2011 – what next.

For what they are worth here is what my clients and I see as the 2011 landscape.

1. Property prices will come back in Melbourne. My real estate clients are already talking about a lack of real buyers and this will drive down the market – particularly at the mid to higher end.

2. Interest rates will move through the early part of the year. I personally believe that the RBA has ben too dramatic too quickly but they have preempted a course and I believe that this will continue. Undoubtedly the floods through Queensland and Victoria will have an inflationary effect and this will result in the RBA responding with rate moves.

3. Small business will suffer through tightening margins and unpredictable sales and cash flow cycles. Be conservative in your 2011 forecasts and you will reap the rewards as good planning gives you an edge over your opposition.

4. The ATO will come down hard on small business this year. We have seen a real focus come back on small business and our ability to negotiate with the ATO is far more difficult. If you are behind in BAS or your income tax returns then get them together and get them lodged. The ATO is showing a real dislike to small business behind in lodgements as this is the method that they use to collect the funds that they require. Non lodging taxpayers are in for a real roller coaster through 2011.

Tougher conditions do bring opportunity. Your competitors will not be performing as well as they had previously and if they do not have the funding behind them or the planning in place then their clients could easily become yours. Plan your strategy well and you could reap some very strong rewards throughout the year.

Let me know your thoughts on what 2011 may bring you and your business.

Ok we have explored the strategic and budget process that every business should investigate, over the last couple of weeks. But what I really want to know is whether you believe that you have a clear understanding and ultimately control over your business – from a financial aspect?

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.

Whenever I talk budgets to my clients I see the fear on their faces. Be it because they don’t want to address the issues, they don’t want to plan for fear of failure or the long held connotations that the process is all too difficult – I really don’t know.

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 that you have worked through your strategic plan its time to turn your focus to what that all means for the business.

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.

Following on from my last post lets look at the rest of the factors that make a good accountant.

A good accountant:

4.. Can think strategically.

Setting up a complex structure that allows profits to be diverted to the Caymen Islands is fantastic if you stay under the ATO radar, trust that your accountant knows all the issues and you actually make profits – but otherwise is irrelevant.

Every bit of advice needs to be aligned to the strategic direction of your business and a good accountant will understand what this is and where its is going. You need to engage with your accountant about where you see the business going and force them to engage in return. If they don’t – move them on.

5.. understands that paying tax is actually a good thing.

Yes this is true. If you are paying tax then this means that you are making profits – which is far better than losing money! Advising you to put your excess cash flow into a great pine plantation in the Tasmanian heritage listed rain forest because this will incur losses that will reduce the tax you pay this year – is bad advice – full stop.

Sorry but I cannot understand ever giving away money in the “hope” that it will eventually be made back by a massive sale price when some act of god doesn’t occur in 10 years. Yet I see this advice all of the time. Be careful and ask yourself – what is in it for the person advising to do this?

No business decision should ever be made – or not made – based on the tax implications. A business decision is right if it meets the right criteria for that decision. A good accountant knows this and advises accordingly and will assist you to test the criteria that you have established and ensure that the decision is good. They will then advise the best strategy to minimise the tax consequences – the full story.

6.. is a member of a professional association that provides clients with some protection.

And there are only 2 that matter here – CPA Australia and the Institute of Chartered Accountants. The others are pretend professional bodies.

These 2 are good because they enforce your rights. If you have an issue then they will force compliance on your behalf from the member. Too many times I see clients have issues and try to leave an accountant only to have their files held by the accountant until all bills are paid. Professional CPA and ICAA’s will not do this.

7.. knows your type of business.

There are many people who will tell you that “business is business and whilst I don’t have any clients in your industry I am sure that I will get a quick understanding of your affairs!”

I have a client who is a large mortgage broking company. Their previous accountants had no practical experience in the industry and in support of a large loan, provided the bank with a budget which was fundamentally flawed in its assumptions and was completely unachievable. When the achievements were extremely south of the budget the bank asked for the loan to be repaid as the business has failed to meet expectations – yet is very profitable, never misses a repayment and is worth more today by 40% than when the loan was taken out.

I have personal experience in working with mortgage broking clients and together we have put a budget together that shows the correct performance of the entity. A new bank has accepted the projections and we have refinanced. In the past 2 quarters we have met all requirements and the budget is in line with actual results – not with a 112% variance.

Nothing I did was rocket science. I have practical experience in working within the industry of my client and have strong relationships with some bankers. This allowed me to get together a picture of what the business is capable of and more importantly what it could deliver.

Conclusion.

Basically I believe that your accountant should be trusted advisor capable of assisting you to run your business. They are not there to make themselves wealthy – although this will happen of they do it well – and should be looking at the long term journey with you. They should be experienced in business and in your industry and they need to know how to listen to your issues and give you advice that leads to results.

Small business, in Melbourne where I operate, is tough. It is competitive operates on tight margins and requires a good selection of advisors to ensure that it can win the ultimate game. It does not need over zealous, non value providing bean counters who don’t help.

I was at a NYE party last night and the inevitable question was asked of me: “So Colin, what do you do?”

After a bit of discussion about what Bentley Partners does and what I do within the company, the topic transgressed to the qualities that make a good accountant. After the jokes about bean counting, brown cardigans and thick rimmed black glasses had all been laughed at, there was actually a couple of people who wanted a serious answer.

So in terms of answering that question a little more coherently than I did last night the next few posts will explore the 7 things that I believe make a good accountant for small business in the Australian and in particular Melbourne, small business area.

A good accountant

1.. knows her skills and does not operate outside of those skills.

An accountant with 10 years of TAX experience should not be putting cash-flows and budgets together for you. They are good at getting your taxation affairs in order and that is it. At Bentley we do not look after your tax affairs. We are specialists in getting your business operating correctly. We are skilled at identifying the drivers of your business and how you can use that information to get better profits, better cash flow and better long term value.

If your accountant tries to do all of these then they are selling you short and you should investigate other alternatives.

2.. has experience in business.

This may seem a little bit of an oxymoron however it is the single most critical skill that an accountant must have.

No-one can possibly understand the practical implications of a particular piece of advice without having been in business. Running an accounting practice is not business – except in a professional services sense. Too many accountants have a theoretical “understanding” of the right thing to do but not practical experience because they have only ever been accountants in public practice.

I recently was interviewing some accountants on behalf of a client who had selected 3 for a shortlist. I created a practical case scenario which I then asked each applicant to provide a possible solution for.

Two were from one of the Big 4 accounting firms in Australia and the other had spent time in a smaller practice and had also been an accountant in a good sized food manufacturer. Both of the Big 4 answers included reviewing operational costs and the majority of the right steps culminating in eventually making some people redundant.

The successful applicant however advised that the business needed to make decisions quickly, that staff had to be terminated as this was the single biggest cost faced by the company and then he proceeded to recommend a series of out placement processes to assist the affected staff to find suitable employment.

This answer was right because he had looked at the people implications of the decision. The outplacement services provided employees with aa step into the next stage of their life and the employer with the belief that he was doing everything he could to help his staff. The solution also showed that he had been in the situation before and knew that this was not the time for reviews but rather needed decisive action to save the business.

Experience is a very hard thing to get from reading a book or from working in an environment where you do not get your hands “dirty”.

At Bentley we work from our clients offices because it shows us what is happening at the coal face. Sitting in the sales team area of my real estate clients allows me to see who is doing the things necessary to get the next listing and who isn’t. We feel confident by doing this work we will be in a better position to advise clients of the implications of running their business and the required decisions that need to be made.

When was the last time that your accountant brought their laptop and worked from an office in your building?

3.. advises you according to the businesses needs and not their hip pocket.

At Bentley we have bookkeepers helping small business all over Melbourne with a particular emphasis on real estate, law and medical practices.

It is therefore in our best interests to engage our bookkeepers for as long as possible. We however have a company policy, which is enforced at our partner meetings, that we will always advise our clients to find an internal bookkeeper when the differential between the cost and value is removed. In practical sense should the annual cost of our bookkeeping services for a client exceed $48,000 then we will recommend that they get a staff bookkeeper.

We have a number of real estate clients who have previously outsourced their accounting functions and paid an abnormal amount for these services. Our largest client spent $165,000 on “administration” fees in the year before we took over. That client now has a bookkeeper on staff and we provide additional management services to cross check the work and to ensure that we provide value. At month end we provide a bookkeeper to assist with the overflow of work and to ensure that it is completed as quickly as possible.

The result has been an $85,000 saving to the business but with a dramatic improvement in the quality of the information provided which has allowed us to look at the strategic direction of the business and focus the business on its KPI’s.

Too many accountants simply look to bolster their fees from their clients rather than advising them of the correct strategy for the business.

We will look at the rest of the factors in the next post.