Engine Room Blog

If you only meet with your accountant once a year it is vital that you use that time to really understand how your business is performing and what you need to do over the next year to achieve your goals.  

The three key questions are:

1.  How did my business do compared to the previous year?

Sales may be up but profits down (or preferably sales are down, though profits are up).  Understanding whether this is a trend or caused by a one off event is essential to making decisions on how to have a better year.  

2.  Where has the money gone?

Often business owners are hit with a tax bill at the end of the year but have no cash available to pay it.  This may be caused by cash tied up in stock or debtors, or because cash taken out of the business by the owner is greater than the funds generated.  Often cash has been used to fund growth in the business without any cash flow forecasting. (If you want to know more check out our next 'where has the money gone?' seminar at www.engineroomca.co.nz/events ).  Cash is always King - if you cannot turn profit into cash your business may be growing too fast, or you are neglecting to put enough time into managing your business finances.

3.  Is my pricing right?

Pricing is 20% science and 80% art, but fundamentally if you are not making a profit on every sale, you need to review your costings and how you set your price.

4.  What is my business worth?  

While valuing a business is a project all of its own, your accountant should be able to give you an indicative valuation.  Understanding what your business is worth is vital to making decisions about getting it ready for sale, retirement and succession.

These three questions will lead to a whole lot more...

What can I do to increase sales?

How can I increase my profit?

How do I keep more cash in my business?

What do I need my business to be worth to fund my retirement?

I'd love to know what key questions you ask your accountant to help you with building your business.

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.

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! 

 

Retail is a tricky business at the best of times – in the good times everyone makes money, though not always a lot.

When times get tough, retailers need to be on their toes. 

So how do you survive the tough times and get ready for the good times…

1.                              Know what sales you need to do to make a profit – calculate your overheads and work backwards to calculate sales.  If you need to do $600,000 in sales and your average sale is $50 that means 12,000 sales per year, 230 per week. 

2.                            Manage your stock well – if it is not selling reduce the price and clear it out.  Money in the bank is far better than stock on the shelf.  If your stock is seasonal clear out as much stock as you can at the end of the season even if it as cost or below.

3.                           Don’t go in to sale too early. Malls tend to drive discounts early in the season but if you are not competing with them don’t discount.  If your stock doesn’t go out of fashion do you need to go into sale at all?

4.                           Understand your customer – if they are buying in the medium to low price range that’s what you need to stock.

5.                           Become a destination store – this comes by providing exceptional service, understanding customer needs, adding value by being knowledgeable about your product range.  If you do this, your business will grow by word of mouth and you can save money on advertising.

6.                           Keep your eye on the costs – when times are tough don’t spend on anything the business doesn’t need.  Save money whenever you can – if it doesn’t add value to the customer it isn’t necessary. It is amazing what is available second hand, in good condition as other businesses fold.   Turn off unnecessary lights, reduce staffing in quiet times, there are always places to save money.

7.                           Negotiate hard – your suppliers are businesses too, they want sales.  Can you negotiate extended credit terms, better discounts for bigger orders or paying on time, rent relief?

 Keep your eyes firmly on the business and know your customers to make this a better year for you.

 

 

We would all love to be able to retire when we want, holiday when we want and buy what we want.  The GFC has certainly made it clear a large part of the population can’t. 

Many years ago I read that most people are two pay periods away from bankruptcy – I very much doubt that this has changed.  For a large number of wage earners if they lost their job through redundancy, ill health or accident they could not survive.  Without an income do you have sufficient savings to pay the mortgage, credit cards, hire purchase payments, and regular living expenses?

Now is the time to make a change:

1.                              Have a plan – work out what you need to live on and start saving to have at least a months living expenses set aside.

2.                            Don’t finance your life with borrowings – if you can’t pay cash for it you don’t need it.  A new lounge suite on 50 months interest free terms may sound like a good deal, but nothing is truly free – it is already built into the price.  Your existing furniture may not be the latest and greatest, but if its not falling to pieces it will probably do for another couple of years.

3.                           De-clutter your life – Trademe and Ebay are a wonderful way to get cash for those things you no longer need or want. Otherwise donate to one of the many charities who will re-home it for you.

4.                           Reduce debt – credit card debt is exorbitantly expensive.  Pay the most expensive off first or get a debt consolidation loan.

5.                           Review insurances – are you over or underinsured?  I’m not a great fan of insurance but in the short term if you need cover to pay expenses it is easier to get while you are well than if you are ill.  Accident Compensation will cover you for an accident and pay 80% of you income, but if you become ill income replacement insurance is your only options if you have no other income or savings.

 

To paraphrase Rachel Hunter – you can’t do it overnight but you can do it.  The sooner - the better.

If you listen to the “experts” 2011 will be a slow shallow recovery, a healthy recovery helped by the Rugby World Cup, or more of the same as 2010. Does anybody really know... It's a bit like the weather really.

One thing is certain – if we don’t help ourselves no-one will.  Conversations I’m having with business owners show some pockets of good recovery, those who are just maintaining the status quo and those who cannot struggle on any longer and want out. 

Admitting defeat is a difficult thing to do, but is sometimes the only option and a great relief once the decision is made.  If you have already depleted all your reserves and need cash to re-stock for improving times your options are to borrow from your bank, negotiate longer payment terms with your suppliers or bring in an investor.   If the business has already tried all these it may be time to cut your losses.

Those that are doing well in this economy really understand their customers and make regular changes to match customer buying patterns.  You can’t do this from your office – you need to be face to face with customers, no matter what your industry, to be able to anticipate their needs. 

One thing is certain is that if you continue to do the same thing you are unlikely to get a different result.

Take time out to think about what you want to achieve – even half a day - and plan some thing new to make it happen.

Make sure that 2011 is better for you…

We all know that there are two certainties in life – death and taxes.

 Your accountant can help you plan for paying your taxes – though a savings account with money in it is a good start!  Death is slightly more complicated.

It never ceases to amaze me the number of times I ask a client if they have a current Will to find that they have no Will at all.  

While it is easy to assume that you are young and don’t need one, life doesn’t always work that way.   You need a will if:

1.                              You have dependents – to ensure they will be cared for by someone you trust.

2.                            You have assets – so they can be distributed as you wish not as the state requires. This article has more information on the distribution of assets.

3.                           You have specific wishes for how your funeral will be conducted.

Preparing a will is relatively straight forward – most law firms will prepare them for a modest fee or you can find a “do it yourself kit” on line.  If you prepare your will yourself you do need to make it sure it is appropriately witnessed to be valid.

My eternal frustration is having a bill to pay with no supplier bank account information on the account.   I have three choices – contact the supplier for the bank details, go on a search to find the cheque book or file it in the too hard basket!

With the UK expecting cheques to be fazed out over the next few years, and the rest of the world likely to follow, it is time to make it easy for your customers to pay.  Always put your bank account details on your invoices, and look to offer payments by credit card   (at least Visa and Mastercard).

Please don’t make me go looking for the cheque book….  I probably wont…