Posts Categorized: News

When industry benchmarks are useful

I have two problems when measuring against industry benchmarks:-

1/. Are you really comparing apples with apples?

How many businesses make up the benchmark and just how comparable are they to each other and indeed to your own business?

Are they big & small, metropolitan &/or country based, new & old, running the same funding and operational structures and so on.

One can place faith in more common and the more identifiable businesses but otherwise, great care should be taken. Data from well know franchises can reliably be compared against each other, but thereafter, beware.

2/. I have found over the years that clients who focus on their industry benchmark fall for the trap of thinking that as they ahead or close to a benchmark, that all is OK. Laziness and mediocrity tend to creep in (it reminds me of one of those great lines from Jim Collins seminal book Good to Great – good is the enemy of great).

More successful business owners however are more focused on improving any system and process in their business. It’s amazing how often little changes have big results (see our blog from two weeks ago titled Greater profitability is closer than you may think).

So should you refer to industry benchmarks? The answer is yes but a qualified one. Just make sure you know what you are comparing yourself to and more importantly, place greater emphasis on improving the processes and systems within your own business. In this regard, it is amazing how some businesses have come to dominate their industry by employing systems and processes from different industries.

The one benchmark though that you should not avoid is any applicable ATO’s small business industry benchmark. Like many accountants, I question how they derive their numbers – for example, it is a blight upon my profession that many public accountants lazily declare cost of goods sold items within overheads so this must greatly distort the ATO’s gross profit margin numbers. Questionable as these benchmarks are, they can’t be ignored as they are the ATO’s greatest business audit selection method and they target those businesses operating outside the ATO’s industry benchmarks.

What your accounting system should do for you

Sadly, for most small businesses, all that their accountant is interested in is their Tax Return and BAS’s. As important as the past is, it is the future that is more important.

One of the many unfortunate consequences is that most small business owners (who aren’t accountants and would like help improving their business) run an accounting system of little use. It will help the accountant prepare annual Tax Returns and generate BAS’s – but little else.

A proper accounting and reporting system will include such features as:-

Report on the true gross profit from your core business activity. It shames me that many of my fellow accountants let their clients exclude many of the production costs from their cost of goods sold. You have to know what you margins are!
Report on different segments of your business.
Have a system to report and monitor key numbers on a daily, weekly, monthly and quarterly basis.
Contain estimates for such things as depreciation and interest – the year end financials and tax should never be a surprise.
Monitoring of KPIs and key drivers.

Such a reporting system will enable a business owner to better understand their business and be able to focus on the matters, which if controlled, will improve the success of their business.

At MRS, we are able to build on this core need and provide further reports and coaching to help our clients towards greater success.

We invite you to look at our service offering as per the services tab of this web page.

More importantly, we welcome the opportunity to meet with you to gain an understanding of your business and determine the ways in which we can help you. This initial meeting is free of charge. We welcome your call.

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

Greater profitability is closer than you may realise

I say this as many business owners don’t realise what can result from making little changes to the main drivers within their business.

What do you reckon would be the effect of improving the following by just 1%:-

Increase price of $187 by 1%.
Reduce cost of goods sold of $117 by 1%.
Maintain overheads at $1,667,904 (they shouldn’t increase).
Improve customer acquisition and defection rates by 1%.
Increase transaction frequency by 1%

Would you believe by 52%! Whilst not true for business with a low number of transactions of high value items, this is actually a common outcome.

Are you wondering what the possible outcomes are for your business?

Why not ask us.

We use Principa’s Game Plan software which models this and performs many other calculations and analysis reports of your business. So instead of continuing to working harder, let us help and guide you to working smarter.

As I said some weeks ago,

What you can measure, you can manage …

… and what you can manage, you can control …

… and what you can control gets done.

It will happen one day so you better plan for it

Not only did last week’s blog create some discussion but our estate planning seminar was booked out within a day!

The one certainty in life is that one day we will pass way. The issue that many fail to address is to plan for that eventuality.

In my opinion this is the most important document in almost everyone’s life (yet sadly only half of Australians have one).

So how good is your estate planning?

To assist you, please consider the following 10 matters that too many people fail to address. They are not in any order and the list is certainly not exhaustive as there are many other reasons as to why a lack of proper estate planning can lead to a disaster:-

I’ll start with the most basic and common matter. Jointly owned assets (such as a family home) automatically go to the survivor. It doesn’t matter what is stated in the will; a will has no power to deal with jointly owned assets as they never become part of the estate.
One’s superannuation is held in trust. In the absence of a binding death nomination, the responsibility of deciding who the super will go to is the responsibility of the trustees – and for a public fund, that is some faceless group of people who you do not know. With 1 in 2 marriages ending in divorce, there can be two or more parties that can claim an entitlement – it can only get ugly, costly and lengthy exercise.
It is alarming how many times a binding death nomination is found to be ineffective.
One good way of identifying whether you have a good estate planning lawyer or not is that they will have asked to see a copy of your self managed super fund deed –if they haven’t, terminate the arrangement and seek another lawyer. By engaging an experienced lawyer, matters such as (but not limited to) will be addressed – voting rights, reversionary pensions and payment of death benefits.
The danger of wills written long ago is that the nominated executor or executrix may no longer be alive, mentally capable or even one’s best friend. Do you really want them to still administer and distribute your life’s wealth? What if your friend from school is now a drug addict?
Unless there is an unpaid entitlement, the beneficiary of a discretionary (family) trust has no right to the assets of a trust.
A lack of planning as to who will be a replacement trustee (either as an individual or director of a trustee company) of a discretionary trust. There is also the more critical issue of who will be the replacement appointor of a discretionary trust.
If one is a member (and therefore trustee) of a self managed super fund, who will become the replacement trustee?
Who will look after the kids if both parents pass away? Too many wills don’t address this; even less fail to address the associated funding.
Not making or revising a will whilst one is still mentally capable and there are no doubts as to there being any disqualifying acts such as dementia and undue influence.

The above is not to be construed in any order of importance as any one of these could be the most important to you. Nor is this list exhaustive – there are other many matters that need to be addressed depending on one’s own circumstances.

So will your wishes be carried out as you intend?

As next month’s estate planning seminar has been booked out, we will be re-running the seminar again later in the year. Please ask Alex Stewart whether you wish to be added to the wait list.

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

The most important task

We all work hard.

We make sacrifices.

We think about work at night and on weekends. It even keeps some of us awake at night.

We do this to build wealth and improve the quality of life of ourselves and our families.

We all have an opportunity to plan the efficient transfer of our accumulated wealth to our intended beneficiaries. It is amazing though how many fail to create a will, or, equally as bad, have one that is ineffective.

Too many people don’t understand that the most common and valuable assets can’t be dealt with under a will, such as:-

Jointly owned assets.
Super (particularly that held within public funds).
Some life insurance policies.
Assets held within discretionary trusts.

It is not uncommon to encounter a will that does not address the distribution of more than 90% of one’s accumulated wealth. It is not enjoyable explaining this to the beneficiaries. It is what I hate most about a job that I love.

Worse still, others don’t understand the tax and dependency super laws. Not planning around these can result in tax needlessly paid and unequal distributions.

Moreover, a lack of proper planning can result in family disputes. Sadly, they often become rifts that never heal.

At Maggs Reid Stewart, our focus is to assist you our clients to:-
* generate income,
* protect wealth, and
* assist you to plan to leave it your intended beneficiaries in the most efficient manner.
We are not your typical accounting firm only interested in your past; Tax Returns are only part of what we do.

To assist you our clients, we are running an estate planning seminar in March. Invitations will be distributed during the week.

When growth is bad (and running out of cash)

Last week I queried whether your plan will work and touched upon good and bad growth.

Increasing sales is not the answer to everything. It is not uncommon to see a business solely concentrating on increasing sales fall part if they haven’t ensured the business has the right team and systems in place to support greater turnover.

Worse still, some businesses even fail as they run out of cash due to the increased revenue not being enough to fund greater expenses and the greater amount of money locked up in debtors and stock.

Consider this……

Take a business that doubles its sales from $1,000,000 to $2,000,000 and everything else doubles from:-

Cost of goods sold from $700,000
Overheads from $175,000
Net profit from $75,000 (average tax rate remains at 40%)
Debtors from $125,000
Stock from $160,000
Creditors from $75,000.

Sounds good?

Actually, it’s a disaster.

Why – because the working capital required has doubled from $210,000 to $420,000 whilst the doubling of profit after tax has only generated an extra $150,000 – of which $60,000 will go in tax. What seems to be a new dawn will actually prove to be a nightmare. The business owner in such a case might think they are going forward in the right direction but there is something coming awfully big and fast straight at them!

The problem here is that the owner has concentrated on sales and sales alone. The outcome would be quite different if other key drives such as debtors, stock and creditors turnover were addressed (and for which we have many strategies from our many years of experience and supporting tools).

We are a member of the Principa accountants network (from which this example was generated). Amongst many other valuable services, they provide us with cutting edge software that quickly models such scenarios – and does so in a way that you will readily understand.

Why not refer to our web page’s article on business improvement potential. Or better yet, why not ring Alex Stewart and make a time to sit down and have an obligation free meeting to discuss how we can help your business.

So again I ask, will your plan work?

Will your plan work?

OK, so you have re-charged the batteries over the summer holidays, committed your goals to paper and formalised a plan. Now comes the next step – have you determined whether the plan will work? Or are you just hoping and guessing? This is where most business owners’ plans fall over. Too many plans fail to model possible outcomes from changing key drivers of the business. All too often, the only goal is to increase sales with little or no regard given to anything else including such things as:-

What extra costs will you incur?
Will your expenses increase proportional to increased revenue or will some increase in steps?
Do you have all the required skills or do you need to find (and train) others?
Will you be able to deliver the same level of service and/or support?
Will you have to cut prices to expand (and what will be the profit and cash flow effects thereof). Is this an area where owners get it wrong!
Do you need to inject sufficient capital or do you need to borrow?
Or do you even need a capital injection – can say debtors and stock turnovers be improved?

Each of these issues raise a number of questions as to how the business does and should operate. I can raise dozens and dozens of say debtors collection strategies and considerations. And there are also more issues than the simple 7 listed above. It is amazing how often owners expand their business only to be crunched or even fail to due to cash flow issues (even where profits have increased). We have tools that can model and show you the outcome of any decision you may wish to make to your business – and do so in a way that you will understand. Why not escape the fog of uncertainty and let us help you to see and change your future.

Upcoming deadlines for Dec 14 qtr

For those of you who are employers, Wednesday 28^th January is the end date for satisfying your SGC super obligation for the December quarter. Late payments will attract substantial interest and penalties. Furthermore, a tax deduction can’t be claimed for the late payment. This is therefore the most important obligation to be paid. I therefore recommend that payments be made by Friday 23^rd at the latest to guard against processing delays.

For those who lodge a quarterly BAS or IAS, your December quarter activity statement is due to be lodged by 3^rd March. As these quarterly activity statements already receive a one month extension, the ATO doesn’t grant any further extensions. Please remember that from 30^th June 2014, electronic lodgement of any activity statement will result in no further paper activity statements being issued. We again recommend businesses to register for the ATO Taxpayer Portal to enable electronic lodgement and to more easily liaise with the ATO, check various tax records and transact in a more efficient manner.

Please note that lodgement of an activity statement (even if it is nil statement) and payment are two separate requirements. Late lodgement attracts a minimum non-deductible fine of $170 for every 28 days that a form is lodged late whereas as late payment results in an interest levy. Not that we encourage it, but should you not be able to pay an activity statement in full, do not defer lodgement as the possible fines are significant. The ATO will of course in time identify that an activity statement liability has not been paid and follow it up; but by this time though the liability should be paid in full anyway and at worst, incur a deductible interest charge far less than any late lodgement penalty. The ATO still seem to be granting payment arrangements on reasonable terms (although not as easily as before).

So you have set your goals

So you have set your goals.

Once committed to paper, the next step is to set out the actions that will ensure these goals are reached. Crucially, the actions must incorporate who is going to what, when and how.

Herein lies a great lesson – most business plans are way, way too long. My experience has been that the best ones are often only a page long. They are concise, clear, and assign accountability within set timeframes. Critically, they are reviewed regularly; weekly at times but not more than monthly.

And remember:-

What you can measure, you can manage …

… and what you can manage, you can control …

… and what you can control gets done.

Get off to a good start

With a fresh mind and before business life gets back to normal, the start of a new year is the best time to re-set your goals and moreover, put in place the action steps that will get your business to where you want it to be.

It is no coincidence that our more successful clients have a clear and stated vision of what their business does.

With this in mind, perhaps the best thing you can do this week, whether it be for the first time or simply re-visiting them, is to commit to paper your firm’s mission statement and customer value proposition. Having these critical statements in your head is not good enough as they will be unclear or even incapable of being understood by customers and employees alike. More importantly, you will be surprised how your thoughts crystallise once you see them written in front of you.

It is critical to get these two foundation stones in place before you start to address other areas of your business operation.

Please keep following these weekly blogs for other key business tips.