Cashflow management is a critical issue for many business owners.
Typically, your cashflow comes under strain in the following circumstances (not an exhaustive list):
- your business is growing
- stock levels increase (eg: lead-up to Christmas for retailers)
- bringing on new staff
- increasing production capacity
- diversifying your business activities
Each of these things can be a “cash thief”.
Let’s consider the issue of inventory(stock) management. The more stock you have on hand, the more cash you have tied up. I explain this in more detail here, here and here. By reducing your stock levels, you free up a lot of cash, however you need to balance out the level of stock you need. You cannot sell what you don’t have! Effective stock management makes a huge difference to your cashflow.
Cashflow management can also be impacted by increasing production capacity. Being able to make a lot more “stuff” requires you to have the raw materials, equipment and people to do this. All this costs. Your wages come in each week, your suppliers need to be paid each month and the equipment needs to be purchased/financed. All this robs cash from the business – and you haven’t yet produced anything you can sell. By building your capacity, you will be able to (hopefully) generate more sales and/or better margins. But you have to spend first. This is where your cashflow management needs to be carefully curated.
A number of our customers have pretty regular sales. They use this to reduce their margins (sometimes!) to generate additional sales and hence cashflow. You find that there is a very clear cycle for this.
One of my favourite fishing tackle stores is in Melbourne. They have a great range of products, know what they are on about and provide great service. Over the past year or so, I have noticed that they are having regular sales in the sixth week after the end of each quarter. This is because they have the Tax Office commitments to meet. They need to free up cash to pay our friends in Canberra. Knowing this, you, as a customer, can manage your time for purchasing gear.
The same thing occurs in a lot of businesses (especially retail). Have a look at the sales cycles and you will see a trend. The margin is better in your pocket than the retailer’s!
Any time you look at the cashflow in your business, get behind the issue to find out what is driving it. Sales too low? Margins being squeezed? Inventory too high? Expanding? Diversifying? Any and all of these can have a significant impact on your cash reserves.
Cashflow management can be difficult. But when you look behind the numbers and develop your understanding of what drives your cashflow, you will be in a far better position to make the decisions and changes needed to improve things.
We have access to some really powerful cashflow modelling tools that will enable you to see the real picture – going forward. If you would like to have a chat with us about how we can help you get a better handle on your cashflow management, give us a call!
Budgets, don’t we love them?
In your small business, what approach do you use for your budgeting? Most budgets I see are based on the thinking of “last year plus 5%”. I have also seen budgets done by some pretty large franchise businesses that are, to put it bluntly, crap.
A budget needs to be approached from the aspect of “is it realistic, is it achievable, is it based on solid assumptions?” It also needs to take note of the environment within which the business operates. Over the past couple of decades, we have seen budgeting and planning programs proliferate. Search “Budget template” on Google and you will get 108 million results. Like anything, having a tool and knowing how to use it are two completely different things.
When you’re looking at your budgets, the issues you need to consider need to be delved into in some detail. Here are some examples (and the questions aren’t extensive):
- Increased sales (everyone works on this assumption) – where are they going to come from? Who are we selling to? Do we offer what they need? Can we supply the additional product/service and at what cost? Is the market being disrupted? Can we divert focus in to one or two high margin products that will deliver a better result?
- Profit margins – what do we need to do to improve them? What options do we have with pricing? What product mix works to deliver the best margins? Does our marketing support our pricing to deliver the margins? Does our sales team understand the impact of margins (hint: most don’t)? What are our competitors doing and where do we see them going?
- Operating overheads- what are we doing to ensure we are getting “bang for our buck” on expenses? What is happening with regard to our overheads and the potential to replace old approaches with new ones (esp software applications)? What control do our people have over the costs incurred in operating the business?
- Staffing – What do our team understand about the expectations and accountabilities of their roles? What additional training and support would enable them to flourish? What is the ideal team mix for a business such as where ours is moving?
- Capital expenditure – do we have the right gear, in the right condition, to enable us to deliver what is needed to support our team and customers? Do we need to invest in additional equipment to save costs over the medium/long term? What is the best utilisation of our capital to deliver strong, sustainable results over the medium/long term?
As stated, the list above is only a “taster” for the questions that need to be asked prior to even thinking about what the budget looks like. More often than not, where these types of questions are asked, they are asked after the budget has been done. This is like putting the cart before the horse.
Once you have done your overall budget, I strongly recommend that you do a cashflow budget that ties in to it. The assumptions you make in this should also be assessed to ensure you are making the right qualitative decisions for your business. For example, we have been dealing with one of our customers relating to one of their major debtors. Sure, the debtor (owes money to our guys) is a big customer. But the margins they make on the work they do for them are really small. Then, the debtor takes nearly four months to pay their account. Is he really a customer that they want? By the time they do the work, spend three months chasing payment (including heavy involvement from the Directors who could be better utilised building the business), the profit from doing the work has disappeared. Is that really what you’re wanting in your business? Maybe you already have it!
Doing the cashflow budget may cause you to go back and revisit your operating budget. The assumptions made might be called into question. This is a really powerful process to go through as you are considering all aspects of the performance of the business.
Remember that a budget is a forecast of what your results are going to look like. Doing your budget with the approach that your inputs will drive your results will give you a far more robust, realistic and achievable plan than doing it “the old way”.
By approaching the process in a way that allows you to develop solid, detailed and explainable budgets, you will actually be in a position where you are in far greater control of your business and you will be able to use those budgets to make better decisions along the way through the year. This moves you from working “in” the business to “on” the business.
Establishing budgets can be a time-consuming process. Yet it is be very valuable. The emphasis should be on qualitative questions to drive the quantitative outputs. By just focusing on the quantitative aspects of budgeting, you are missing out on a great opportunity to maximise your return. And isn’t this what you, as a business owner, should be looking to do?
If you want to (metaphorically) fall in love with your budgets once again, take the time to approach the process in a way which will enable you to get the reward and return you’re seeking. Last year plus 5% doesn’t work.
If you want to discuss how we can assist you in developing a really solid budget (and cashflow budget) for your business in the lead up to the end of financial year, please get in touch. Our first meeting is at no cost to you and is designed to provide you with significant value. It just might lead to you achieving the results you’ve always wanted.
Superannuation and government – a recipe for disaster!
Treasurer Scott Morrison delivered the Federal Budget on Tuesday night. After many months of speculation, the detail (such as it is) finally came to light. And how short-sighted the document turned out to be – especially for those with superannuation.
Having worked in and around superannuation since 1991, I have witnessed so many changes and it is little wonder that the average punter tends to tune out when the word “superannuation” is used. It is therefore not surprising they really don’t seem to care and become easy prey for financial planners and industry superannuation funds.
The changes being proposed by the Turnbull government in the budget can be summarised as follows (note that I’m not covering all of them here – just the major ones that will impact our clients).
I preface all this by stating that the policy platform relating to superannuation is somewhat confusing – the government wants people to provide for their retirement so that there will be less strain put on the welfare system when they retire. Fantastic!
Why then do they limit the amounts that people can put into superannuation? This flies against any and all forms of logic. If you want to create a welfare replacement vehicle, encourage people to use it – don’t restrict them.
Over the past 20 plus years, we have seen limits – some very generous, others less so. Passing strange it is that superannuation limits tend to reflect the underlying state of the budget! When things are going pretty well, the limits are up, when things tighten up, so do the amounts people can contribute.
So here goes:
$500,000 Lifetime Limit on “private contributions” (in the legislation, these are called “Non-concessional contributions”)
The idea has always been that there were opportunities for people to add to their superannuation accounts during the year using tax-paid/after-tax money that they might have saved up. This can also include amounts withdrawn and re-contributed to the fund when it is in pension phase. Prior to Tuesday this week, people could deposit $180,000 per year into their fund or, elect to “bring forward” a couple of years contributions and put $540,000 into their fund. This works really well for people who haven’t been able to build big balances in the superannuation system as they were running businesses, bringing up families and generally contributing to the wealth of the nation. Now, the government, in their wisdom, is placing a “cap” on the amount they can contribute in this way.
The net effect of this is to restrict the ability of people to put money into their superannuation accounts for their retirement.
Remember when it was possible (some years ago) to put $1,000,000 into superannuation? Lots of people took that opportunity up.
Now, if you’re one of the lucky ones who have made contributions of this type since 2007 and are currently over the new $500,000 limit, good for you. It just means that you won’t be able to make any more. If you’re not at the new $500,000 limit yet, well, you can make additional contributions to get you there – but PLEASE don’t go over the limit or you will get stung with Penalty Tax.
One interesting note – the budget papers make reference to the fact that the date of 1 July 2007 was chosen as this is the date from which the Tax Office has “reliable contributions records”.
I am not sure whether backdating a limit commencement start time is valid Constitutionally. Watch this space!
Limiting the Size of your Pension Fund
The government refers to this as a “Transfer Balance Cap” – what they really should call it is “You can’t have a pension bigger than this”.
What it means is that, from 1 July 2017, you will be able to transfer a maximum of $1.6 million into your retirement account. Subsequent earnings on the amount transferred will not be subject to tax.
I don’t know about you, but I have found that where you segregate assets, it becomes difficult to “un-segregate” them. Let’s say you have a fund with $2m in it. You transfer $1.6m of shares into the new “Maximum Pension Fund” box. The share market tanks – all of a sudden, you have well less than $1.6m in that account. Can you top it up?
Conversely, you transfer $1.6m into your “Maximum Pension Fund” box and the shares appreciate markedly so that the balance in that “box” is now well over $1.6m. Do you have to transfer funds out?
Or, riddle me this one – your single asset in your superannuation fund is a building worth $2m. Do we have to transfer 80% of that building into the “Maximum Pension Fund” box?
Apparently the government is going to “consult” on how this will all be implemented. Good luck with that. This has all the hallmarks of an absolute mess and will result in uncertainty for the superannuation industry for years.
I find it somewhat galling that the government will be effectively trying to legislate how much you can save in your pension fund to access the tax-free earnings. Many people have saved and worked hard over decades to give them a retirement that they can enjoy. To come in and take this away from them is unfair – especially for those who are already in pension phase and who have planned their lives and activities around what they thought was some level of certainty.
As mentioned above, the government keeps telling everyone to put more money into superannuation. Then they place a limit on how much you can contribute before you run into penal tax rates.
If you have a look at the levels of allowable (read “deductible”) superannuation contributions over the past years, you will see it is a dog’s breakfast. Starting (for the under 50 year olds) at $50,000 in 2008/9, it has reduced to $25,000 from 2009/10 then increased to $30,000 from 2014/15 and it reverts to $25,000 from 2017/18. It’s a bigger mess for those aged over 60!
If the government wants people to contribute to superannuation to fund their retirement, set a limit and stick to it. For younger people with a plan to put money aside, it becomes impossible for them to budget to achieve this.
I will point out there are some positive proposals in the budget with regard to superannuation, however, the issues highlighted above are so short-sighted and ill-thought-through that the government is making the superannuation system even more unwieldy than it was previously.
And so it all begins again.
The past year has been an “interesting” one on a number of fronts and we have seen some of our customers make significant progress in a range of areas. Their progress has been due to some detailed planning, decision-making and accountability across their organisations and it is exceedingly pleasing to see the results that reward the consistent effort they and their teams have put in.
The major notables can be summarised as follows (and this is not an exhaustive list):
- clarity around the “why” of the business;
- effective communication with and engagement of their teams;
- focus being driven in the areas of their business that offer the greatest opportunities (niche);
- planning, implementation of the plan and review of results against expectations; and
- being prepared to try new things and approaches.
Funny isn’t it – the things that have delivered terrific outcomes for business are the things that everyone knows that they need to do? So, why don’t they do it? I call it being uncomfortably comfortable – you’re OK, you know things can be better, but you’re pretty comfortable and don’t want to stop being comfortable.
This issue is one we constantly battle with in discussions with customers who we know can be better – they are so busy being operational, they forget/avoid to be strategic. And they are comfortable.
In many respects, they have traded off their vision and focus on purpose to being servants of something that doesn’t really matter to them – because it’s easier. It is also far less fulfilling.
In one of my discussions with a customer prior to Christmas, he came in, sat down and said “I’m just really happy”. This same customer has undertaken some massive changes in his business – all as a result of effective questions, looking at the broader economic environment and considering what he really, deeply values and where his skills lie. He has brought his team along with him. He and his business are now far better, more agile and responsive than they have ever been. And they are ideally placed to take advantage of the changes that are going on in their industry.
In the current environment where there is so much disruption going on – across nearly every industry, the need to adopt a more strategic approach is essential. The commitment to do this can be hard and challenging, but it is necessary to enable the business to thrive and continue to deliver on what it is there to do. Avoidance of the work required will see you wonder why you can’t seem to keep getting the results and outcomes that you desire.
On Saturday morning, I was invited to do an interview with some guys in the USA about what advisory work should look like – it will be up on a podcast in a couple of weeks. The guts of the discussion really turned on the fact that, as a business owner, you need to ask better questions. The types of questions that really dig into the opportunities and challenges that confront your organisation. By thinking about and answering these “better” questions, you then create a planning template which can be implemented in your operation to make sure the changes that are required actually get done.
The New Year promises to be a challenging and exciting time for all of us. There is a lot of stuff going on the world at the moment which, whilst remote from Australia, will have an impact on us. Things like the slow-down in the Chinese economy, the migration issues within Europe and the coming Presidential election in the USA. Each of these things can have an impact on your organisation (believe me, they do) and you need to consider how you’re placed to take advantage of the opportunities that do present themselves.
By way of example, think about the issues going on in China at the moment. The well-reported slow-down of their economy is unlikely to directly impact on you unless you are exporting into that market. However, the impact of that slowing economy will be felt in Australia through lower export demand, greater uncertainty and a loss of the confidence that “China is there” that has supported the growth of our economy over the past decade or so. We have seen the impact of the downturn in the mining industry over here. What was once “boom time” is now not so. The flow-on effect of this has had a marked impact on a number of regions around Australia. It is impacting on home prices (did you know that the banks have a number of postcodes where they won’t undertake any mortgage lending?), employment levels and subsequent demand for goods, products and services. This challenge then flows out beyond those regions into the organisations that support the businesses that were operating at “full tilt” in those regions.
Consider the impact on the airline industry – fewer jobs and increased closures of mines means fewer fly-in-fly-out employees. The airlines have specifically geared up to deliver the services required to meet the FIFO demand from the mines – now, much of that equipment is sitting idle and/or being used far less. This means that the airlines therefore have less cashflow to support their commitments for the planes, staff and support crews. They can either try and get rid of the excess capacity, or pass the increased costs through to the other customers through less discounting/higher pricing. Have you noticed how there are fewer discounts being offered of late? I’m not blaming everything here on the Chinese economy, but I am trying to demonstrate how a global event that seems far-removed from your operations, can actually have a trickle-down impact on your business.
Over 2015, those organisations that have thought further and harder, who have asked themselves the challenging questions and have gained greater clarity about not only their operations but the industry they work in and the broader economic environment have flourished. Because they have done the work.
How are you placed for 2016? Are you prepared to ask yourself the right questions (or, better still, do you know what questions to ask?) to create the outcomes you desire? If you’re not, then you might well be bound to repeat the success or otherwise of the past year.
One of my favourite quotes come from Albert Einstein:
To make the coming year as effective as possible in delivering things that really matter to you, please don’t go insane! The change in approach is challenging and requires work, but it actually isn’t that hard. You just need to make up your mind to do it.
The common complaint about bureaucrats is that it seems they don’t really know what goes on out here “in the real world”.
Interesting meeting with one of our customers this week. They are dealing with a bureaucracy as part of their operations and they need to work with this bureaucracy to assist their clients obtain and retain registration to operate within the particular industry.
Now, I’m not sure about you, but my (probably misplaced) belief is that bureaucracies should exist to assist the section of the broader community that they were created to serve.
How can it be then, that this bureaucracy, which regulates and approves businesses to trade has not the first clue about how the sector actually runs?
Some examples? OK, try these on for size:
- no understanding of the form of the contract that is standard in the industry;
- absolutely no understanding of the way that businesses in the industry account for income, expenses, assets and liabilities;
- a demonstrated absence of clarity about how cashflows in the industry work; and
- adopting a “slave to the process” approach rather than looking at what is really happening – if there is a box that needs to be ticked because someone(unknown) says it needs to be ticked, then, if it cannot be ticked, they will close the business down.
From our client’s perspective, the regulator’s approach is one which is great for their business. Lots of clients approach them for assistance in dealing with the myopia that is prevalent in the organisation that registers and re-registers the operators in that industry, BUT, as our client indicated, the approach they are forced to deal with from “big brother” is one which wastes an incredible amount of time, resources, effort and emotional energy. All because the bureaucrats do not understand the first thing about what they are trying to regulate.
For the sake of some education and appreciation of the peculiarities of this particular industry, the whole process could run much more smoothly and the regulator might actually be able to get on with doing their real job rather than being consumed servicing an ineffective process and creating mayhem in the process.
We all have a grizzle about dealing with bureaucrats – it’s almost a national past-time. In this case, the grizzle is warranted as the effects of the incompetence displayed is creating a reality that is adversely impacting on a large sector of industry – and it need not be the case.
Having clarity about the industry and its processes will enable systems to be designed and implemented that actually do what they are supposed to do. Designing and implementing systems and processes that bear no resemblance to reality just wastes everyone’s time.
Happy to speak with anyone from the Victorian Government about this. They have created an unworkable outcome for an industry that simply doesn’t need it.
Regular readers might recall a recent post concerning the identification and development of talent of one of the staff members in one of our favourite client’s businesses. This all occurred through using Trimetrix on some of the team in his business.
Well, the financial results are now in. And they are spectacular!
I won’t quote the actual numbers (as that would be unfair and not in line with our professional obligation to keep client information confidential) but I will give you the impact that they have experienced from identifying a great person (using Trimetrix) and giving them the opportunity and support they needed to thrive.
Using the six month period we were reviewing, the results for the half year to 31 December 2013 were (let’s say) $20,000 net profit (after all expenses but before tax). Then our client dropped his newly-identified star into the business. Profit for the period to 31 December 2014 was $173,000! All the metrics for the site have improved and staff morale has gone through the roof.
Remember that, as I wrote in May last year, if you have a deep understanding of your people and their talents and skills, along with the capacity to trust yourself and them, you can create some exceptional outcomes.
Why don’t you give it a go? What have you got to lose (other than a potential star who will leave because they’re not being challenged and developed in your business)?
Give us a call to discuss how Trimetrix can make a huge difference in your business which will have an exceptionally positive impact on you, your people, your team and your customers. You will be happier, your team will be happier and your customers will be happier.
And, if it results in an 865% profit improvement for a six month period, I’ll bet the investment will be worth it!
One of the things that amazes me is that many people in business don’t really understand the “ins and outs” of a profit and loss or balance sheet. And that is before we get to issues surrounding cashflow.
I’ve had some interesting meetings with people over the past week where it has become apparent that there is a significant lack of understanding of basic financial concepts. Please be aware that I am not necessarily saying this is a bad thing – it’s more of an opportunity.
Where business people don’t appreciate the information that we provide to them, it is incumbent on us as accountants and advisors to help them to learn and provide them with a financial education. I know of one accounting firm in the UK which provides an education process for their customers (and others) where they teach the basics of reading financial reports. I believe there is a terrific opportunity for us accountants to provide this sort of service to business people – it will really assist them in making better business decisions.
A year or so ago I presented to a business group in Ballarat on the topic of business margins and mark-ups. Many of the attendees did not understand the difference in the two and certainly did not appreciate the impact of discounts. The feedback I received after this presentation was terrific.
As a consequence of this, and following from our strategic planning work, we’ve now appointed a firm to assist us in putting together some video presentations which we’ll post on youtube. These will discuss the topics that business people need to know in simple and understandable ways which will help anyone wanting to develop their understanding of basic financial reporting. In some ways it will be a community service – if we assist a number of business owners to make better business decisions then that will be a terrific outcome.
I’ll let you know when the posts are available on youtube – hopefully you will get something from them and I would appreciate any feedback you wish to give on the topics as presented.
Well? What DO you REALLYwant? A lot of people out here in the real world have some vague concept as to what they want, but they never get any real clarity about it. They pay lip service to goals and aspirations, but make no concrete plans to move themselves towards those goals.
In our meetings and discussions with businesses all around Australia, we find that a lot of businesses (and especially business owners) really have no idea as to what they’re wanting to do or achieve. They get caught up in the day-to-day processes of running their business, family and life. Their activities are all operational and none of them strategic and none of them actually propelling them to where they want to be.
This is a real tragedy as, with a few changes, they will be able to make a significant change to their lives by, firstly, getting clarity as to what they want. This is often seen as a difficult and confronting process – but having been through it, I can attest to the fact that it’s absolutely liberating!
To really succeed, you need to be able to describe what success looks like. Many people we talk to can’t even answer the simplest question “How much money do you want to earn?” If they can’t answer this, they’re not going to be able to design their activities, let alone their business, to deliver what they’re wanting.
The clarifying of goals and aspirations is vital as, once they are clear in your mind, you will be able to design your approaches to create what you’re wanting. In many respects it come down to whether you are at cause or at effect in your life.
Once you know what you really want, you’ll be at cause and you will start to behave and perform in ways that will deliver the results that you’re after.
The other side of this is that if you don’t do the planning etc, you will more than likely end up with what you DON’T want!