Profile of Michael Norrish
A downloadable copy of my profile is available here. Michael Norrish Profile
SUCCESSION PLANNING IN TOUGHER TIMES
With thanks and acknowledgement to David Krause, Associate Director, BDO Kendalls Corporate Finance Division
The tight credit market and diminished business confidence has drastically slowed business and property sales and reduced prices. Yet the fundamental challenge facing Australia has not changed, namely the ageing of the population and the need to transfer ownership to the next generation.
This challenge places those in the midst of succession planning in an unenviable position. But despite the gloomy business conditions there are strategies that can be put in place to unlock the value built up in the business.
For those who have made the decision to sell their business, a desired strategy may be a complete divestment. However, buyers are nervous at the present time, so this outcome is not always easy to achieve.
This means that vendors need to think “outside the square” to help alleviate the concerns of buyers. Some of the successful strategies that have been employed recently include: –
- Vendors taking a convertible note from the buyer as part consideration;
- Merging with a compatible company with a put and call option to sell at a later date; and
- Recruiting new management with an option or obligation to acquire an equity interest in the business.
Each strategy has its benefits and shortcomings, but they can help achieve reasonable value from the asset concerned.
Under this approach, the vendor receives an upfront payment, usually from bank finance and the purchasers equity, for a significant proportion of the value of the consideration and takes a convertible note from the buyer for the balance of the consideration.
This effectively means the vendor is providing additional equity for the buyer to obtain the bank finance. The convertible note may provide the option to redeem the note in cash or convert to equity in certain events, such as a trade sale or initial public offering.
This approach may help the buyer gain confidence in the business since the vendor remains financially involved. The approach may also maximise the sale price.
The opportunity to exit the business may be the most significant benefit of a merger. This can be achieved by agreeing to a friendly merger with a competitor, coupled with an obligation or option to sell, thereby allowing the vendor to gradually exit the business and giving less risk to the buyer.
It is also important to consider the time period over which the option can be exercised and the methodology to determine the price of the exercise. If a longer option period can be negotiated, the economy may improve in that time and ultimately result in a higher price, depending on the structure of the option.
To complete a merger, a contract will need to be negotiated to include a shareholders agreement. This document will set the ground rules for the way in which the merged business will be managed.
Partial Sell Down to New Management
This approach is similar to a management buy in, except a full divestment does not occur immediately. This style of transaction may be useful where a ”hands on” owner and operator is looking to retire and has found it difficult to divest a 100 per cent interest in the business.
To execute this approach, the vendor needs to recruit appropriately skilled and compatible managers to run the business and must hand over management duties over time. The new managers are recruited for two reasons: –
- They have the skills to run the business; and
- They have the desire to operate and own their own business.
Often an agreed amount of equity is purchased, either upfront or after a probationary period. One outcome of this approach is that it releases capital owned by the vendor that is locked up in the business. This gives the vendor value for their asset and potentially improves their lifestyle by removing the pressure of having full responsibility to operate the business.
The current state of the economic environment may prove challenging for those parties wishing to continue with succession planning in the short term. However, if vendors (and their advisors) think outside the square, a positive outcome is achievable. By undertaking the right strategy, a fair and reasonable price can be obtained for an important asset which may have taken years (if not a lifetime) to develop.
Click this link for a copy of the article: – Succession Planning
Starting A Business From The Ground Up!
All too often, I come across people who have endeavoured to start their own business and have failed. The reason for that mainly, is that they did not have an understanding of all the steps necessary to develop a “start-up” business. Starting a business requires attention to detail and a mindset that exemplifies diligence and persistence. I have prepared a “checklist” of some of the matters that need to be addressed when commencing a business from scratch. The content is extremely relevant to anyone wishing to get started in becoming successful in their business endeavours. It may be helpful also to anyone who has already commenced business to ensure they haven’t overlooked anything!!!
Here is a suggested point by point list of the things you will need to consider both prior to and during the setting up phase. They are not (necessarily) in order of action.
- Research your Business Idea
- Is the idea viable and profitable?
- Will people pay you for your product or service?
- What is the competition like?
- Do you have sufficient start-up capital to commence a business?
- Have you undertaken some true market surveys from complete strangers?
- Research your market well
- Examine all and any Industry Statistics.
eg. IBIS, CCH Benchmarking, Google.
- Visit a Business Enterprise Centre (“BEC”) and seek their assistance in guiding you to the correct sources for information.
- Ensure you do a full examination of all the competitors. Research them in depth.
- Who are they?
- Have they been operating for long?
- Are they successful?
- Do they do any marketing? If so what?
- If necessary, do some “secret shopper” stuff to determine their prices.
- Establish a written business plan.
It should include at least a two (2) year Profit and Loss AND Cash Flow forecast. A Business Plan will typically have the following main headings: –
- Executive Summary
- Mission and Vision Statement
- Background of Business
- Products and Services
- Management Operating Plan
- Markets and Marketing Plan
- Financial Plan (details of all assumptions made and including Break-Even and Sensitivity analyses)
- SWOT Analysis
- Objectives and Milestones
- Action (“To Do”) List
Each main heading will typically also have various sub-headings depending on the type of business being commenced.
- Develop (as part of the business plan) a complete and well researched Marketing Plan.
- Consider finance options if you need any start-up funds.
- Select and engage an accountant who will act as your financial and taxation advisor.
He/she will also undertake your annual taxation returns. Negotiate a mutually acceptable fee structure.
- Determine your appropriate business structure.
Sole Proprietor, Partnership, Pty Ltd Company, Trust. The correct option for you needs to be discussed with your accountant.
If you decide on a partnership then you need to have a formal partnership agreement prepared.
- Do you have a logo?
Will that be standard on all your stationery? Business Cards? Letterheads, Invoices etc.
- Set up your Pty Ltd Company correctly.
If you select a Pty Ltd company (after you have discussed with your accountant) it is suggested that you get an experienced person to set the company up for you. That way, everything is correctly covered. Name, Constitution, Minutes, Share Registry etc.
- Do you need a OH&S system?
You may need to obtain an Occupational Health and Safety system if you are working on mine sites or similar sites where OH&S is a pre-requisite.
- Do you need a Risk Management system?
If you are going to be dealing with contractors and sub-contractors it is advisable that you develop a Risk Management and Safety Management plan to cover any contingency.
- Do you have an ABN?
Ensure you apply for an ABN. Are you registering for GST/PAYG? These can be done at the same time. (If your per annum sales value is less than $75,000 you do not have to register for GST)
- Business Name Registration
Make sure you Register your Business Name via ASIC if you decide to have one.
- Home Office Occupancy Licence Required?
If you are operating from a home office you need to check with your local authority as to whether you need any statutory approvals or home office occupancy licence.
- A website is a great idea.
Do you need a website? If so you need a domain name. If you get an experienced website developer to assist you, a lot of the pain can be taken away from you but of course you pay for the privilege. Who will host your website? How much will it cost? Your website developer should be able to provide you with an associated email address(s). It is far more professional to have your own email address rather than using (say) a Hotmail account.
- Do you need separate premises?
Or are you going to operate from a home office environment? If separate premises then a lease arrangement and/or purchase needs to be negotiated.
- Have you determined your insurance requirements?
Seek the input of a competent insurance broker (e.g. gibbscorp.com.au) to ensure all your insurance requirements are covered. Some of the insurances may be: – Public Liability, Product Liability, Professional Indemnity, Office Contents, Premises, Theft, Business Interruption, Vehicles, Personal Life Insurance, Income Protection etc.
- PPSR and PPSA
Do you deliver product to client’s premises? See ppsr.gov.au which is the Personal Property Securities Register home page for more information on this very important matter.
- Terms of Trade documentation
You may need to have formal, legal and binding Terms of Trade prepared to ensure your clients understand exactly what you require of them. The Terms of Trade need to be worded to cover any goods you deliver to client’s premises relative to PPSA/PPSR.
- Accounting software
What accounting software package is your business going to utilise? Xero; MYOB etc. What training do you need to undertake the correct input? Do you need a bookkeeper?
- Staffing Requirements
Are you going to engage staff? Ensure you understand your legal obligations. g. Employee PAYG; Superannuation Guarantee Contribution, Workers Compensation etc.
Develop a connection with a networking group/club as that can foster good referral business.
- Motor Vehicle
Get clear advice on use of a vehicle. Is it in your name? Is it in the company name? If in the company name and it is used for personal use there may be a Fringe Benefits Tax factor! What method of record keeping do you need to implement for the vehicle? Talk to your accountant for the most appropriate methodology for your business.
- Bank Accounts
I recommend opening up three (3) bank accounts: –
- Personal account (do not use this account for any business purpose)
- Trading account (do not use this account for any personal purposes excepting for payment of your wages/salaries/drawings)
- Cash Reserve account into which you place all your GST (as you collect it), your PAYG (deducted from employees wages/salaries) and your expected annual Taxation Provision based on your forecast net profit.
Some useful websites for reference: –
www.asic.gov.au – for company registration and business name registrations
www.abr.business.gov.au – for ABN look-up
www.ato.gov.au/businesses – and then follow the links to ABN registration
www.ato.gov.au – for all business tax matters
www.business.gov.au – an informative site for all matters relating to business
www.businessadviceperth.com.au – a good site for excellent start up assistance and guidance
www.flyingsolo.com.au – an online community for people in business
www.smartcompany.com.au – an online business resource
Click this link for a copy of the article: – Starting-a-Business-from-the-Ground-Up
LEARNING TO FLY SOLO
With thanks and acknowledgement to Nick Reade – General Manager Small Business Banking – ANZ Banking Group
Australian Bureau of Statistics figures reveal that two in every three Australian small businesses are small office or home office businesses operated by one person. It is all too easy to feel isolated in such a business. Many people who now work alone once worked in an office or team environment and have found the transition from daily contact with others and “chats around the water cooler” to the isolation of a home office very challenging.
You may be coming down with the “working alone” blues if you find yourself: –
- So wrapped up in your work that you become overstressed and burnt out. Everything seems to be on “top of you”.
- Losing morale and enthusiasm for your task through lack of human or business contacts.
- Losing touch with developments around you or changes in the marketplace; or
- Losing the energy and initiative to find new markets or develop your business in new directions.
These symptoms may result in a diminished sense of perspective and lessen the ability to make sound decisions.
In my experience, some of the key ways to overcome these issues are:
Make Time to Develop Your Networks
Business is all about people and extending your networks, including customers, suppliers and business contacts. Successful business people don’t operate in isolation. Instead they work at steadily extending their business network. By working at increasing your networks you are automatically decreasing your isolation, so schedule time for networking.
Make sure you get away from your business by joining local business support groups. Contact your local Business Enterprise Centres (www.beca.org.au) to find out about business network groups in your area or talk to the Australian Industry Group. You’ll make new connections, gain inspiration from the success stories of others and improve your own motivation.
Business contacts and developments often come to you indirectly; for example, can you donate your time or expertise to a local charity organisation s few times a month? People power can make all the difference to a smaller organisation that may not be able to afford to hire someone with your unique skills. Service clubs such as Rotary International or Lions Club International offer another effective way to increase your network of business contacts while making a worthwhile contribution to your community.
Always carry a good stock of business cards with you to meetings and gatherings and exchange cards with as many people as you can. Remember, it’s natural to seek the security of familiar faces at such gatherings. Make the effort, however, to meet at least a couple of new people on each occasion. This task of forcing yourself out of your “comfort zone” becomes easier with practice.
Connect via Online Communities
Take full advantage of all online networking tools and social media outlets. Most are either free to use, or require a very small investment to get you started. They are a great way to expand your contact base without even having to leave the office.
Social networking sites allow you to create or join groups, make contacts and communicate in a variety of ways with the other people in your network. Some of these sites are specifically targeted at certain groups of people. For example, Linkedin (www.linkedin.com) is purely focussed on business networking and is an easy way to stay in touch.
ANZ has a unique “Small Business Hub” (www.thesbhub.com.au) an online business resource community that allows small businesses to connect with other like-minded business owners and business experts, enrol in workshops and access topical articles, tools and guides. Flying Solo (www.flyingsolo.com.au) is another resource site for solo or small business owners that operate forums for users to connect and share ideas with each other.
Depending on the nature of your business, websites such as Facebook (www.facebook.com), MySpace (www.myspace.com.au )and Twitter (www.twitter.com )can also be cost-effective ways to build an on-line brand presence, reach out to new contacts and generate new marketing avenues for your products and services.
For example, creating a Facebook profile for your business will help you build a data base of contacts who you can keep in touch with about new events or products. It is also an easy way for your existing contacts to spread the word about your business within their own networks.
If you already have an online presence, consider starting your own blog as a way of keeping abreast of what’s happening in your business, showing that you’re innovative and a knowledge leader, and sharing your thoughts on new developments in your industry. Alternatively, free websites like WordPress (www.wordpress.com) or Blog Spot (www.blogger.com) will host your blog for free.
Attend Seminars and Workshops
Schedule the time to attend at least a few business skills workshops every year. The workshops will keep you stimulated and help you make new business contacts. It is also a good chance to refresh your skills and hear about new strategies you can employ to help you run your business more efficiently.
ANZ runs a number of free workshops specifically for small business throughout Australia on different business topics from marketing a business to generating sales leads. You can find out more information about the topics and can register to attend through the Small Business Hub or talk to a Small Business Banking Specialist in your nearest branch.
Both State and Federal Governments also hold events around Australia such as seminars and training courses. You can find out what is available through the “Events Calendar” on www.business.gov.au .
Become a Speaker, Personality or Expert
Can you become a speaker, a personality or “the expert” in your field? Service clubs such as Rotary, Lions and Zonta, as well as many other community groups and organisations are always on the lookout for good speakers.
If you’re nervous about public speaking, why not get some training through organisations such as Dale Carnegie (www.dalecarnegie.com.au) or Toastmasters (www.toastmasters.com.au) You’ll have fun along the way; develop confidence and gain new communication and people skills that will stand you in good stead in your business.
Have you considered writing an article for a local newspaper or magazine on your topic of expertise? Here’s an example: – Danny started his Newcastle brake, clutch and muffler repair shop with just one assistant, but became a regular commentator and reporter on local car racing, rallying and other motor sports. As he became better known the spin-off for his business proved significant.
Or, become an expert in your field. For example, Susan, who runs a home based computer training business, extended her network by offering free evening computer training classes for senior citizens in a local community centre. Word spread about how effective she was as a teacher, and her daytime trading bookings increased three-fold.
Choose Good Advisors
Regular contact with a select group of advisors (such as an accountant, lawyer and your Small Business Banking Specialist) can lessen your isolation and help you make better business decisions. Most successful business people acknowledge that their success owes a great deal to the help they received from their advisors.
Your business may also benefit from taking on a mentor who can provide occasional advice and support. For example, a retired businessperson or the owner of of a business similar to yours, but perhaps in a different city? Being able to share problems and tap into other people’s business experience can be very valuable.
Use Business Coaching
Take advantage of the business coaching that is available to small businesses. For instance you may wish to make contact with Enterprise Connect (www.enterpriseconnect.gov.au) or your local Business Enterprise Centre (www.beca.org.au) or if you are in a rural area your Area Consultative Committee (www.acc.gov.au). Be sure also, to make use of the Small Business Hub’s business resources.
Develop Self-Management and Motivational Skills
An important challenge for most small business people is developing the increased self-discipline that working alone requires. Working in a structured environment of a busy office is far easier than working alone. Everyone finds different ways of overcoming these challenges – for some people, setting daily targets and rewarding themselves when they have achieved those targets works well. Remember to reward yourself regularly for your achievement in starting and running a small business, because no one else is likely to.
Form Joint Ventures and Alliances.
Combat the isolation of being a small business by thinking of possible joint ventures and alliances. For instance, can you team up with similar businesses to gain more buying power from your suppliers, or work more closely with complementary businesses to offer a “one stop shop” for your customers.
Can you form an alliance with your supplier to share the costs of promotions, advertising and signage or special events? Are you ready to move out of your home office and share the overheads with a “cluster group” of similar businesses in a more professional office environment? All these tactics or steps will help you to extend your business connections and networks – which is what being in business is all about. Some of them involve moving out of your “comfort zone”.
Working alone in a small business is indeed challenging, but by thinking differently, extending your contacts and making sure you get out of your office regularly, you can do much to build your business and launch yourself into the larger business community.
For more information, visit www.thesbhub.com.au or call 1800 351 663 or talk to an ANZ Small Business Specialist.
Click this link for a copy of the article: – Flying Solo
PROFIILE OF EMMA McQUEEN
Emma is a Business Coach but with a difference. She focuses her coaching attention on ensuring that CEO’s, COO’s and Board Members fully understand how to extract the best out of how they manage their daily operational activity. She will be able to provide all necessary guidance, inspiration and motivation to anyone with a desire to succeed in business today. I commend her to you. Please download Emma’s profile by clicking the link below.
FIVE TIPS TO STARTING A SUCCESSFUL BUSINESS – RICHARD BRANSON
I received this article via Linkedin and consider the advice ex Richard Branson to be simple, effective and to the point. Worth a read. The content is appropriate to anyone wishing to start a new business successfully. Far too often, we make a simple task just to complex!
We all talk about networking but do we have a networking plan?? I read an article by Debra Taylor in one of the national newspapers and am of the view that it is a very good article. It is not my authorship but is Debra’s and I make no claim on the content. The content is however extremely relevant to anyone wishing to network successfully and I commend it to you.
PRICING FOR PROFIT
Do you know the difference between “mark-up pricing” and “profit margin pricing”? Sadly, not all businesses understand that difference! This article attempts to demonstrate the difference between the two mechanisms so that business owners/managers can understand the most appropriate method for their business.
Do you know what your break-even position is in your business? Most businesses do not understand what it is or how to calculate it! This article attempts to assist with that understanding. Have a read.
UNDERSTANDING BALANCE SHEETS AND INCOME STATEMENTS
What do you know about your Balance Sheet and Income (Profit & Loss) Statement? Do you know how to interpret them? Do you know what they mean to your business?
As a business owner or manager, you wear different hats and juggle several “management balls” at once. But the one hat you can never shed is that of financial manager and planner.
When you finally have an accounting system that produces timely and accurate financial statements, your primary ownership responsibility of understanding and interpreting exactly what you have begins.
The process of analysing your statements is not a glamorous task, and the best way to start is to roll up your sleeves and dig in.
Three steps are required: –
- understand how your statements are formulated;
- use your data to produce a series of financial ratios; and
- interpret using the ratios to analyse the causes and effects of financial events in your business.
Making a statement
All financial analysis begins and ends with financial statements. The two basic statements are the Balance Sheet and the Income Statement (or Profit & Loss Statement).
The balance sheet functions as a historical record of activity since day one of your business.
Functionally it’s like taking a snapshot of the business at a point in time – usually the end of an accounting period. It reveals three things: – assets, liabilities and net worth. This fundamental relationship is summarised in the following formula: –
Assets equals Liabilities plus Net Worth or Assets minus Liabilities equals Net Worth
There are several issues worth noting in relation to your balance sheet. First, the assets are broken down into three basic sections based on the time frame in converting them to cash: – current assets, fixed assets and intangibles.
Since assets are things the business owns, they have to be bought. Liabilities reflect funds in the form of loans, and net worth reflects funds in the form of capital investment and retained earnings.
Three Classes of Assets
Let’s discuss briefly the three classes of assets. Current Assets are those that are normally converted to cash within one year. – such as cash at bank, accounts receivable and inventory. These three types of assets interact to create the working capital cycle. : – cash to inventory to accounts receivable and back to cash. If you’re a retailer with no accounts receivable, you still have inventory to manage in the cycle.
In current assets, you also typically find a category called prepaid expenses such as rent and insurance that you “use up” over the course of the year.
Fixed Assets represent those tangibles upon which the activity of the business turns – such as land, buildings and plant and equipment. With the exception of land, fixed assets are depreciated – or written off – over the “useful life” of the items.
Intangibles are the third asset category and are represented by such items as goodwill and franchise rights.
Most of your assets are placed on your books at cost or fair market value – whichever is less.
Liabilities and Net Worth
Liabilities are also classified into short-term and long-term, depending again on whether they are paid within one year.
Current Liabilities (short-term), such as accounts payable, overdraft and accruals are paid within one year. Accruals are simply a way of saying, “I know I owe it, but I haven’t written the cheque yet”.
Long Term Liabilities (Non-Current Liabilities) such as mortgages or equipment loans, are those that will be repaid over a period exceeding one year.
The last section of the balance sheet is labelled – Net Worth. There are two components: – owner’s contributions (share capital) and retained earnings. Retained earnings are those after-tax earnings kept (retained) in the business to finance the acquisition of new assets.
There are two important things to remember about retained earnings: – first, they are not cumulative; and second, they are not usually cash. Many owners make the mistake they represent cash. Not so. They represent funds available to purchase new assets, and in many case, they have been spent before you get them.
Balance Sheets and Income Statements
To sum up the balance sheet: it’s a record from day one and measures what a company owns and owes at a point in time. The key financial issues relating to the balance sheet are liquidity/solvency, financial risk and asset management.
And why does the balance sheet balance? A system of double entry bookkeeping means each entry is checked by a balancing entry.
Now let’s talk about the income statement (or Profit & Loss Statement). It’s simply the results of the operations over a given period, normally a year.
The primary benchmarks are gross profit and net profit. Gross profit measures what remains when the cost of goods sold (variable expenses) is subtracted from sales and, naturally net profit measures what remains when operating (fixed) expenses are subtracted from gross margin. The key financial issues relating to the income statement are pricing, margin maintenance and expense control.
At the end of each year, your bookkeeper closes all of the income and expense accounts to produce “net profit after tax” (your income statement). This amount goes directly into retained earnings (your balance sheet) and then you start all over again in income/expense. Thus, the income statement represents only one year at a time while a balance sheet is forever.
Now let’s wrap it all up. This information can be used to see where you’ve been and where you’re going. The goal? Planning and control.
Click this link for a downloadable copy: – Balance Sheets and Income Statements
Successful businesses understand the need to plan well to determine potential future outcomes. Businesses that decide not to formulate a carefully researched and compiled business plan are unlikely to achieve the required profitable outcomes. The adage…”Fail To Plan…..Plan To Fail” does apply!!
Business Planning is a valuable management technique but it’s all too often overlooked.
Some businesses do not see the benefits of a carefully researched and compiled plan. As a result, they do not undertake the task at all.
Business failure statistics in Australia indicate that upwards of 50% of business fail within the first three years of commencing operations. It is realistic to extrapolate that many of these may not have failed had they undertaken some business planning and financial forecasting activity.
When done properly, the planning process and the preparation of the plan, provide business owners and managers with the opportunity to stand back from their work, assess the achievements of their business and set objectives for its future performance and development. It allows them time to evaluate their trading environment and assess their competitors and the economic factors which affect their business. It is imperative that any business plan be a written document that can be referred to on an ongoing basis and to be continuously updated as circumstances dictate.
A business plan should give the reader a very clear and concise view as to where the business is NOW, WHERE it wants to be in the future and HOW it plans to get there. It is unimaginable that you would allow a house you wanted constructed proceed without having an architect and perhaps an engineer determining that the construction would be successful. So it is with planning your business.
Should you have a need to access funding (perhaps venture capital or equity) any potential lender/equity participant would expect to see that you had a thoroughly researched and complete plan rather than just having an idea in your head. Bear in mind that a business plan is a forward looking document rather than concentrating on historical aspects.
There are some distinct benefits in producing a written business plan.
These are: –
- It provides a mechanism for you to think long and hard about and enable informed decisions to be made about the success of your business.
- It will assist in enabling your financial backers to consider that you are a safer option for their funds that someone who does not plan satisfactorily.
- It provides a survival strategy in the event of a general business downturn
- It may assist management anticipate and respond to change
- Most importantly, it provides you with details as to how your business is progressing and what strategies you may need to implement to ensure you achieve your business goals and objectives.
There are no hard and fast rules about what content should be included in a business plan. There can be many components to a business plan that require significant input and a probable outline template could be as follows: –
- Executive summary
- Description of the industry
- Description of the business
- Description of the product or service
- SWOT analysis both personal and business (including skills audit)
- Sustainable competitive advantage
- Analysis of the market
- Assessment of existing and potential competition
- Marketing strategy and action plan
- Ownership and management, key personnel
- Business milestones and action plan
- Insurance requirements
- Business structure (including legal duties and liabilities)
- Financial structure
- Financial statements
- Profit budget
- Cash Flows (at least three years) (including quotes for capital equipment)
- Sensitivity analyses (including industry averages, interest rate sensitivity etc)
- Analysis of sales projections
- Break-Even analysis
- Assumptions used in the financial statements
- Security details to offer a lender if you need to borrow capital
- Any valuations received from licensed and registered valuers for any proposed security
- Licences or similar documents required to operate the business
Generally speaking, it is wise to engage a suitably qualified business management consultant to assist you in compilation and preparation of the business plan. Although that may incur expense, it can ultimately save you an enormous amount of heart ache later as the consultants experience can very early determine the ongoing viability and profitability of your start-up or more mature venture. Most business owners appreciate the honesty of knowing the potential financial outcomes that the planning process determines.
This is extremely critical as far as preparation of valid financial forecasts are concerned. There cannot be any “formulation” or “assumptive” errors otherwise the entire integrity of the business plan may be lost.
Any prospective lender, equity partner, venture capitalist and indeed anyone interested in the business will always tend to examine in detail the “bottom line” position. The business plan may be the most complete and elaborative piece of prose but if the financials do not stack up and provide a solid indication as to the profitability and positive cash flow position of the business, then all the writing will probably be in vain.
The preparation of a comprehensive business plan can be a reasonably lengthy exercise and must involve significant input from the business owner(s). If a completed business plan is not “owned” and/or fully understood by the proprietors, its credibility will probably be lost amongst all parties to whom it is presented. If you elect to utilise the services of a consultant, look upon the consultant as a “facilitator” to get the job done and in a professional presentation rather than it being his or her plan.
It bears repeating….. “A BUSINESS THAT FAILS TO PLAN PLANS TO FAIL!!!
Click this link to download a copy of the article:- Business Planning
FUNDING OPTIONS FOR TRUCKS
Are you a truck owner? Do you understand the various financing methods available to you? Would you like to have a brief overview of the financing opportunities that are available?
There are several funding options available to truck owners (and potential owners) to enable them to acquire requisite machinery. Each option has its own set of circumstances and tax treatment. It is important that discussion with your accountant occurs prior to deciding to enter into a contract to buy a vehicle! It is too late once you have signed a deal to discover that it is not the most appropriate one for you!
Commercial Hire Purchase (CHP)
The most common mechanism used is Commercial Hire Purchase (CHP). In simple terms, a CHP is a contract where the financier (the “owner”) allows you (the “hirer”) the right to possess and use the vehicle in return for regular payments. A “balloon” payment (a final payment made at the end of the agreed term) is optional with a CHP. Ideally, this balloon payment should be no more than the estimated value of the vehicle at that time.
A deposit towards the transaction is (depending on the financiers) optional but generally not required.
The repayments normally attract stamp duty depending in which state or territory you are undertaking the transaction.
CHP’s are subject to the Goods and Services Tax (GST). Where the terms charges are disclosed in the CHP agreement, GST is calculated on the cost of the equipment less the Input Tax Credit applicable to the purchase. Repayments are not subject to GST.
With a CHP there may be significant taxation advantages as you are generally able to claim the interest payments as well as the depreciation of the asset whereas with a standard lease (we will discuss these next) the actual repayments are the tax deductible part of the equation. This only applies if the equipment is used to generate assessable income.
You also have the option to purchase the vehicle prior to the end of the term of the CHP.
Once the final payment is made on the CHP to the financier, the title of the goods is transferred to you.
A CHP may also be known as a Corporate Hire Purchase or an Asset Purchase.
Vehicle Finance Lease
The second mechanism is a Vehicle Finance Lease. This is one of the more straight forward methods of purchasing a vehicle. A financier (“lessor”) provides the finance and the customer (“lessee”) is responsible for making repayments in terms of the lease.
Low or no deposit terms may be available depending on the lessee’s circumstances and the financiers (lessor’s) requirements. Regular payments are determined over a period of time and generally an agreed “residual value” (the value of the outstanding at the end of the term) noted and agreed. The residual value is normally determined by the effective life of the equipment. That effective life is calculated using Australian Taxation Office guidelines.
The payments made are generally fully tax deductible depending on your taxation status and circumstances. Unlike a CHP, the interest and depreciation is not a tax deduction to you (the lessee) as the ownership of the vehicle remains with the financier (the lessor). As with a CHP, the equipment must be used to generate assessable income to get the taxation deduction of the repayments in the hands of the lessee.
At the end of the lease, you are required to return the vehicle to the financier unless the financier is agreeable for you to acquire the asset. Generally, the monetary consideration for you to acquire the asset is the residual value plus any GST component. This is not a hard and fast rule however, and you would need to ensure that you understand what the terms of the arrangement are prior to signing any contract. As mentioned above, once you have signed the deal it is mostly too late to change the arrangements!
Moral of the story; – READ EVERYTHING VERY WELL BEFORE COMMITTING TO DO THE DEAL!!! This applies no matter what the financing methodology is that you elect to utilise.
A further alternative is to seek a term loan/line of credit (or similar) from your bank. In this scenario, generally, the bank will require you to provide security in the form of a mortgage over your house. They may also require a specific charge over the vehicle being acquired (this is normally a PPSR charge – Personal Property Security Register charge)
However, this option is a good one if you wish to consolidate your debts and negotiate one regular repayment.
Most trucking ventures require machinery at various times and sometimes enter into one arrangement after another and wind up with a number of monthly repayments that they need to meet from their cash flow. The more repayments the more potential stress on the business cash flow!! Adopt the KISS principle if possible.
It is worth considering whether there is some value in consolidating these financing arrangements such that a (perhaps) more manageable repayment structure can be obtained.
Again, as with the aforementioned methods of financing, there are taxation considerations to be determined and the advice of your accountant is paramount in this suggestion as much as the others.
The secret to a successful business is a comfortable and regular cash flow. Anything that a proprietor can do to improve the cash flow of the business and in turn reduce the cash flow stress, the more probable it is that the business will succeed and prosper.
This presupposes that the business has abided by all corporate governance requirements and has an up to date and written business plan with specific forecasts prepared so as to check progress of the venture.
Remember: – a business that fails to plan will generally fail!!!
Click this link for a downloadable copy of the article: – Funding Options For Trucks
BORROWING FROM A FINANCIER
What information do you need to provide when you want to borrow money from a financier? How do you go about it? Read this article for some pertinent information.
Financing for your business is always a tricky task.
Start-Up businesses will always find it difficult to borrow money particularly if they haven’t got a house that they can provide as security for any loan that is provided.
There are some banks/institutions that do provide a nominal “unsecured” personal loan (around $20,000 – $25,000) but that doesn’t necessarily give the start-up business owner the level of funding they need.
Sadly, the small business owner needs to develop a track record of operational activity over time before the bank/financial institution will “lend against the business cash flow position”.
Some of the things that lenders look for are: –
- The Balance Sheet
A balance sheet outlines three basic components being: –Assets, Liabilities and Net Worth (or Equity).
Having a lot of cash in the bank account does not necessarily infer a strong balance sheet. That is because it is very liquid and can be utilised very rapidly. It is better to build up tangible, illiquid assets that the bank can take security over for any borrowing. These include: – land and buildings and plant and equipment.
Stock (inventory) and Debtors (people who owe you money) are available assets but again the bank will look very critically at them to see what the quality may be for those assets. Effectively, the bank looks upon it as “what would be recoverable IF the business goes bust” and what could they get back. Therefore, the bank may view loans to associates or related parties in the balance sheet as virtually uncollectable. As far as debtors and stock are concerned the bank will apply a “scaling” factor to those assets and that could be quite severe. E.g. they may “extend the value” for security purposes at 25% of the total value for these aspects. That further assumes that the bank considers them “good quality” collectables.
The fewer liabilities you have the more comfortable a bank will feel as they consider your application.
Debt in the balance sheet secured against specific assets normally means that there is no “security value” in the assets and the two items cancel each other out.
If you have a large amount of creditors (money you owe your suppliers) outstanding and they have been outstanding for more than a short term, the bank will view that unfavourably. Try and keep all your creditors payable within a maximum period of 30 days.
Other liabilities such as outstanding Australian Taxation Office (“ATO”) debt; superannuation unpaid and payroll tax unpaid will all be scrutinised very critically.
Loans by the owners to the business are all viewed favourably as it demonstrates that the business is partially funded by the owners and that they have provided some “hurt money” into the venture.
The more equity that is shown in the balance sheet the better it is for the proposed financier. Good levels of equity or shareholders’ funds demonstrate commitment by the shareholders/owners. If a negative equity position exists that would be of great concern to any lender.
- The Profit and Loss Statement
Generally, lenders look to examine three years Profit & Loss (“P&L”) statements. This is to enable them to determine what the level of sustainable net profit is evident over that period and what is probable going forward.
They will apply their own measures against industry benchmarks to see if your business expenses are in line with those benchmarks. They will generally examine all expenses very carefully.
Close examination of gross profit margin, closing stock figures, sales and turnover are all areas that the lender will scrutinise and compare to industry standards.
For an “owner/operator” type business, they will also look closely at the level of drawings or wages that are being taken from the business. It may be (e.g.) that the profit is high but the drawings are minimal or conversely that the profit is low and the drawings high. Either of these situations will generate enquiry from the lender so be prepared with a response if that applies to you.
- Cash Flow Forecast
A well prepared cash flow forecast for at least two (2) years is critical when making a presentation to a lender.
As well, all the assumptions that were used in compiling that forecast need to be fully understood and readily explainable to the lender by you.
The forecast also needs to include any loan repayments from the proposed loan that you are seeking to access from the lender.
Any forecast prepared must be realistic and achievable. The lender will (generally) examine your historical outcomes (where they are available) to determine whether the forecasts meet that criteria.
Don’t make the forecasts too optimistic as that could provoke a query as to “why do you need to borrow the money from us”?
A well-presented approach to your financier is essential. Be prepared. If you do not feel comfortable in approaching your banker, engage an “advocate” or “consultant” to accompany you and assist in presentation of the business case to the lender.
Times are tough and obtaining finance is not a “lay down misere” like it used be so make sure that your financial statements are in good order and that your case for assistance is very well presented.
Click the link for a copy: – Borrowing From A Financier
TIPS FOR BUSINESS SUCCESS
Here are some bullet points for you to consider to assist in making your business successful.
THE PRINCIPLES FOR SUCCESS IN COMMENCING A SMALL BUSINESS
- Create and build the business on a real market opportunity
- Gain experience in the type of business you plan to start
- Plan ahead
- Be sure to have your family’s emotional support
- Continually work to improve the business image and product/service
- Strive to be the best rather than the biggest
- Build on strengths and concentrate effort and resources
- Seek and use expert advice
- Recognise the different types of risk in operating a business
- Avoid being overly dependent on others
- Do not persist with products which have become obsolete, unfashionable or have been superseded
- Be decisive and assertive
- Use time efficiently and effectively
- Keep up-to-date records
- Select employees carefully and maintain their motivation
- Be prepared to become tired and discouraged and still persevere
- Follow your strengths and interest
- Regularly review the location of the business
- Don’t be too proud to quit if absolutely necessary
- Believe in yourself (and your partners – if applicable)
Click here for a copy of the article: – Success
I know not everyone likes acrostics!! I am not a huge fan myself but in my opinion this one is helpful and plays on the initials of the word SUCCESS.
WORKING CAPITAL and CASH FLOW – THE DIFFERENCE
Generally, most small businesses do not understand the difference between Working Capital and Cashflow. This article endeavours to explain it in very simple terms and provides a formula for calculating Working Capital requirements. It also discusses the Working Capital Ratio and the Acid Test Ratio which is critically important to ensure a business is viable.
In simple terms working capital requirements is the amount of funds required by the business to meet its short term obligations. i.e. the next twelve months. Working Capital and Cashflow are often confused with each other. Cashflow is the amount of funds available in the business to meet its future obligations.
The key words above are “required” and “available”. The difference between the two can be vast and cause funding headaches if not properly managed and considered.
Working capital requirement is affected by the management of several factors in a business. These are: –
- Work in Progress
- Outstanding debtor (customer) amounts, and;
- Outstanding Creditor (supplier) amounts
So how do you calculate “working Capital Requirement? Here’s a formula that explains how to do so.
Working Capital % = (Outstanding Debtors + Work in Progress or Stock minus Outstanding Creditors) divided by Revenue x 100
Here is an example where a business has the following: –
- Debtors of $150,000
- Work in Progress of $300,000
- Outstanding Creditors of $100,000
- Revenue of $1,000,000
The calculation of working capital requirement would be: –
($150,000 + $300,000 – $100,000)/$1,000,000 x 100 = 35.00%
This means that for every sale of one hundred dollars in this business $35.00 is required to fund the sale. i.e. to allow for the time: –
- Customers are taking to pay
- Work is in progress prior to invoicing; and
- The business is taking to pay its suppliers
Minimising Capital Requirements
The way to minimise working capital requirement is: –
- Stock – aim to minimise the length of time it sits on the shelf sucking up cash
- Work in Progress – aim to minimise the length of time jobs are in progress prior to invoicing or arrange to invoice a job progressively
- Outstanding customer payments – aim to minimise the length of time customers take to pay.
- Outstanding supplier payments – aim to maximise the length of time available to pay suppliers.
To meet these objectives you need systems and processes in place to constantly manage these factors and minimise working capital requirement.
Some people ask if they sell more, will that provide the working capital? A common fallacy is that if a business sells more, working capital will take care of itself. A problem arises when the abovementioned factors are not managed and the cash gets tied up in stock, work in progress customers and suppliers etc. You can then have difficulty paying costs such as wages, superannuation and meeting other overheads.
I have seen many examples where a business was purchased for what seemed like a good price, and the issue of working capital was completely ignored.
The purchaser gets a rude shock when the extra business doesn’t equate to more cash in the bank. The moral here is to think very carefully before you take on extra business or buy a competitor. Consider the extra working capital required to fund that business before taking it on.
A common trap SME’s fall into is focussing on profit without considering working capital. High working capital requirement will bring a business undone far quicker than low profit margins.
Click this link for a copy: – Working Capital & Cash Flow
CASH FLOW IS KING!
Cash flow is vital to any business. To not have sufficient is a recipe for disaster! This article explains a little about the necessity for cash flow, what it means and where you may have to go to find it.
I often use the expression “Cash Flow is King” when I talk to my clients. It is a very true expression that bears thinking about.
If the “cash flow” is not consistent in your business, then it is a recipe for disaster.
Typically, a business “cash flow” or “working capital cycle” is as follows: –
CASH → STOCK → SALES → DEBTORS → CASH
If you ignore any one of those areas, you get a “puncture” and the “cycle” grinds to a halt!!
No cash = No Stock
No stock = No Sales
No Sales = No Debtors
No debtors collected = No Cash
and so on and so on and so on!!!
To say today’s environment is a tough one for SME‘s is an understatement!!! There are however some strategies that you can employ to endeavour to maintain a consistent and reliable cash flow. These include: –
Before you enter into agreeing to a credit limit/account for a new customer, get a credit check on that proposed customer.
If that is satisfactory, then get the customer to agree to your “Terms of Trade” in writing.
If you don’t have written terms of trade for your business you need to get them prepared by a reputable advisor as soon as possible. Always display your terms of trade on each and every invoice you issue. (e.g. All my invoices clearly state: – “Payment Terms: – Strictly Within Seven Days Of Invoice Date”)
It is imperative that your business has a cash flow forecast that you can use as a barometer as to whether you are meeting your targets. As well, it provides a guide as to where you may have “cash flow hot spots” where you may need some financial assistance.
A well prepared and explainable forecast is a critical aspect that you will need to provide should you be seeking any financial assistance from a financier for your business.
Banks have been traditionally the main source of funding for SME’s. That is no longer the case and there are a number of other institutions that provide financial assistance. These include: – credit unions and factoring companies.
Essentially, factoring companies take charge of your debtor collections and charge you a fee for so doing. They provide you with a sizeable portion of your outstanding debtors within a short period of time (normally around 80% within 48 hours or so) and then they do the collection of the debtor on your behalf at their cost. They then deduct from the invoice their costs of collection and pay you the residual. You do need to examine it carefully though as the cost of factoring can be quite high.
Also examine your funding needs for plant and equipment. There are other options here too. They include leasing and chattel mortgages.
Speak to a well experienced finance broker as they generally have a greater variety of lenders available to whom they can refer you to and who can tailor your financial needs.
If you decide to follow the “factoring” route, you must speak to your accountant or financial adviser or do some research of your own. There are a number of companies offering factoring/debtor finance/invoice finance services and a website search will lead you to them. You may care to have a look at The Australian Finance Industry Association website (see https://www.afia.asn.au/difa) which will give you some entry level information.
It is always appropriate to discuss your circumstances with a number of factoring companies to ensure you get the best fit for your business. Generally, factoring companies tend to prefer businesses than have a specific product or service where there is clear evidence that same has been provided. This could be via a signed delivery note or a timesheet or similar methodology.
The imperative here is that your record keeping and bookkeeping disciplines are up to scratch and that you have an up to date list of all invoices issued. Lack of discipline in this area can be disastrous.
Click the link for a copy of the article: – Cash Flow Is King
DEBTORS – YOUR MONEY
A friend and colleague of mine – Adrian Stead – operates Accounts Receivable Solutions WA – which specialises in assisting businesses in collecting monies (debtors) that are owed. My experience is that most businesses “do not like” having to ask for payment for products/services rendered. To that end, Adrian can assist by acting as your Financial Controller and collecting outstanding funds for you. Have a look at the article and click the below link for a free download.
VENTURE CAPITAL EXPLAINED
Are you confused about venture capital? Do you need some and don’t know where to get it? Download this article as it contains some pertinent information on the topic.
Growing your business or starting from scratch needs capital!
Venture Capital is a means of financing fast growing private companies, either for a start-up, development/expansion or purchase of a company through a management buyout or buy-in.
There are a number of different ways to fund growth in a new business and these include the business owners personal capital, arranging debt finance or seeking an equity partner i.e. venture capital
With venture capital, the investment firm acquires an agreed proportion of the company’s equity in return for the requisite funding. Equity finance offers the significant advantage of having no interest charges, instead seeking a return through long-term capital gain.
When venture capitalists invest in a business they become part-owners and typically require a seat on the company’s board of directors. They intend to take a minority stake and act as mentors and provide support and advice on a range of management and technical issues to help develop the company’s full potential.
Surveys both in Australia and abroad consistently rate management input as the most important contribution of a venture capital firm.
There are many sources of capital but only a venture capitalist can provide experienced management input gained by helping many other companies conquer the inevitable problems and growing pains.
How does the venture capital industry work?
Venture capital firms typically source most of their funding from large investment institutions such as superannuation funds and banks. These institutions invest in a venture capital fund for a period of up to 10 years.
The venture capital industry in Australia has an industry body – The Australian Private Equity & Venture Capital Association Limited – (“AVCAL”) (http://www.avcal.com.au/). This website may give you some guidance about venture capital.
To compensate for the long-term commitment, investment institutions expect to receive very high returns on their investment. Therefore, venture capitalists invest in companies that have the ability to quickly repay a high level of debt – as in the case of a leveraged management buyout.
Venture capitalists typically exit the investment through the company listing on the stock exchange, selling to a trade buyer or through a management buyout. Their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically 3 to 7 years after the investment. Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors capital/
Selecting an investor
AVCAL represents most venture capital organisations in Australia with its Directory of Members providing basic information about each member’s investment preferences.
Before selecting a venture capitalist, you should study the particular investment preferences set down by the venture capital firm. Often they have preferences for particular stages of investment, amount of investment, industry sectors and geographical location.
Once a short list of potential venture capitalists has been drawn up, it is a good idea to contact the firm and request a copy of their publications to clarify the investments they favour. Finally, when choosing a venture capitalist, you should consider the additional value that the venture capitalist can bring to the company. These skills may include industry knowledge, fundraising, financial and strategic planning, recruitment of key personnel, mergers and acquisitions and access to international markets and technology.
What does a venture capitalist look for when investing?
Venture capitalists are considered higher-risk investors and they desire a higher return on their investment. They manage the risk-reward ratio by only investing in businesses that fit their criteria and after having completed extensive due diligence.
Venture capitalists have differing operating approaches. These may relate to the location of the business, the size of the investment, the stage of of the company, industry specialisation, structure of the investment and involvement of the venture capitalists in the company’s activities. An entrepreneur should not be discouraged if one venture capitalist does not wish to proceed. The rejection may simply reflect the venture capitalists particular investment criteria.
A venture capitalist typically seeks the following: – superior businesses; quality and depth of management; corporate governance and structure; appropriate investment structure and an exit plan.
Size of Investment
On the whole, early stage investments require less capital than an expansion or MBO stage. There are a number of venture capital firms that specialise in investing in particular stages or MBO’s or MBI’s. While each venture capitalist will have their own investment range, as a guide, venture capitalists invest between $1 million and $10 million.
The Australian venture capital industry invests in a wide range of industry sectors. According to surveys undertaken the most popular industries are: – manufacturing, computer software, internet, distribution/retailing, technology services, business services and communications.
Some venture capital firms specialise in particular industry sectors such as manufacturing, bioscience or information technology. Many venture capital firms will actively avoid investing in sectors such as property, mining and farming, which are unstable. In Australia venture capitalists do tend to have investments in many geographic locations, focussing on a company’s attributes rather than accessibility.
Approaching the Venture Capitalist
Once a short list of appropriate venture capi6talists has been selected, an approach can be made. The firm will ask prospective companies for information concerning the product or service, the market analysis, how the company operates, the investment required and how it is to be used, financial projections and questions about the management team. In reality, all of the issues noted here should be answered in the business plan.
The Business Plan
Venture capitalists view hundreds of business plans every year. Your plan must therefore convince them that the company and the management team have the ability to achieve the outlined goals within the specified time.
The length of the plan depends on the circumstances but as a rule, it should be no longer than 10 pages. It is important to use plain English – avoid jargon and generalisations.
Essentials for your business plan
This summarises your business plan and it is vital to give this significant thought as it may well determine the amount of consideration the investor gives to your proposal. It should be clearly written and powerfully persuasive, yet balance “sales talk” with realism. It should be limited to no more than two pages and include the key elements of the business plan.
Provide a summary of the fundamental nature of the company and its activities, a brief history and an outline of the company’s services.
Explain the company’s product or service in plain English, especially if it is technical. Emphasise the competitive edge or unique selling point. Describe the stage of development. Consider the following: – scope for a second-generation product; technological advances/redundancy; legal protection such as patents.
In this part of the plan you need to offer a description and analysis, including a realistic “SWOT (strengths, weaknesses, opportunities and threats) analysis. Define your market and explain in what industry sector your company operates in while considering the following: – the size and development of the market; how your company fits in; competitors (strengths and weaknesses) and barriers to new entrants.
Describe the distribution channels and who your customers are. Explain the historic problems and address the current issues, such as risks affecting your business and the industry.
Outline your sales and distribution strategy including your sales force, strategies and unique distribution channels. Identify overseas market issues and resolutions. State your pricing strategy. Describe advertising, PR and promotion plans.
The Management Team
Demonstrate that the company has the appropriate management to turn the plan into reality. The senior team should be experienced in areas such as management strategy, finance and marketing, and their roles should be specified. The abilities of each member has should be explained and an organisation chart provided, including auditors and other advisers. A concise resume should be included for each team member, highlighting their track record in running, or being involved with, successful businesses.
Identify current/potential skills gaps and explain how you aim to fill them. Explain your controls, performance measures and remuneration for management, employees and others.
Consider an external; accountant to verify this part of the plan. AVCAL has a range of corporate members who could help you.
Realistically assess sales, costs, cashflow and working capital. Produce a pro-forma profit and loss statement and balance sheet. Ensure these are easy to update and adjust. Assess your present and prospective margins in detail and explain the research undertaken to support these assumptions.
Demonstrate the company’s growth prospects over, for example, a three to five year period and present differ scenarios for the financial projections of sales, costs and cash flow for the short and the long term.
Ask “what if ?” to ensure that key factors and their impact on the finances required are carefully and realistically assessed – and keep the plan feasible. Relevant historical financial performance should also be presented.
Amount and use of capital
State how much finance is required by your business and from what sources (i.e. management, venture capital, banks and others) and explain the purpose for which each will be applied. Outline the capital structure and ownership before and after financing.
Consider how the investors will strategically exit the investment and make a return on their input. Possible exit strategies may include floating the company on a stock exchange or selling the business on to a trade buyer.
The process begins with the venture capitalist conducting a review to determine if the proposal fits with the firm’s investment criteria. If so, a meeting will be arranged with the entrepreneur/management team to discuss the business plan.
The initial meeting provides an opportunity for the venture capitalist to meet the entrepreneur and key members of the management team to review the business plan and conduct initial due diligence on the project.
This involves an agreement between the venture capitalist and management of terms of the memorandum of understanding. The venture capitalist will study the viability of the market to estimate its potential as well as looking at the competitors, entry barriers, niches, product life cycles, distribution channels and export potential. The due diligence continues with reports from accountants and other consultants.
Approvals and investment completed.
The process involves disclosure of all relevant business information and final terms can then be negotiated and an investment proposal submitted to the board of directors. If approved, legal documents are prepared. A shareholders agreement is prepared containing the rights and obligations of each party. This process can take up to three months or longer so it’s important to plan ahead for your business.
Buying a business
Venture capitalists can assist you in buying a business either by a management buy-out of the business you are running or a management buy-in of a suitable business in an area chosen by you.
Management Buy-Out (“MBO”)
A management buy-out is a transaction where a business is purchased by its existing management team with the help of outside investors like venture capital firms. It gives you the freedom to manage your business and a financial stake in the results. You would take control. The existing owners of the business might be attracted to this as a way to realise the value of their holding and step away from the business. This kind of opportunity is rare.
If you are a business manager and see an opportunity, your first step may be to approach the existing shareholders to see if they are willing to sell their company to you. Once you have reached an in-principle agreement with the shareholders and have the support of investors, you can move on. The transaction could be long and complicated, but it could also end up with you being in control of your own business as a manager and important shareholder.
Management Buy-In (“MBI”)
If you see a business that might reward a new investment and a new management team, you should consider a buy-in. In this instance, a manager or team of managers from outside the company finds the financial support to buy the company.
There is also a substantial amount of money set aside for working capital, to fund new growth. In many MBI’s, new managers take over the company to launch major new projects. The biggest factor in a successful MBI is management talent, which means your skill at putting the MBI deal together and achieving your aims once you gain control of the company. Potential investors will consider your direct managerial experience and your skills when they weigh up the investment opportunity.
Hit the ground running
As soon as you complete the transaction you need to start generating cashflow. Your challenge is not only to reduce debt the company has incurred but also to plan new investments that will achieve growth.
The most likely executives to succeed are those who can demonstrate a record of solid management and entrepreneurial drive. They need a clear vision to take an existing company and transform it, creating a new company with a much greater value. If that is you, then you should start planning your MBI now.
Stages of Development
All businesses have a “life cycle” that involves a number of stages of growth and development. Venture capitalists refer to these stages when making investments and you’ll need to include this information in your business plan. The stages are as follows: –
The company venture is at the idea stage or maybe they need finance for research and development. The entrepreneur’s resources usually fund this stage.
The company is being set up or may have been in business for a short time. Investee companies have completed the product development stage and require funds to initiate commercial manufacturing and sales.
The company is established and requires capital for growth and expansion. This is a period of rapid growth and the company will usually require several rounds of capital injection.
Management Buy-Out (“MBO”) Stage
These are funds provided to enable a current operating management and investors to acquire an existing product or business from a public or private company.
Management Buy-In (“MBI”) Stage
These are funds provided to enable a manager or a group of managers from outside the company to buy into the company.
Click the link for a copy of the article: – Venture Capital Explained
TEN TIPS TO AVOID BUSINESS FAILURE
We all want to be successful in business today! Sadly, that is not a reality for some business owners. Here are some issues (gleaned from the experience of some failed businesses) to avoid becoming a casualty.
Failure in business is no mystery. Over and over again, small and medium enterprises (SME’s) make near identical mistakes.
Up to 90% of SME’s make the same financial mistakes leading to high failure rates.
Many SME’s are only earning wages and receive no profit return for being in business. Often the cost of these mistakes would employ one or more staff members. Many of the problems arise from poor business planning.
The ten most common mistakes are: –
- Insufficient Capital. Most SME’s are undercapitalised. They do not have any buffer for quiet times or unexpected expenses. This problem is compounded when they don’t have arrangements in place with their bank.
- No business plan. Statistics show that top quartile businesses are twice as likely to have a written business plan in place. As the majority of SME’s do not have a business plan, they tend to be too easily distracted from the right strategic course.
- Tendency to work in the business not on the business. Many SME’s fall into the fatal trap of believing that because they are good at what the business does they will be good at running that type of business. They are so caught up in what they are doing, that they do not have time to manage the business.
- Inadequate Records. Too often the paperwork is left to last or forgotten. People cannot manage what they cannot measure. They can get into a lot of trouble with authorities such as the Australian Taxation Office.
- Lack of Profit Focus. Too many businesses do not plan for profits or adequate profits and tend to focus simply on survival. This leaves them with nothing in reserve or revenue to fund growth.
- Cash Flow Management. SME’s often get into trouble because they run out of cash. They do not differentiate between profits and cash flow and they do not understand the cycles that occur as their business grows.
- Inadequate Systems. Too many SME’s are run out of their owners’ heads. A lack of systems can cause differential standards and an inability to provide consistency within the business.
- Failure to Plan for Taxation. The average business is responsible for a number of different taxes with differing systems/methodologies for each. Failure to plan and manage these can put a company out of business.
- Inadequate Resource Management. Successful businesses manage their resources well. Profit simply flows from good management of resources such as time, people, plant and equipment and cash.
- Don’t Know their Break-Even Point. The break-even point is one of the most critical pieces of information for any business. It is only when a business owner knows this that he or she can make effective pricing and costing decisions.
Here is an 11th one just for good measure.
- Your Accountant. Too many businesses use their accountants only at tax time. The best way to handle complex financial pressures is to get an accountant’s advice on how to structure the business throughout the year.
Click the link for a copy: – Avoid Business Failure
There is always a tendency for SME businesses to discount their prices to gain market share. This is particularly evident when a “new” business commences operations and wishes to compete against an established business. If that is your view then you should read this article. There are better (and more profitable) strategies than “discounting”.
Discounting is one of the most abused practices in the business world. Too many businesses are seriously weakened because the real cost of the discount has never been calculated.
In the real world many discounts simply do not exist. Retail’s big boys use their carefully thought out “everyday low prices” strategy (EDLP) on certain categories of merchandise only. The approach is rarely used store wide.
Although tempting, discounting is really no substitute for adding value to products or finding more economical ways of achieving customer satisfaction.
Here is an example of the dangers of discounting.
Suppose your average gross profit margin is 35% but you have decided to discount by an average of 10% to meet new competition. How much extra business will you need to cover the drop in net profit caused by your discounting policy?
Let’s say your sales are $1,000,000 pa and your net profit is 5% of sales, or $50,000 pa. Your average gross profit margin is 35%. Your trading statement would look like this: –
|less Cost Of Sales (Variable Expenses)||$ 650,000|
|Gross Profit||$ 350,000|
|less Overheads (Fixed Expenses)||$ 300,000|
|Profit from Trading||$ 50,000|
You then offer a 10% discount across the board on all products.
Now here are the same figures after the application of discounts.
|less Cost of Sales (Variable Expenses)||$ 650,000|
|Gross Profit||$ 250,000|
|less Overheads (Fixed Expenses)||$ 300,000|
|Loss From Trading||($50,000)|
Discounting is fraught with danger for small business because they probably lack the financial strength to attack a competitor who discounts in some areas but maintains or enhances margins elsewhere.
For small business it is often smarter to turn it right around and – rather than discount – increase your prices and add extra value to your goods and services so your customers can see the benefit of doing business with you rather than a competitor who can only offer lower prices.
If all businesses put their minds to it they would discover some “value-add” mechanism/spin that could be quite inexpensive but which would add some real value to their business and be a lure to recurring custom.
Let’s say you increase your prices by 5% in order to add services elsewhere. Assuming sales volume is static, your bottom line (as per the above example) would be a profit from trading of $100,000 rather than the $50,000 loss from a 10% discount.
|less Cost Of Sales (Variable Expenses)||$ 650,000|
|Gross Profit||$ 400,000|
|less Overheads (Fixed Expenses)||$ 300,000|
|Profit From Trading||$ 100,000|
By instituting a 5% increase in prices, the resultant gross profit margin goes from 35% to around 38% and the net profit outcome is enhanced considerably.
Of course the assumption that is made is that both your Variable Expenses (“Cost of Goods Sold”) and Fixed Expenses (“Overheads”) remain constant in the example provided.
It is also imperative that correct Costing and Pricing strategies are both understood and implemented. Too many businesses today are of the view that if you mark something up by (say) 45%, that that equates to a Gross Profit of the same magnitude. No, no, no, no, no!!!!
A “Mark-Up” of 45% only equates to a Gross Profit Margin of around 31%!!!
Call me if you want to understand how to price your product for “Profit” rather than “Mark-Up”!!!!
Click the link for a copy of the article: – Disastrous Discounting
SOME FINANCIAL TERMS
Most start-up businesses are somewhat mystified by some of the terminology used by accountants and bankers. Here are some of the more common terms that are used today and which are defined. .
- Working Capital
Funds required for the business to meet ongoing costs and expenses. The working capital position is determined by taking the value of the Current Assets divided by the value of the Current Liabilities (from the Balance Sheet) and the result (as a rule of thumb) should be a ratio of no less than 1.5/2.0:1.0. This means that Current Liabilities are covered (in value) by Current Assets by a factor of 2 times. In monetary terms the dollar amount of Working Capital is determined by deducting the value of Current Liabilities from Current Assets.
- Current Assets
Items (with a monetary value) you own that have a life expectancy (maturity date) less than the 30th June of the next fiscal (financial) year. Generally less than 12 months.
- Current Liabilities
Monies you owe that have a life expectancy (maturity date) less than the 30th June of the next fiscal (financial) year. Generally less than 12 months.
Any debt with a monetary value that you owe.
Any item with a monetary value that you own
- Equity Capital
Funds injected by the owner of a business to enable operations to commence.
- Debt Capital
Funds borrowed from an external source (bank, credit union etc) to enable operations to commence.
- Fixed Assets
Items (with a monetary value) you own that have a life expectancy (maturity date) greater than the 30th June of the current fiscal (financial) year. Generally greater than 12 months.
Closely related to working capital. Items of value (assets) that are readily available to be converted into cash rapidly to meet the business short-term cash requirements.
Click this link for a copy: – Financial Terms
CHECKLIST FOR PRUDENT FINANCIAL DECISIONS
A financial planning colleague of mine – Sam Gray from Incito – has provided a checklist of items that you need to consider when making a financial decision. The checklist asks the questions that will assist in you determining your investment strategy. I offered to place the article on my website as it contains some very pertinent and practical assistance. I commend the checklist to you. Please download a copy by clicking the link below.
Are you afraid of public speaking as much as I once was?? Petrified was the word that came to mind when I was first required to provide a public speech!! I overcame those difficulties by application of a couple of simple strategies.
I just had to overcome that fear as in business today you need to be ready to be available to promote your business as and when required and sometimes that is in a public environment.
What strategies did I initiate to help me address that “scary feeling” when asked to speak in public?
Subject Matter and Practice
If you are comfortable and confident with the subject matter of your presentation, that is the best way to overcome the issues.
I learnt this by doing some lecturing (initially) in the staff training section of a Bank and more recently with a Registered Training Organisation.
I have discovered that (in the circumstances I have mentioned) that as the presenter, I (generally) know more than the attendees and hence if I slip and stumble a bit they really don’t notice it!
However, the word “practice” is important and you must be prepared to put a few “dry runs” in before you ascend the public stage! A “mirror presentation” is still a good way of overcoming any issues as you can see your facial expressions and eye movement very easily!!
I can’t overemphasise the need to practice, practice and then practice some more!!
Did I make mistakes when I first started?
My word I did and some huge clangers too!
But as I practiced more and more I became very comfortable with the subject matter and developed the confidence I needed.
Imagination and Passion
Use your imagination to see” in your mind’s eye” a perfect presentation! Get excited about the subject matter as that really boosts confidence and helps in giving you the ability to speak fluently.
Be very genuine as people can pick up a false presentation very quickly. Always tell the truth and avoid embellishing the facts.
Know Your Audience
Always endeavour to tailor your message to the specific needs of the people attending. Do some research to try and determine their interests, habits etc.
There are varying methods of “breaking the ice”. I have used different methods here. Telling of a tasteful joke; undertaking a group puzzle and relating an anecdote relative to the topic. There are others and you need to find one with which you are comfortable.
Opening and Closing
Both these sections of any talk are critical. If you don’t have a good opening, you have lost the audience before you start.
If you don’t close strongly with a call to action or similar the talk may be in vain. Always relate your closing back to the opening so that continuity is seen (and heard) in the audience.
I tend to seek questions from the audience (in the appropriate environment of course) as I found this is a good way to think on your feet and provides spontaneity.
The risk is that someone will ask you a question to which you may not know the answer.
I have never found that a problem as I simply respond (if I don’t know the answer) that I will find out and let them know. The methodology to do that is either via email direct to the enquirer or via a general note on my website.
Don’t bluster around pretending to know the answer if you don’t! It will detract from all the good work you have done in the presentation.
Most audiences appreciate honesty and will not think poorly of you if you admit that you don’t know a response to a question BUT always be prepared to follow up that enquiry and get the response requested subsequent to the presentation. And do it promptly!
Click the link for a copy of the article: – Public Speaking
I AM NOT AN SME YOU PATRONISING ***!”!
This is an article by Robert Craven who is a keynote speaker and author and is based on his UK experience. I found it interesting and reckon it also has some application to small businesses in Australia. I claim no authorship.
I think it fair to say that we are all needy of a reminder about time management!! I am constantly challenged daily to maximise my time so that I can generate invoices! If I procrastinate (and I am inclined to so do) I am not being productive. No production = no invoices = no inward cash flow!!!
Are you a procrastinator?? Do you have difficulty in maximising the time in your business? Are you less than effective in getting all tasks done each day?
If you answered YES to any of the above, you are probably in the top 80% of the business population!!! In other words, the majority of us!!
I think it is fair to say that we all have very good intentions each day of ensuring we manage our time effectively and efficiently but sadly that doesn‘t always occur.
Some tips that may help you are: –
- Track your daily time
Although that can be a pain to do it is a very good way to see where you spend your time each day. The majority of accountants and lawyers do it this way as they have to track their time in 6-minute intervals so that they can charge their time accordingly. I am not suggesting that you go to that extent (unless you want to) but perhaps in blocks of 30-minutes might be helpful.
- Keep your eye on the game
We all lose focus so we need to bring ourselves back on target if we begin to “drift”! All of a sudden “useless” tasks become “good fun” and drain our productive time. Don’t be a “slacker” as it will drain your competitive edge. If perfectionism is holding you back, then recognise that “good enough” is a kind of excellence in its own right and is a step towards improving your performance.
- Daily Action Plan
Have a daily Action Plan. A “To-Do List” or a “Timetable” as that will help you develop good time management techniques. Prepare it first thing in the morning or indeed, the night before.
Sadly, you HAVE TO develop the discipline necessary to do it but it can be most rewarding when you do. Naturally, once having established an Action Plan, it is critical that you follow it. Set time limits for each task so that you stay on track. A good idea is to have a large wall clock in front of your work desk so that you can monitor how you are going.
Maximise the use of electronic means to ensure you are always up to date. With the myriad of smartphones and similar there is just no reason why appointments, tasks and to-do lists cannot be in your hands at all times.
Try and clear your emails as a first task in the morning. If there are some matters that need to be addressed promptly then do so as part of your Action Plan. Once cleared, turn the email programme off until you have finished the initial task(s) in the Action Plan, then turn the programme back on (say) on the hour to download the next lot of messages! Then repeat the process of dealing with them.
I cannot over emphasise the absolute necessity to be disciplined in your approach to your business activities. Take your eye of the ball and you will fall in a heap. If you see yourself slipping into a procrastination mode, stop and give yourself a mental kick in the rear end! Always set daily goals as to how much of your Action Plan you can get rid of in that day.
- Know Your Deadlines
Make sure you have a good grasp on any deadlines that apply to any task. Ensure your calendar or organiser clearly sets out the deadline dates and times. If there is a deadline it always looks completely professional if you can meet that timeline. Obviously, some circumstances occur where that may not happen and if that does eventuate, you must keep your client fully in the picture.
I always endeavour (once having been given a deadline) to try and finish the task prior to that deadline date as that looks most efficient in the eyes of your client and augurs well for repeat business!
- Learn to Say “NO”!!
I have had to apply that to my business operations as well. There have been occasions in the past where I had to (in spite of it not being in my nature!) to turn work away as I was just unable to meet the client’s requirements. If I do have to say no, I always tend to refer the enquirer to another of my colleagues rather than just slamming the door in his/her face!
There is just no point in taking on work when you are under pressure as that will lead to an increased stress level and we can all do without that!
- Focus your Attention
We all tend to be easily distracted and very quickly! Close off any Internet browsers that you don’t really need to have open. Keep your mind in gear and on the job. Is your phone ringing a distraction? Turn it off! (Make sure you have a Voicemail service though!) SMS messages continually beeping? Turn it off? Skype or similar interrupting you? Turn it off! Does Facebook, Twitter and Linkedin take away your focus? Turn them off!
- Reward Yourself
Managing your time also means scheduling some downtime to relax and recharge. Plan rewards as soon as you complete a task. Shout yourself a cup of coffee (outside of the office!) when you have achieved one of your mini goals for the day. It is also a great idea to get out of your chair every 30 minutes or so and stretch the legs and to get a breath of fresh air. It’s amazing how that invigorates.
Click the link for a copy:- Time Management
KILLING YOUR BUSINESS WITH DISCOUNTS
Most retailers are of the view that if they discount their prices they will achieve a greater profit as a result of increased sales. That is not (necessarily) the case. This article by Andrew Carter provides a good insight to the discounting trap. It complements my article called-“Disatrous Discounting” (see above) and both are worth reading.
Are you one of the many retailers offering specials and slashing prices in an attempt to attract more customers and increase turnover – or are you at least thinking about doing it because it appears everyone else is?
Most business owners offer sales and discount prices in the false hope that this will bring more customers through the door and increase sales which will in turn more than offset the amount lost by discounting the price. This is simply not the case.
If you have a 50% profit margin on the goods you sell and you offer just a simple 20% discount, then you actually need to increase sales of that product by 67% just to make the same profit. Do you really think you will get an extra 67% in sales by offering that sort of discount?
As the fear of long-term recession grows stronger, many stores are offering far greater than 20% discount, with 30% to 60% being common. A 30% discount with the aforementioned 50% profit margin means that you need to increase sales by 150% to make the same profit.
If you have less than 50% margin then the situation becomes a lot worse. At just 40% margin, the same 30% discount on goods would require a 300% increase in sales volume to generate the exact same profit. So, in most case discounting simply doesn’t work.
That doesn’t mean that you should never discount – there are several situations when I actively encourage it.
If you (or your bookkeeper) were to go through your records and look at the total value of sales made and divide that by the total number of transactions, you would end up with an average value of how much each customer spent in your business. It would be prudent to also determine how many items the average customer purchased per visit. If you know that the average customer purchases say 5 items per visit and spends on average $150 on those items, then you may consider heavily discounting (even taking a small loss) on a particular item in order to get the customers through the door who will then purchase other items which are not discounted.
If you have a database of customers who have bought from you before, then contact them with a special offer. Again, value adding to an existing product is better than discounting, but a small discount to entice a repeat customer is acceptable as marketing to them is less expensive, has a higher response rate and the discount you give them is less than the cost of having to obtain a new customer.
Getting Rid of Old Stock
I see many stores where some of the stock is outdated. It has been left sitting on the shelf far too long. In some cases even the box looks faded. You have to get rid of this old stock. You need the money from the sale of these products to buy new products that turnover quicker. Also the shelf space the old stock takes up is valuable real estate that can be used by newer products that are in demand.
I would try finding other ways of selling that stock before I considered discounting. For example, can you value add other products or services to that old stock in an attempt to make it look more appealing to your customers? If not, see if there are similar items on eBay or other auction sites or houses and move the product through there. If neither of those strategies work, then you have to lower the price. Get whatever you can for it. Just get rid of it and put whatever money you receive into better selling products.
Now more than at any other time in your business life it is important to get your stock control in order. Too many businesses I deal with have maintained a higher level of purchases for their decreasing sales.
Conduct a stock take. Determine which stock you have had the longest or is the slowest moving. If you have several brands of the same product, consider reducing to just one brand. You can then advertise a sale on those other items. Once your stock levels are under control, the easiest way to not just survive but grow during this time is to actually put your prices up!
Before you decide that this will never work, know that with just a 10% increase in your prices, at a 40% profit margin, you can afford to lose 20% of your customers and still make the same profit – and it is incredibly unlikely that you will lose anywhere near that number of customers.
Think about it this way – for every dollar you now make, does it allow you to purchase as much as it did a year ago? The answer would of course be “no”.
Putting Up Your Prices
Everyone around you is putting their prices up. The groceries you buy now cost you more than they did a year ago. The goods and services you continue to use cost you more than they did a year ago. By not putting your prices up you are actually giving yourself less buying power than you had previously. Discounting prices on your products only exacerbates the situation.
Here’s the problem though. If you now know that businesses around you have put their prices up and you then put your prices up, all you’ve done is kept up with where you were before. So now, you’re not going backwards, but you’re not getting any further ahead either.
The biggest resistance I get is, “well, if we’re 10% higher than all of our competitors on price, we’ll lose all of our customers to them.” You simply won’t. If you have marketed yourself correctly, ensuring you and your business stand out and you attract the right type of customer, then they will come to you and pay the price listed.
If not, then you need to look at your current methods of marketing (if any) as they are not working. Far too many businesses look at marketing as an expense and cut back on it when times are tight. Marketing is an asset to your business and you should actually be doing more of it now, not less.
Despite the economic doom and gloom, you need to actively start setting your business up for what you want it to be in the future and start properly marketing it that way, instead of reacting to the current marketplace and discounting prices just because everyone else seems to be.
When deciding which direction to take your business, remember that people do pay more for: –
- For a ready-made solution, and
- To give themselves more time (or at least avoid doing tasks they hate)
Think about yourself. How many times have you been at a petrol station and purchased chocolates, soft drinks etc? Now you know there’s a supermarket no further than ten minutes away, you know you can get those items for literally half the cost of what you just paid for them at the petrol station, but it’s convenient for you to buy goods whilst you’re there. People will pay up to 100% more on some products for convenience. You know that yourself. You’ve done it. People will pay for a ready-made solution. Does the product or service you offer alleviate somebody’s problem? People are prepared to pay more money for that.
The other thing to keep in mind is that people are prepared to pay more money for anything that gives them more time. How many mowing services exist now that weren’t around ten years ago? Rather than spending the time yourself to do the lawn mowing, you’re prepared to pay someone to do it and you’re prepared to pay more than it would probably cost of your own time. People are prepared to pay more money for the service, if it gives them the time to do what they want to do.
You’ve got to push the price envelope. Raise your prices now. You may lose some customers, a very small percentage off the bottom, but the ones you keep are worth far more to you. The reality of just raising your prices is that most people aren’t even going to question it, especially in tougher economic climates like we’re having at the moment. Everyone else is raising their prices. Your customers just expect you to do the same. I doubt you’ll even be questioned about it.
Click the link for a copy of the article: – Killing Your Business With Discounts