Engine Room Blog

There are a few principles small business owners need to understand if they want their business to last:

1.  It is not what you make it is what you keep (cash is king).

80% of businesses fail in the first 5 years - most of these are profitable, they just run out of cash.  No matter how good your sales are it is the profit that counts most - and more importantly the the cash you retain.

A sale is not a sale until the cash is in your hands - whether you sell furniture, property or time it is not a sale until you get paid.

And the cash that is left after you have paid manufacturing costs, overheads and taxes is yours to live on or re-invest in your business.

2. Borrow only to buy assets.

As our grandparents and parents who lived through the 1930's depression will tell you, never spend money you don't have.

An asset is something that either generates income over a period of time or goes up in value.  A car is an asset if the person driving it is earning you an income or saving you money. Stock is an assets if you turn it over regularly otherwise it is  a liability

A holiday is not an asset, neither is furniture or shoes or a computer,.

3. Reduce debt as quickly possible.

They only personal who benefits from long term borrowing is the lender.  To understand this calculate the total payments over the life of your loan and deduct the principal.  Banks want you to extend your loan, and add to it if possible.

4. Always understand your financial position.

Seeing your accountant once a year to see how much tax to pay is not enough financial information to run a  successful  business.  A good business owner knows what their monthly operating costs are and checks each month to ensure they are not exceeded.  They also know what sales they have to do to meet their costs and monitor this throughout the month.  

Poor debt collection and stock management is the downfall of many businesses. If your cash is tied up in stock and debtors careful management is required.

5.  Know what you are good at (and what you are not)

Nobody is good at everything - well not many of us - and limited time generally means you cannot do them all.

Focus on the few things that you do best for the business and employ or contract out the rest. Never abrogate responsibility - you may not be good at finance but you still need know that the job is being done right and what the results are to use that information for decision making. (Your accountant should be able to tell you the key numbers to watch in your business)

6.  Put something away for a rainy day..

There are two types of business - those you can sell and those you can't.

A business that sells well doesn't need the owner working in it every day and generally has physical assets and/or stock or a process to sell. Everything else is just a job by another name.

If your business falls into the former category to maximise your sell price your emphasis needs to be on having a well run systemised business in a good market.

If you really just have a job by another name - for example you are a self employed contractor, your only asset is really your customer base and this is likely to have a limited value to anyone else.  Your earnings are generally restricted to e number of hours you are available to work.  The secret with this type of business is to maximize your earnings and invest those in assets that generate passive income such as dividends, interest and rent.

I have just returned from India, one of the fastest growing economies in the world.  Since the my last visit two years ago the increase in infrastructure development has been huge.  As we left Agra and hit the first of the road toll booths our Guide explained that they were happy to pay as the new highway had reduced the travel time to Jaipur by three hours. The people of India clearly see development from a much more positive perspective than us and realize that their Government cannot afford to pay for everything.

Development is not hampered by the complex regulation of the west - some of which is a bad thing as there isn't even a minimum health and safety standard. But it also means things happen much quicker.  In the last 20 years the living standards for the lowest classes has moved to where the middle class were, and it is moving faster all the time.

Unemployed are offered work on a day by day basis.  If they register as unemployed and turn up at their local meeting place they are guaranteed a miminum wage of 220 rupees ($5.10) per day. If they are not offered a job as a day labourer at a better rate they are assigned jobs for the council working on roads, gardens and other developments.  

Much of the economy runs on cottage industry but as they become more urbanized the biggest problem will be managing demand for higher wages.

There is a significant emphasis on education and health with new educational facilities being built everywhere to cater for the needs of the lower and middle classes.

Sadly in New Zealand we no longer seem hungry to improve ourselves - now we think it is someone else's job to do it for us.  For all our talk of being entrepreneurial and number 8 fencing wire, we would rather go to the beach an earn the minimum we can for the maximum lifestyle.  It is time we raised our goals before we are taken over by the ambitions of countries like India.

No one said you had to have a degree in marketing when you went into business, yet active marketing is one discipline that is critical to the success of a growing business.  See if the following sound familiar: 

1. Not tracking marketing promotions.  If you don’t track responses from a promotion, how do you know if it was worth doing?
2. Failing to retain customers.  It costs six times more to get a new customer than to keep an old one.  Don’t get so caught up in marketing for new customers that you forget your regulars.
3. Not having a USP ‘elevator speech’.  Focus on your solution to the customer and make sure it describes in simple terms "what's in it for them".
4. Not including a call-to-action in your advertising.  The incentive doesn’t have to be expensive as long as it is adding value.
5. Not thanking referrals.  Remember, people like to be helpful but they also like to be thanked.

Co-operative marketing is a great way to increase business. It gives you access to a ready-made market of ideal potential customers; customers you otherwise may have missed.  Co-operative marketing is where two or more non-competing businesses join together to save time, money, and increase their access to their ideal potential customers at very little cost.

How much has it cost to grow your customer base? The answer is hard to define.  It has cost you every single dollar you have spent on marketing and other areas of your business, like training your team. Now, think about another business—a non-competing business, whose ideal customer or client is very similar to yours.  They have invested a similar amount of time and money to build their customer base.

At this point, both businesses have a choice. You can go out and spend all that money and take all that time to build your client base and double its size again, OR you can access each other’s and in an instant double your client base. There a many non competing businesses who have the same customer demographics - hairdressers and cafes, panelbeaters and mechanics.... whom might you market with?

 A business owner approached me recently about encouraging businesses to “shop local”.  In his words – “we would just like the chance to quote”. 

 Always keen to support local businesses and looking to replace my car in the next few months I braved the wet winter weather to visit a local dealer to see if I could test-drive a car I had my eye on.  Sadly this dealership is unlikely to get my business – the sales person couldn’t bring himself to get up from his chair to introduce himself, did not ask for my contact details and failed to give me either a business card or literature on the two models of car I have been considering.  Any information I did get was solely from the questions I asked.

Clearly this sales person is unaware that women make 60% of buying decisions and they influence a further 30%.  In this case the decision is solely mine – and that decision is now to go elsewhere.

I thought customer service was quite straight forward really - treat the customer the way you would like to be treated. Either some people have very low expectations for themselves or they have never considered what it would be like if they were on the receiving end.  

How does your business rate?

Amendments to the Employment Relations Act 2000 mean that from 1 July 2011 employers are required to retain a signed copy of all employment agreements or current signed terms and conditions of employment.

Where an employer has provided an employee with an intended agreement the employer must retain the intended agreement even if the employee has not signed it or agreed to the terms and conditions specified. An intended agreement cannot be treated as the parties' employment agreement if the employee has not signed or not agreed to the terms and conditions.

If the employee does not accept an intended agreement, the employer should enter into good faith negotiations to reach agreement.  If negotiations are unsuccessful, the employer should record what happened and the outcome of the negotiations.  A copy of the intended agreement must be retained on file along with the current terms and conditions of employment, signed or unsigned.

Employers are required to provide a copy of the agreement on request from their employees.

From July 1 2011, labour inspectors will be able to seek a penalty against an employer who is in breach of legislation relating to employment agreements, including the requirement for all employers to retain a copy of the intended and current employment agreement or terms and conditions of employment, whether signed or unsigned. Employers will be given seven working days notice of to fix the breach. Where the breach is not remedied the inspector can take a penalty action in the Employment Relations Authority.  Click here for more information. 

 

• Budget deficit of $16.7bn or 8.4% of GDP, as expected, and surplus forecast for2015, a year earlier than forecast last year
• Net debt to peak at 29.6% of GDP in 2015 (below market expectations of peak around 33% of GDP), and decline thereafter and be repaid in full by 2024
•  Should placate rating agencies
• Investors to see four new equity offerings (subject to re-election), an Earthquake bond and inflation bonds, and the local government funding agency to start this year
• Kiwisaver Member Tax Credit to be halved and Member and Employer minimum contributions to be raised from 2% to 3%
• Government to review taxation on investments (Minister of Finance indicated this in his lock-up speech)
• Treasury is forecasting short and long-term interest rates to remain largely unchanged from current levels over coming years, and for the NZD to steadily decline by a cumulative 18% over the next four years.
• An impressive budget that provides confidence for maintaining portfolioallocations to NZ assets
• In terms of addressing NZ’s long-term economic performance, while not delivering any major policy initiatives, the tone of the Budget appeared to reiterate a solid commitment to improving productivity and incomes in NZ. It needs to - page 3 of the Budget document had a chart that shows per capita real GDP in NZ has not grown since 2004, and noted that if average growth over the past six years had been the same as that of the preceding 15 years, per capita income would be 11% higher now.

This summary was supplied by Craigs Investment Partners

• Working for Families Abatement rises from 20% to 25%
• Kiwi SaverTax Credit reduces by 50%, employer and employee miniumu contributions increase to 3%
• Opportunities to invest in NZ Assets through partial privatisation of for state owned energy companies
• Changes to student loan scheme
• Increased IRD audit and prosecution of tax evasion - particularly the property sector, seasonal workers and the hospitality industry
• Students over 55 may only borrow for fees and course costs.

Clients often ask “How do I grow my business?” There are lots of different techniques and tactics that different types of businesses might use to do this but in fact there are only 4 ways to grow your business.  These are:

 1             Increase the number of customers – but only the ones you want. 

2             Increase the transaction frequency – this means getting your customers to come back and buy more often than they currently do.

3             Increase the average value – this could mean increasing the quantity customers buy or increasing the price you charge for your product or service.

4             Reducing the cost of making your product or delivering your service - this is often achieved by making the process more efficient.

Start with these four ways and think about what you could be doing in your business to address each one.

 

Now we live in an online world business owners need to be vigilant.  It’s not just the nice Nigerians whose long lost relative want to share their millions with you. 

There are also the scammers who want to do business with you. Approaches can often seem quite legitimate - though if it seems too good to be true it probably is.  They are often friendly and plausible, but is you are selling online you need to be alert to unusual approaches or orders that are of size larger than you expect.

While payment in advance seems a safe option it is not always enough…

Smart business owners always check the validity of a credit card before processing it and shipping goods.  It is likely to be stolen and you bank can check very quickly for you.  More likely to catch you out is the customer who sends a cheque.  A cheque drawn on an overseas bank takes up to a month to clear. 

If you get caught out don't expect your insurance company to help either - this is fraud not theft.  You have supplied the goods or services in exchange for payment - the payment is fraudulent. 

Remember to report approaches to the Commerce Commission so they can post it on their website and warn others.

 

Cash can be elusive in a small to medium sized business.  A surprisingly large number of business that fail are showing good profits but have run out of cash.  Understanding the cash cycle for your business is vital to its ongoing survival.  Do you ask yourself “Where has the money gone?”   Careful management of debtors and stock are often the key.

Having to pay for stock before you sell it or before the customer pays is often a problem for businesses, particularly as they grow, or if there is a sudden downturn in sales.  Understanding the seasonality of your business and planning stock levels to reflect this can help. Quitting surplus stock even at cost can be a lifesaver for businesses - cash is always king.

Debt collection is often difficult for small businesses when they personally know the customer.  Contracting it out can help.  Always make it easy for the customer pay - print bank details on invoices and statements, accept credit card payments for larger sums or don't offer credit at all.  Always credit check new customers.

With products like Xero, the on-line accounting system at www.xero.com, you get daily automatic feeds from your bank so there are no excuses for not keeping in touch with your cash position.  Xero’s innovative dash board tells you how much money is outstanding.  Xero let’s you take control of your financial records and even share it with your accountant – at the same time!