect the dots completely because it's a completely different industry. What's the best and most economical way to get money out of the company and how do I start saving it for 5 years so that I know that in 5 years I'll have enough capital to start another project?
Michala Janatová
Of course, there is some possibility to create holding structures to keep the money within the company, but you can't ensure that diversification, that the companies are truly independent of each other and the failure of one doesn't affect the other. So the only legal way is to actually pull that money out in the form of profit and tax it. There are some minor accounting tricks to pull that money out of the company in smaller amounts, but in larger amounts there is no legal way other than to pay out a profit. I think this is also the right thing to do because the purpose of business is to make a profit and profit is taxable income, so that's how it should be.
Martin Hurych
You were telling me, if I understood correctly, that this should be done relatively quickly and that it was not a good idea to keep the accumulated money within the company.
Michala Janatová
Of course it is. It's an eternal contradiction whether cash is king or cash is trash. So it's true that on the one hand, cash can save you, but on the other hand, if it doesn't work, you lose money because you don't invest it somewhere.
Martin Hurych
You think he's a cash king or trash?
Michala Janatová
I think it takes balance. Of course the reserve is needed and you need to do an analysis of your own business, what is needed, but it is pointless to hold money beyond some reasonable reserve. If you plan for negative scenarios, you might as well have some option for what to do when that cash runs out. So sometimes it's better not to have such a large reserve and actually use the money, but to have an option ready for what happens when the cash runs out.
What to do if you run out of money?
Martin Hurych
Then what?
Michala Janatová
I think it's good to have some sort of relationship with the bank to see what terms you can get for operating financing. There are classic products like overdrafts that can help, that you can tap into if something is going on, but if nothing is going on, it doesn't cost you anything. So it's good to have an open door to borrow that money on some reasonable terms and bridge that difficult period.
What does a proper financial plan look like in terms of company finances?
Martin Hurych
Listening to you, you've mentioned financial planning several times. I suppose as a business owner, I have to have both my own planning and planning within the business to be able to funnel that money back and forth as economically as possible. What does that proper financial plan look like for you on the business side? We've been discussing here recently how to build a financial plan in terms of budgeting, controlling, what the business is actually supposed to do, how to see the business in numbers. What would you like to see in a financial plan from the point of view of someone who helps with finance?
Michala Janatová
I think any financial plan should be based on financial targets. Those goals should follow the classic SMART methodology. By making sure that those goals are measurable, they are quantified, so that's the number that I base the financial plan on and that financial plan should be a pathway to those goals. I'm saying that very broadly, but it's actually the foundation that then individually sets that plan for each company or each person.
Martin Hurych
I'd stop there, because I don't know a person in my bubble who says they want to make 20million in 5 years at a company. Financial plans are not built that way. Is that what you meant?
Michala Janatová
This is exactly how they should be built. The fact that I want to make 20million should be in the plan for next year and that's the basis. If I take the long term plans, that's where the numbers should be, how big the company should be, what the turnover should be, how many employees and then build on that. Plans should be made on a year-by-year basis, because of course inflation, interest rates and other things affect that.
Martin Hurych
When you talk to entrepreneurs, how long do they have financial plans for?
Michala Janatová
They have no financial plans. They have neither personal nor corporate. Mainly, there's another thing that I encounter, which is that the business owner is still a person too, and that person should have his plans, his goals, and his idea of what life is going to be like, and the business should fit into that plan. He should run that business so that it serves his personal goals. If he wants to travel around the world every year, buy a Ferrari and send his kids to the most expensive schools, or if he wants to live frugally and then the money that once he gets out of the company, use it for some charitable purpose. That's where the management of the company comes from.
Martin Hurych
I always say that profit is not a dirty word and it's up to the discretion of each person how they use it. Someone wants a big red flat car, someone wants thirteenth, fourteenth salaries for employees. But if there is no profit, there is nothing to distribute. So there has to be a black number at the end to dispose of.
Michala Janatová
I'm going on that basis. Business is an activity for profit. If it's not profitable, there's no point in doing it and you're better off getting a job.
Summary
Martin Hurych
If we were to somehow wrap this up into a couple of bullet points on what to do with what's currently left in my account, it's free and I really want to use it, what would it be? The second part is, if I didn't do well last year, how do I improve my attitude towards money relatively quickly so that I can do better with money this year in 2023?
Michala Janatová
As for the first question, there the money that the company has a use for in the next 3 years is good to have ready for some reserve. Plus I can invest it within the company and it will help the company grow and achieve those future profits, that's what those classic short term products are for. There's no point in inventing anything else. For the money that the company sees no use for and is just keeping it there so it doesn't have to pay taxes, it's better to shed a tear and pull it out and use it either to start another company or for personal investments and other things. As for the second question, of course, you really need to go into the details of the individual revenues and expenditures and look at it with the classical view of the Pareto optimum. Look at what brings in that profit, do those things and have that focus on the things that bring in the profit and not be afraid to put those costs in. That's terribly important, because I don't see a way to cut costs. The classic mistake that I've heard about for years is that when things aren't going well, or it looks like they might not be going well, they cut back on, say, marketing costs, or labor costs. Then it's hard to get the train moving again. So it's really not about cutting costs, but rather focusing on activities that are profitable.
Martin Hurych
It's true. Don't listen to the ex-corporatists in this case, because corporations are cutting back immediately and you and I, as ex-corporatists, know something about that. Misha, thank you so much, it was great. If those who you just got them excited about some more active money work want to look you up, where can we find you?
Michala Janatová
I have my own website, www.jamico.cz, but otherwise, just type my name into the Google search engine and I think there are plenty of ways to contact me. You can also find me on LinkedIn, on Twitter, on YouTube and on Facebook and I have my own podcast, Jamicast. So when you type that into Google, I think you'll definitely have no problem getting in touch with me.
Martin Hurych
Thank you for being here and for advising us on what to do with our money.
Michala Janatová
I thank you for the invitation and I greet the viewers and listeners and I will look forward to hearing from you again sometime.
Martin Hurych
I'm sure. That was Mischa Janatova. As soon as you finish listening to this Ignition, check out Jamicast, but don't stay with me too long. If you liked this episode, make sure to like, subscribe, because otherwise the world won't know about us. Check out my website, www.martinhurych.com, where in the Ignition section there will be not only this episode, but also a bonus that I'm going to pull out of Misha, so that you'll have everything nicely in print in front of you when you're dealing with money in some way, and certainly in a better way. All I can do is keep my fingers crossed and wish you success, thanks.