So what is the current range of multiples, what is the retention requirement and what are the factors that effect rent roll values.

What are the factors that effect rent roll values?
In no particular order these things effect the market value of your rent roll:
- the quality of the management.
- the locality of the rent roll. The closer to the CBD the better.
- the current management fees.
- whether the agent or agency is going to continue to operate post the sale.
- the number of multiple landlords on the rent roll. Rent rolls with owners who have a number of properties increases the risk of losses as a numbers of properties could be lost by the decision of one person..
- the timing of the last rent reviews.

The current retention period appears to be 3 months and 10% of the sale price. That would give me comfort that I should be able to retain the majority of properties if I was buying.

So what are the current multiples?

The range is 2.75 to 3.5 times the annual management fees received. I have personally been involved in 2 very recent transactions – one at 2.85 times and one at 3.5.

The differences in each were immense. In my opinion we got to 2.85 very cheaply and sold the 3.5 over the odds. And this is the point I suppose. The value is really only whatever the purchaser is willing to pay. You can pay me or whoever whatever you like to value the rent roll but if there is no deal then the is no deal.

So as I discuss with all of my clients that are looking to sell something do as much as you can to minimise the opportunities to reduce the value. So work on each of the factors listed above and change the ones that you can effect and ignore what you can’t and you will achieve a great result – assuming there is a buyer!

Once of the questions that was asked was – should I have my accounts audited?

It is a question that I am often asked, and in most cases I say yes. Whether Bentley are doing the work or someone else an audit is a very good step in ensuring that the accounts are being prepared correctly and also ensure that things are not being “swept under the carpet”.

My Melbourne based client is not a service business, i.e. a lawyer or real estate agent, and thus relies on the work of others to get their products sold and also to get their accounts prepared. They do not know what is the correct accounting procedure for an transaction and rely on the financial controlling skills of their accountant to ensure it is all treated correctly.

But who is checking the accountant?

In reality no-one is. You have to have total faith that the advice that you get is correct. Now what would you do if your doctor said that the cough that you have had for the last 7 months is nothing to worry about. You would try his remedies but eventually you may – and more often than not will – consult a second doctor to confirm the diagnosis.

An audit is the exact same procedure. I encourage my clients to get an audit because it ensures that they are happy with the way things are happening and provides support for the work that we do. A review will cost you a very little – maybe $1000 to $1500 and the peace of mind gained is worth fair more than that. You don’t need them every year, in fact I encourage my clients to get them whenever they feel like it. On average every 2 to 3 years meets their needs.

I am confident in our systems and accounting treatment of transactions that I have no fear in the audit process. I encourage it because the piece of mind provided ensures a better outcome for everyone. In my experience however there are others out there who fear the process. beware of these people!

I am very much an advocate of the philosophy that suggests that business success will flow from specialising in and mastering your core strengths rather then trying to do everything.

Lets take accountants.

I believe – and am yet to be proven incorrect – that experience provides a background to achieving success that a text book simply cannot. Hence I do not prepare tax returns (OK some but only for a select group – read every member of my family). Yes I have studied the topic, read extensively and understand the concepts – I am an accountant after all. But I have not prepared enough tax returns to consider it an area that I would look after for a client. Hence I refer this work out to a select loyal group of partners who look after this for my clients.

What staggers me is the amount of “business coaches”, accountants and advisors who proclaim to be management consultants however have never been in a senior executive role in a company or don’t have an MBA, and who still claim to be capable of delivering the service to their clients.

Sorry guys, but if you have not had practical experience in managing a business through a crisis, restructuring a division, or operating at a hands on level within an organisation then your advice is worth didly-squat!

Lets look at this practically.

I met an accountant this week. For the last 30 years he has been a tax agent. No mean feat I agree. However he also claims to be a management consultant, undertake business improvement reviews and provide business advisory services.

Why? What qualifies him to do so? What experience does he have?

You know the answers here – he shouldn’t, none and none.

Compare this to a close associate of mine. 20 years of experience in large listed entities as CFO. Successful restructure and float of 2 business divisions. Documented track record of business improvement success stories from taking companies in administration back to successful trading, to expanding a small retail group from 5 to 9 outlets and improving bottom line from 8% ROI to 23% ROI in 3 years.

Who is more experienced?

The point of this is that in your business you can sell every brand of widget available – but why not decide on 3 and make sure you always have stock that is accessible, deliver within a time frame and follow up afterwards to make sure that the widget works as required.

Your bottom line will be much healthier with the latter approach – trust me – I am NOT a Management Consultant.

Well the short answer is – get compliant. All my clients whether it be my Real estate or medical practice clients – whether in Melbourne or OS know that they must be compliant and that if they are then we can negotiate our way around numerous minefields.

In all honesty there are two very distinct issues here that you need to address.

1… Lodge your activity statements.

2… Pay what is owed.

You will always receive a better hearing from the ATO if you are compliant with the reporting issues associated with business and themselves. They like to know what is going on and even if you cannot pay I implore you to at least lodge your statements on time.

Now when it comes to payment in my experience the ATO is a very receptive body to understanding the cash flow issues of business. They will attempt to create a payment plan that meets yours and their needs and are more than willing to extend the timeframe to pay so long as you comply with your obligations on an ongoing basis.

But this is where most businesses come up short. They enter an arrangement and then break it. Now whilst they do not admit this the ATO will provide some leniency again here – but after the second time you are in trouble. Your issue will be escalated past the lower levels to areas that are much more demanding.

Consider this in your own business.

- Client x owes you $2000.
- Your accounts person/bookkeeper/husband/wife calls them and they agree to pay next Friday.

- That day arrives and you are not paid.

- A further phone call then gets a promise for payment on Tuesday.

- That deadline also passes.

- Your accounts person/bookkeeper/husband/wife then tells you about the issue and you call the client. Your discussion is a little more forthright and you demand payment.

- The next deadline passes and the details get sent through to your debt collector who wanders around to your clients premises and promises to remove your clients toe nails – with some 50cm secatuers! An actual true story.

Now the ATO have to be careful about using secateurs however they will get nasty sooner rather than later. However communicating with them is the best option you have of getting a working resolution in place.

Of course your accountant, or someone like Bentley Partners, who are experienced in negotiating with the ATO can take that in hand for you but making the payment is your duty. Make sure it becomes an unconditional process.

The Federal government has recently passed some legislation that will effect a lot of small businesses and has dramatically effected my business. The new Tax Agent Services Bill was passed which means that anyone providing tax or BAS related services must be registered with a new Statutory authority in order to provide those services.

The legislation is very good in my opinion as it will force bookkeepers – in particular – to be educated, follow a code of conduct and be known to the relevant authorities. It will provide a much better framework for businesses to more fully engage a bookkeeper. There is a complaint process and all bookkeepers must now have PI insurance. This is excellent news as it will weed out unqualified bookkeepers who should not be operating.

However it does come art a cost.

An industry that is already under all types of time constraints will lose a core level of providers and increase demand for the remaining bookkeeping fraternity. This will increase the cost of outsourced bookkeepers. Many small businesses will struggle to cope with this increase – if they can get bookkeepers at all.

Practically it has implications for many businesses. A real estate agent that provides management of client properties and provides a monthly statement which is in compliance with the GST legislation and charges a fee for that – via the monthly management fee – will have to be registered. In most cases they will not qualify – so what happens in this case?

An employee bookkeeper working for ABC P/L who then does work for XYZ P/L – another related business in the same building – and whose services are charged to XYZ via a management fee – needs to be registered. But they won’t qualify. Not sure this was the intention of the legislation.

For my business we have some practical implications that were not envisaged. We now have a partners meeting this week solely to try and work out a solution. Thank you to the advisors to the Federal Government for that one.

It does however highlight a significant point about business – whether small or large. Sometimes there are things that affect your business which you cannot control. No matter what planning you have done or how good you are at converting a lead into a sale – if the rules change then you have to adapt your business model and move on – or go out of business.

Small business is much better at doing this than big business – so that is the one upside for us – but it is still annoying. So whilst you may have your business humming along beautifully, beware that there are other factors afoot that may change your model and force you to adapt – but at what cost?

Every business has a set of expenses that relate directly to the revenue derived. They rise and fall depending on what level sales are at and they identify the costs that go into directly attaining that revenue.

If you are a real estate agent then the commission paid to sales people and property managers is part of this expense item. If you are a law firm then the costs of your staff who directly bill clients is part of your COGS and if you are a medical practice then the doctors employed or contracted are also costs relating directly to your revenue.

The problem is that very rarely do I see this set up correctly. People often just lump these costs in with their overheads. So why is this such an issue?

Well your COGS and associated gross profit shows you very quickly how you have performed in your core activities. If your gross profit has always been 30% but this month it is 50% then something is wrong and it needs review. Geting this margin right is critical for EVRY business. Slightly increasing your sales price or reducing the core expense items here will return a greater amount of gross profit that may very well add straight to your bottom line.

3. Your 5 key expense lines

The 5 biggest expenses in your business are irrelevant – unless you can control them. Yes you may be paying $100,000 in rent but if you are locked into a 5 year lease then what changes can you make that will reduce the cost – very little.

You need to know what items in your expenses are the largest that you can effect quickly if business conditions change. That way you can review your supply contracts and prices and ensure that you are getting the best deal. Furthermore, if you realise that you represent a really good annual sale value to your supplier then you may well have some leverage to realize a better buying price.

4. Do you have enough working capital?
The question that I usually get asked when referring to working capital is: what does it mean?

Working capital is basically having enough cash coming in to meet your financial commitments. That cash will be in the form of cash and assets that can be easily turned in to cash – so debtors and stock. Without this key ingredient in your business you will not be successful.

So how much working capital is the right amount?

There is no right answer here and every business will have their own “right” level. Again a budget constructed properly will highlight what you need. You need enough to allow short term issues or unforeseen glitches to be covered. I would normally like to see somewhere between 6 and 12 weeks coverage but some businesses may need only a couple of weeks as their sales will be virtually guaranteed.

If you do not know your working capital requirements then you need to – and fast.

5. The value of your Business.

Everyone in business should be continuously thinking about their exit strategy. Do not think that just because you are ready to sell that you can do so whenever you like. It is a long drawn out process in most cases and needs planning and forethought to ensure you get the best result.

You cannot do that without the knowledge of what your business is worth at any point in time. Now businesses are worth only what someone is prepared to pay today. No valuation method provided by a broker or valuer will ever be 100% accurate. In fact most brokers that I have worked with are well off the mark except in specialist industries.

However knowing what businesses sell for in your area is important and you should be measuring that. At the very least use a conservative multiple on your earnings – say 3 to 5 times net profit for the year, and track that over time – probably once a quarter in enough. You will then know whether you are in fact moving towards your exit strategy or not.

Conclusion.

The things that i have outlined are by no means the entire list of tools that you need to have a handle of in order to have control of your business. There are many more around cash flow – such as debtors days and stock turns – that should also be measured. However the above shows that you are looking at what your business is doing and how you can effect the outcome. These will probably create a thirst for more key data but in every business in Melbourne the above is certainly attainable.

If I printed off your profit and loss statement and your balance sheet and asked you 5 questions could you answer them?

• What is your annual turnover and what are the drivers of your sales performance?
• What is your gross profit in dollar and percentage terms.
• What are your 5 highest expense lines – that you can directly control?
• Do you have enough working capital for your operations?
• What is the value of your business today?

Now if you are really honest and answered correctly, I would guess that most of you said no to all of those questions. I rarely come across a potential client who knows this information or can locate it it quickly in their financial position. In my opinion you need to know these off the top of your head because they are key to how you are performing.

So how do you get to that level? I amm glad you asked!.

Firstly you can’t get there unless you have the right information. This means your bookkeeping must be complete and current. If your bookkeeper can;t complete the work in the time that you have allocated then find out why and make some changes. You cannot correctly review old or outdated data and expect that to provide the information that you need. if your accounts are not current then get them current.

1. Turnover:

Turnover is simply the revenue or sales that you have achieved in the last 12 months. If you had prepared a budget then you would know this information – both actual for the last 12 months and what you expect to get in the next.

Revenue does not include “sales” of reimbursable expenses unless there is a profit or margin made on these. As an example, in Melbourne virtually every real estate agent that I come across has the advertising that they have “sold” to a vendor in their gross revenue. As the legislation only allows you to recoup the actual cost of the advertising, and as every agency that I have come across makes a loss on this area, then this item should be part of your cost of goods sold and not sales. Your revenue is only the commission earned from your sales and property management functions.

Now the factors that drive your revenue are much harder to understand. This is where a detailed budget helps as it forces you to look at how you get sales. A law firm looking at its revenue will find that the majority of their work comes from a few sources – namely referrers, LIV website, previous clients, advertising and transactional based activities. So if your business is transaction based and we are in a GFC then you may have some issues and need to investigate how to get other work in.

If you do not know where your work comes from then how can you review and implement changes to it that will effect the outcome?

If you do not have a budget then print out a list of your transactions over the last 12 months, or a list of clients and their sales and note down how you got that business. That will quickly show you some trends that can be worked on.

After this has been completed you will have a rudimentary list of the sources of your revenue. You then need to decide how these drive your business. E.g. if your work is referral work then how are you tracking this? Do you have a plan to meet with, chat with and reward each referral source? Most people don’t!

Your sales drivers are the key drivers to success for your business and must be clearly identified and strategies put in place to work on them. Without knowing these you cannot possibly have control over your business.

In our business we spend a great deal of time getting this area right. We work with our clients to ensure THEY identify and understand how they get sales. It is a detailed process that involves a great deal of questioning and critical analysis of the business’ activities – however the rewards are significant.

……Next Time: the other factors.

So lets cull that belief right here.

Setting targets is good – it allows you to address issues that need to be addressed.

Too may clients I have – from real estate to legal practices – all have issues that need to be addressed. They don’t go away they just get compounded – so lets look at them and deal with them.

And failure – whilst not a desired outcome – can highlight the fact that changes are needed and force you to address the corrective actions required.

Budget 101

The budget that I have prepared (here) will take you 1 hour – maybe 2. Its not going to solve all of the problems of the world but at the least forces you to predict where you want to be in 12 months.

Now some points that you should consider when preparing your budget.

• When you estimate your revenue – take 25% off. My experience is that people who first start to budget, do so with such optimism that they can just never achieve the outcome. That just puts you in a defeatist attitude and doesn’t let you use the budgets power. If you believe that you can get that magical $1m turnover this year well sorry but unless you have a real plan to get there you will fall short. Be conservative and drop it back to 700 to 800k and make sure you get that.

• Now with your expenses. Look at your profit and loss statement and use these as a starting guide only. Then add an additional 15% as a miscellaneous line. This gives a buffer that can be played with as you go, but also covers things that the P/L can mask**

• Your expenses should be looked at critically and assessments made to ensure that you have the right control over these. Tip: Don’t be tight! A big mistake is looking at an item – say Stationary – and saying ” why the hell did we spend $5,000 last year”. Then you enforce a policy that all stationary purchases must go through you from now on. Be critical of the cost and look at reducing them but you still require the items so make sure that they are available.

Outcomes:

This budget will achieve the following:

• It will set a revenue target that you will benchmark your performance against.
• It will set an expense target that you will monitor and make spending decisions about where your actual results are compared to the budget. As an example if your printing is already at budget then printing a new set of brochures is an issue. Find the cost from another line item – say advertising – and allocate the cost here so that you have the brochures required. Then don’t go over your advertising budget.
• A good budget will show cash flow requirements and allow you to forward plan how you will meet your commitments.
• It will get you focussed on your business and you will work damn hard to meet your expectations.
• You will have a method of evaluating the impact of decisions before making them. And the decisions will have a target that they will need to be met to determine success.

Yes I believe in the budget – but not at the expense of running your business. It is a great tool to allow you to plan where you spend your valuable and finite resources and if used properly gets outcomes. I personally re-forecast the budget whenever there is a significant change in circumstances. It ensure that it is current and vibrant. Make a copy and amend the numbers as required. Then report against both.

But most of all have fun. Look at what you want from your business and set the processes needed to get there.

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** Your PL can often be misleading as to what is actually occurring. An example – say that you look at your annual accounting fees and the cost is 12,000 – so $1,000 per month. However you have engaged them to do some monthly management reporting and the cost has risen to $1,800 per month. Your budget will be wrong if you just look at the base average for last year.

Now I am very passionate about the budget and its ability to direct your decision making process. It is the one tool that allows you to make informed decisions about where you will spend your limited resources. It is critical in planning how to tackle the various projects that you have identified in your strategic plan and ensure that you get the best results.

So how does it do that I hear you say.

Your budget, if constructed correctly, will identify when you expect your revenue to flow into your business. Every business that I have seen has a degree of seasonality with its sales. For example:
- Real estate agents major trading period is the spring.
- Lawyers are very busy from February to July and then again from October to Mid December.
- Doctors are very busy through the winter months.

As these periods will see the greatest amount of cash flow coming into the business, it is imperative to know when they are as they will determine what needs to be done to ensure the greatest amount of success.

Now I see many businesses simply say that they will get $2m this year and divide it evenly throughout the 12 months. Sure you can do this, but how do you track your performance? If your budget is for January to December and your strongest months are in June to September, how do you know whether you are on track, if for 6 months you are behind your budget? You simply can’t. So take the time and look at the last two years of your trading and see when the sales occur. Then set your budget up with this seasonality implemented and you will get a better outcome.

Once the revenue is in place, you put into the budget your fixed costs – the ones that cannot be effected easily – rent, telephone etc.

Then you look at your variable expenses and the projects that you want to get under way and look at when you can afford these.

And wallah – you have a budget.

Now I specialise in preparing these and can roll one out pretty quickly but this should take you no more than two to three days and a few two hour bursts. On Thursday I will have a basic template that you can use to at least create a basic budget – which is better than none at all – and try to predict where you will be in 12 months time.

We will also look at some of the pitfalls of budgeting and answer some of the common questions that I am often asked.

First, lets look at a quick set of definitions to clarify what I am talking about.

- Strategic Plan – this is a very high level look at what you want to achieve form your business. There are no specifics just statements and directions that need to be made. I try to keep this is pictorial form which shows in a snapshot the things that are important to the business. An example will be available next week after we review a few more steps in the process over the next couple of posts.

- Business plan – this is a 3 to 4 page document which details the key steps to achieving the goals of the Strategic Plan. You can go on forever with these but my plans include the following headings which we work through:
1. Executive Summary – what will be achieved.
2. SWOT Analysis – this is the section where you look at what you are good at what you are bad at, what potential is there and what can stop it all in its tracks.
3. Marketing Strategy – how you will sell your products/services.
4. Competitor analysis – who should we be watching.
5. New product/service delivery – anything that changes the offering.

- Budget – the financial implications of your strategic and business plan.

I usually keep the strategic and business plans to 1 page. Why – because that is the most that you can successfully work with as it summaries the directions into a picture format. There are specific sections for each area and they are short sharp key points that allow you to focus on getting the results. There is normally an expanded document that underlies the operational aspects of the plans but this depends on what is required. Usually the plans create a set of projects that must be worked on throughout the year to ensure success.

Once you have created the SP and BP then really you just need to review them throughout the year. It is critical that you review your success against the predictions that you made and fine tune it all with anything new that comes out and requires attention or consideration.

The New Year is a perfect time to look at each of these plans and ensure that they are moving in the right direction. I will put up a template for a business plan and strategic plan called a Strategy map on Thursday and we will then look at the appropriate steps required for a budget.

Planning is a critical phase of your business’ operations. Yes I can point you all to the research showing that businesses that plan are more successful. In my experience it is true because it sets a benchmark and target that people try to surpass. People are competitive beasts and when you sit down and put in paper the expectations it is amazing how people succeed at delivering.

If you haven’t done any of this before then take some time and work through the template and see what happens – you never know it may actually be rewarding!