Posts Categorized: Business improvement & efficiency

Part 2 – your break even point

Two weeks ago, I wrote a blog on the need for business owners to understand their break-even point. Gordon Ramsay thinks it is critical to know; I couldn’t agree more.

The blog generated a fair bit of discussion and on the back of those conversations, I would like to explore one aspect in greater detail.

I stated that the break-even point to monitor is not the point at which one starts to make a profit but one which also includes a fair return for the effort, time, finance and risk that an owner invests in a business.  This means that the expenses used in the break-even calculation should include the following items:-

  1. A market salary for the skills and time worked in the business. In this regard, we find that small and medium sized business owners don’t allow enough for the hours they work (being significantly more than a 40 hours week). We often find with new clients that they are earning a good income but working 20 more hours a week to do so.
  2. Interest on any loan account balance for monies owed by the business at say home loan rates. If you put money in a bank account, you would want to earn interest on it. If you lent it to someone you would want to earn interest on that loan. The real return on a business should therefore also include a fair return on the money loaned and invested in the business.
  3. Being in business carries risk. Some businesses carry low risks, others are quite significant including such thing as risk of bankruptcy and fines for non-compliance measured (often in the tens of thousands of dollars). If you invested in a risky investment, you would want a higher return. Likewise, your desired return from your business should reflect the risks taken.

The common problem is that what most businesses record as owner’s remuneration doesn’t reflect this real break-even number. This is because business owners pay what they can pay, sometimes underpay themselves and/or the results are skewed by tax decisions.

We have advanced software that will adjust the real numbers to either increase or decrease owner’s remuneration so that the business reports on its real numbers. And from that knowledge, proper decisions can be made.  Why not talk to us about what your real break-even point is and the actions you can take to improve your situation.

 At MRS, we will spend today planning for your success tomorrow.

What’s your break-even point?

I watched an episode of Gordon Ramsay’s Kitchen Nightmares during the week – you know that show that would be under 50 minutes if they cut and out every word starting with f.

This week’s episode featured a husband and wife team. The business was going down the gurgler, and sadly, as so often happens, so too was their marriage.

All the restaurants in the series are on the wrong side of serious trouble and their problems are numerous. As usual, the restaurant was re-designed and the menu was simplified with an emphasis on fresh ingredients. However, in this case, Ramsey also honed in on the fact that they had no idea of their break-even point.

What intrigued me was that Ramsey adopted the pure definition – how much revenue do you need to cover expenses in order to break-even. There are two points I would like to make about this common definition.

Firstly, most business owners don’t have a clue about their break-even point. Business owners must be able to:-

  1. Correctly identify which costs are overheads (being those expenses incurred in just opening the doors) and those cost of goods/services sold (being those expenses which are which are directly incurred in doing what they do whether that be make widgets or provide say training). Getting the cost of good/services sold correct is vital – yet sadly few of my fellow professionals bother to ensure that their client’s system accounting systems report on this basis.
  2. Have an understanding of which costs are fixed and which ones are variable. This is easy to do. However, some costs are stepped – meaning that they are largely fixed but go up in steps such as taking on another employee. It’s not easy to track this but one must know what these costs are, when they increase and by how much.

Secondly, the break-even point is not the end game. The purpose of being in business is to make a profit; if not, the operation is effectively nothing other than a charity. So therefore the true break-even point of a business includes a fair return for the effort, time, finance and risk that the owners put into the business. Every business owner should be regularly measuring itself against this number.

Do you know what your true break-even point is? We have helped many clients to not only determine it but also to set up measuring systems and procedures to ensure the business (or rather its owners) stay on track. We would welcome the opportunity to discuss this with any potential new client. You have nothing to lose as the first meeting is free of cost or obligation.

At MRS, we will spend today planning for your success tomorrow.

The danger in not increasing prices

I recently met with a new client. They manufacture and sell a product that whilst not unique, has few direct competitors and certainly none in their area. It’s not expensive so people aren’t going to travel to buy from someone else.

The story of their last couple of years has been a steady decline in profit. Unfortunately, it has been matched by a savage decline in cash but that will be a story for another day.

Whilst there are a few reason for this, it didn’t take long to get to the bottom of the problem. They haven’t been increasing their prices. Their suppliers have been charging them more and they are paying more to their employees.

By not passing on their increased costs, they have in effect given a discount to their customers. Or put it another way, they have more and more started to work for the benefit of their customers rather than themselves.

If the price freeze continues, then they will do their employees (and their families) a disservice as well as they will lose their jobs.

I reckon their customers would have been expecting their prices to increase. Given, the quality of their product and the apparent return loyalty of their customers, I would not expect a price to increase result in their losing custom.

We use some business analysis software that shows the outcome from changing any key driver in a business. In this case, we were able to show our client:-

  • What price increase would be needed to return to past levels of profitability.
  • Discussed how those price rises should be communicated.
  • How many customers they would have to lose and still make the same profit. Just to digress, this is usually substantially less than most clients guess.
  • What difference this would make to the sale value of the business.

Our cutting edge software can set out the impact from making changes such as this in a form that business owners understand. Yes, there are still a host of numbers (largely for my benefit), but the output is graphical and the numerical result simplified.

In my experience, business owners are reluctant to make changes when they don’t know the outcome. The results from making small changes are often amazing. So what is your lost opportunity? Why not met with us to find out. You have nothing to lose and everything to gain, particularly as our first meeting with a potential new client is free of cost or obligation.

At MRS, we will spend today planning for your success tomorrow.

 

So what did Friday’s public holiday cost your business?

We have long had a public holiday for a horse race; we now have one for the AFL Grand Final.

I have been asked many times over the last week about what Friday’s holiday cost the typical small businesses. The answer depends on the nature of your costs.

If your costs are largely fixed (like mine), the loss is basically the loss of time and subsequent billings. Or costs basically don’t change – maybe we saved $10 of electricity.

Other business will have more variable costs than fixed. Most of these businesses losses won’t be as great as they avoided the variable costs that otherwise would have been incurred on Friday.

Some businesses may have gained, but I suspect that they are few and far between. I understand a lot of shops were closed but some cafes may have a booming day even after allowing for penalty rates and other labour costs.

All this leads to an interesting point.

So few business understand what costs are direct and which aren’t and which ones are fixed and which are variable.  They don’t know their gross margins and they don’t know their break-even point (which may be rising in steps as they grow).

With this information to hand, you can confidentially make decisions about your business and know what the outcome will look like. Our business clients know these things. Do you? If not, why not have a free meeting with us to see how we can help you.

In the meantime, read the following posts from our archive:-

  • 1st post from Feb 2015 – Greater profitability is closer than you may realise
  • Last post from Feb 2015 – When growth is bad (and running out of cash)
  • Last post from March 2015 – What your accounting system should do for you.

 At MRS, we will spend today planning for your success tomorrow.

An unpleasant conversation

We have a client’s whose business model no longer works.

To make matters worse, the couple who have run the business have separated. So now they have to pay market wages within an industry where employees don’t work as hard nor are as productive as their owners (isn’t that usually the case?)

So the ugly question to be confronted was can the business continue to work, particularly as it requires a large outlay in the form of its re-licencing.

Yes, I could have done a whole lot of calculations using Excel, calculator, back of an envelope, or combinations thereof. However, someone has almost always built a better mouse trap and using cutting edge software, I was able to present within minutes a number of scenarios that would be required for the business to continue to be viable. These scenarios included:-

  • How much prices would need to be increased to generate the required profit/wages.
  • Adjusted to work out how many customers could afford to be lost.
  • How many more customers would have to be obtained.
  • How many more times a customer would have to return.
  • An examination the impact of increasing the average transaction value (do you want fries with that?).
  • Made adjustments for the cost of the re-financing.

All of this required proper recording of the clients cost of sales as well as understanding of which costs are fixed, which are variable and which ones may increase in steps. Our clients know these things, break-even points and more – do you know or more importantly, does your accountant ensure you know such things within your business.

I’d rather be talking to clients about how they can increase the profit of their business and therefore its end selling value. Whilst the topic was unpleasant, it was a rewarding one as the client clearly understood from this analysis that the business was no longer viable. I repeat, this was made clear to them. Without such an analysis, they could have made an ill-informed decision to continue or to close the business (and wondered whether it was the right decision).

So why not speak to us and make the right decisions in your business.  Our initial meetings with new clients are free of cost or obligation.

At MRS, we will spend today planning for your success tomorrow.

The 10 benefits of cloud accounting

One seemingly today can’t spend five minutes without hearing about cloud services and, in particular, cloud accounting packages.

However, we believe that there are now compelling reasons as to why most businesses should upgrade to a cloud-based solution if they have not done so already (please note the use of the words solution rather than version and most but not all clients).

Here are our top 10 benefits of using cloud accounting:-

  1. You can access your numbers anytime from anywhere and do so easily. So can we.  So can your bookkeeper.  So can someone else in another store.  So can anyone else that you need or wish to give access to.  Access can be granted with differing rights to access certain areas and perform various functions (such as access payroll records and generate a profit and loss).
  2. You can issue invoices from anywhere at anytime, even from a tablet or mobile.  No more waiting until you get back to the office.  You might even be able to speed up your cash flow by taking payments on the go.
  3. The three big players in this space, Xero, MYOB and Reckon Hosted (QuickBooks), all include the option to automatically upload bank transactions.  You don’t have to, but it does save time.  The first time a payee name appears in a data feed, you assign an account to it – so, for example, the first time Maggs Reid Stewart appears, you link our name to accounting fees.  Thereafter, Maggs Reid Stewart is automatically posted to accounting fees unless you otherwise edit the transaction.  As you can imagine, data entry progressively takes less and less time and it is for this reason that there are a lot of good bookkeepers out there scratching for work.  The fees for these bank transaction data feeds are now very reasonable.  So the benefit to you is that you either pay your bookkeeper less or spend less time yourself bent over the keyboard.
  4. With automatic bank feeds, it becomes much easier to keep your numbers up-to-date.  Remember that old saying – what you can measure you can manage (and by extension, what you can manage you can control and what you can control gets done).  You will have the power to know what is happening in your business at all times.  The days of business owners being in the dark as to their true situation until a Tax Return is prepared some time after 30th June should, finally, be a thing of the past.
  5. As multiple people can access the same file, gone will be the common problem of the client, the bookkeeper and the accountant all wanting to work on the file at the same time yet only one having the current file at any one time.  No more re-entering invoices, no more incorrect restores, no more avoidable time wasting, no more wasted and costly time in delivering or collecting a back-up of a desktop file and other such annoying problems.
  6. It is sometimes months after year end before we finalise a client’s financials (we only have two arms so we can’t finalise them all in July).  Cloud accounting packages allow us to access a client file at all times.  The closer we are to the time of each transaction, the greater value we can be to our clients.
  7. You don’t have to load upgrades to the software – it is done for you.
  8. No more version control problems between a client and their accountant.
  9. We have for some years used programs such as LogMeIn to access clients’ computers remotely whether that be to obtain reports, fix problems, etc.  Those remote access programs are comparatively cumbersome.  With cloud based programs, we can just login once you have set us up as a user.  We can then answer your queries far more quickly and efficiently.
  10. When up and running and used properly, cloud accounting should reduce accounting fees and, more importantly, enable us to provide a better service.

Is cloud accounting the way to go for your business.  And if so, which program will better suit your needs?  Call us fro a free initial meeting to discuss your business and its needs.

At MRS, we will spend today planning for your success tomorrow.

A missed opportunity – no fries with that

I am amazed how often this happens.

During a break at a seminar the other day, I went outside for some fresh air and wandered, as I do, into a golf shop that was next door (some would say I still would have found it if it was three blocks away).

This was most fortunate as they had a great sale on a named brand of golf trousers– for those non-golfers, they were tailored specifically to the game of golf with an expandable waist, an outside tee pocket for tees (thereby saving the wear and disfiguration on traditional pockets), protruding and accessible pockets for scorecards and golf glove as well as other attractive features.

I digress slightly as the real point is they were cheap for their high quality. I thought this was as good as Christmas.

I therefore bought three pairs – and without my asking, he reduced the price further (therein lies a story for another day).

But an easy opportunity was lost.

I wasn’t asked if I would like to buy a belt or belts with those (nor indeed anything else for that matter). Golf shops sell belts. How easy would it have been to suggest buying a matching belt (particularity given one pair of trousers was a different colour from my existing golf trousers and shorts). Asking the question wasn’t going to stop me from buying the trousers which I had already decided to buy anyway. The question would have taken 5 seconds. The question would not have offended or annoyed me. Perhaps they had some belt with special features – waterproof whatever – that I may have happily bought.

For the sake of spending 5 seconds asking a question and perhaps making a recommendation, the chance to sell something else, at a normal margin mind you, was lost.

So who is at fault here?

I would suggest the store manager as they should better train their staff.  McDonalds worked this out long ago as the simple question do you want fries with that adds MILLIONS to their collective bottom line.   I would like to think our clients wouldn’t fall for the same mistake as we have software we use with your clients that shows the gain from increasing the number of transactions by each customer and increasing the average transaction value of those transactions. There is also the true cost of giving discounts – but as I said above, that is a story for another day…

What are you going to do?

During the week, I read PWC’s 2015 Stem report (aka Future-proofing Australia’s workforce by growing skills in science, technology, engineering and maths {STEM}/April 2015).

The headline finding was that 44% of all jobs performed in Australia are at risk from digital disruption. That’s 5,100,000 jobs! And accountants top PWC’s list with 97.5% of all existing jobs at risk of automation.

So whilst this raises some series questions for myself and my colleagues, what does it mean for you and your business?

Will your existing business model be economical in the not too distant future? Will your competitors find new and better ways to provide your good and service at much lesser cost? Will your competitors be able to provide a superior product or service? Or both?

And then there’s the one fundamental hurdle raised upon the report’s release made by PWC’s Chief Executive Luke Sayers is that “business is already struggling to find the right skilled talent for their workforce.”

So how much time to you take out of working in your business to work on your business? The world is changing at an unprecedented rate and most businesses need to change with it to survive. Are you setting time out of every week or month to address these issues?

In writing this, I’m reminded by what I once heard John Bertrand state as the secret to the success of the 1983 America’s Cup campaign. As you will remember, the key to their success was the technological approach that was taken and which was manifested in the famous winged keel. Underpinning this approach was the initial framework of working within the mantra of what it would take to win the cup in 20 years’ time from then.

What will your industry look like in 5, 10 and 20 year’s time? Hard to say. But even if you don’t get it right, you will be heading in the right direction and ahead of most of your competitors. For some, this will mean cleaning up; for others this mean getting out of a dying industry before it is too late.

We can help you address these issues, whether that be from using our collective years of experience from clients in your industry or just general experiences from all of your clients (and our own).

At MRS, we will spend today planning for your success tomorrow.

Small business CGT concessions

One of the pleasing announcements within the 2015 Budget was the proposal that a small business be able to restructure itself without any Capital Gains Tax (CGT) implications.

This is particularly important for start-up businesses.  Even with the best made plans, the performance of new business can prove to be way above or way below expectations.  It is therefore quite common to find that the initial structure is no longer beneficial.  This new proposal gives the option to ensure that the initial structure does not prove to be detrimental.  Please note though that stamp duty and other charges may be incurred in a restructure.

Budgets are notoriously thin on detail; this one in particular.  There are many definitions of a small business within the Tax Act and we await to see how a small business will be defined for this proposal.  That said, we expect that it will follow the most common definition being turnover of $2 million in the current or previous financial year.

What most people don’t know though is that there are already four Small Business CGT concessions which can be used where a business is being sold.  These concessions, either defer, reduce or eliminate any tax liability.  They can also be used to restructure.  These four concessions can be used by businesses with turnover in excess of $2 million provided the net asset value of the entity concerned, and anything else connected with it, is less than $6 million.

The Small Business CGT concession laws are quite complex.  Furthermore, they are a key ATO audit area.  It is therefore essential to ensure that all the T’s are crossed and the I’s are dotted when using any of these concessions.

Does your existing structure work for you?

We welcome the opportunity to discuss what you may be able to do in an obligation free first meeting.  Why not give us a call today to make an appointment.

At MRS, we will spend today planning for your success tomorrow.

Dividends v wages – a new ball game

We often recommend to our small and medium sized business clients with largish retained profits to cease paying wages and to pay dividends instead.

To pick some round numbers, a $7,000 net salary will require say $3,000 of tax to be paid thereon AND WorkCover AND may be Pay-roll Tax as well.  Of course, there is also 9.5% SG super but that is not a bad thing.  So the cost of getting $7,000 into a working shareholder’s hands is often close to or even exceeds $12,000.

This is a costly way of remunerating oneself when a company has large retained profits.  In Victoria, there is no WorkCover or Pay-roll Tax on dividends.  And as a franked dividend is using the credits from tax already paid, the cost of getting $7,000 into a shareholder’s name is just $7,000.

It is important to note though that whilst the company can save up to $5,000 in immediate cash flow by paying a dividend instead of a wage, the company will have a greater profit in the current year as it has less deductible wages.  It will therefore pay more income tax in arrears.  For someone approaching retirement this can lead to other tax and cash flow advantages.

In the 2015 Federal Budget, it was not only announced that the Company tax rate will fall to 28.5% but that the dividend franking credits would remain at 30%.  So in my example above, you can add another $150 saving to receiving dividends over wages.

So what’s best for you?  Ask us.

At MRS, we will spend today planning for your success tomorrow.