A lean business is a healthy business. Keep fit year round

Diets are temporary by their very nature. They last from point A until point B, they are a means to an end. What’s more they are usually the second last resort before far more drastic measures come into play. The same applies in our businesses when we say we’re slashing costs, tightening the belt and other ways of whispering, “stay calm but… we have a cash flow problem, people!” At best it relieves some pressure in the short term, but at worse it signals to your team, key stakeholders and your family that things are not looking good. Just like when someone goes to extraordinary lengths to achieve significant weight loss in an unfeasibly short period of time. Don’t do it!

Professional Bodybuilding and Accounting

Yes they do belong in the same heading but only in this context. Pro-bodybuilders used to bulk up in the winter, consuming otherworldly amounts of calories and supplements and then a couple of months before the big contest day they would literally starve themselves – almost to death! Okay, regardless of your thoughts on this particular sport, there came a time when things took a turn for the better from a year round health perspective. Instead of dieting quite so viciously for three months in the year, a number of athletes decided to stay relatively lean year round. Sure, they didn’t look quite so massive in the dead of winter but when it came time to get into “contest shape”, they only had to lose a few kilos instead of say 25+ kilos. Far more sustainable and easier on the digestion… I assume.

Avoid financial whiplash

All that is to say that looking at the year ahead, you could and should set your objectives and the KPIs that will get you there. Then take a long hard look at the resources needed to make it all happen. Do those resources include, weekly give-aways, lavish lunches at the finest restaurants in town and hire car upgrades? No? Then eliminate them. You might miss some of the perks and what we sometimes call profit-killers but their absence will also stop you from having to unexpectedly wrench on the budgetary handbrake. That’s how people and the businesses they run get hurt.

Year round conditioning is the key and success depends on you staring hard at your objective and consciously deciding to eliminate costs that do not get you closer to those goals. Be ruthless at first and set yourself a baseline. Understand that this will be as difficult as it gets and then you can plan to add a sensible layer of fat. But that should come in the form of performance related rewards as opposed to perks that simply breed entitlement – which doesn’t help anyone.

A lean business model is one that efficiently delivers more sustainable profit and time for you to enjoy your life and loved ones. And it looks good year round.

Compound interest cuts both ways. Kill your debt before it kills you.

There’s a lot to be said for the miracle of compound interest and how it can turn modest savings with small regular contributions into a sizable nest egg that hatches holidays, jet skis, long term financial security and more. But as with most things, there is another side to the big, cuddly compound interest bear. That’s the side with the fangs and claws that tear away at your savings and ravage your profits and yes, your lifestyle too.

If, like me, you liked but were shocked and amazed by the man versus bear fight in the recent release, “The Revenant”, you will understand what I mean. I will admit it’s fun to get all cinematic, exaggerate and characterise debt as a marauding grizzly bear but the truth is that there’s nothing fun about working hard for the banks – unless you’re actually employed them. And that’s exactly what’s happening when you don’t attack your debt as if your business life depended on it because, without exaggeration, it just might.

Alright, I mentioned how making regular deposits can work with compound interest. With the right plans in place, it is not at all unreasonable to suggest that you will double your money over a reasonable period of time. Flip that on its head and think about that “easy to apply for, even easier to get approved” business loan for $20K. In our private lives, we might shudder at the thought of a 4-figure credit card debt with its ravenous interest rates but we’re somehow okay with paying the bare minimum on a business loan with another zero or two on the end of it. Expect that debt to have doubled by the time you’ve paid it off using minimum repayments.

But what about opportunity costs?

Yes, almost forgot about high school economics. If I pay off my debts quickly, I won’t be able to afford office upgrades right away and it’ll eat into my profits for the next 12 months. You’re right. But that sounds like the introduction to a good news story that you’ll be able to tell and retell for years. You know where I am going with this. If you were to stick a fork in your $20-$40k debt within 12 months say, you will have paid your establishment fee and some other costs of doing business with your lending institution of choice. You will have also paid the required interest (up to a year’s worth) and the loaned amount.

Forget the costs and focus on the opportunity. Over time that debt would have cost you another $20-40k on top of the amount borrowed! The compound interest bear will have been feasting on your interest repayments (PROFITS!!!) for years and years denying your business the opportunity to build a war chest, build a better product or service… (how about this one?) build a better life for your loved ones.

Compound interest on debt is a dangerous beast that stalks your business, steals your profits and murders long term growth. It’s a kill or be killed game you’re playing when dealing with debt. So act quickly and FINISH HIM!!!

Why don’t you test drive an accountant that can help you get the most out of your business both now and the years to come.

The Sheeran School of Business Success. Because talent is very rarely enough

It’s becoming increasingly obvious, even to those that have joined the party a little late, that Ed Sheeran is a very successful singer songwriter. I heard somewhere that he paid his dues by never refusing an opportunity to play and actually played 300+ gigs one year while travelling throughout his corner of Europe. BUT… that’s not necessarily why he is successful. Sure it accounted for notoriety, even fame and of course, talent had a lot to do with being heard but the secret may be the people he’s got around him. I’m not even talking about the entourage like, say the guitar technician, promoters and roadies. I speak of the numbers and money people.

It’s been proven again and again and again that you can teach yourself to sing beautifully, compose songs and play an instrument but doing all that and handling all your own financial affairs? Well, it’s said that Ray Charles achieved that successfully but surely he was one of a few rare exceptions.

If Mr Sheeran ever opened a business school, I would think it’d be a mistake, but if he did, I’d like to think he’d look at his amazing career so far and inspire us with the following lessons:

Do what you love – obvious
Work at it tirelessly so you can get from good to great – harder to do but makes sense
Get some trusted experts in the necessary fields around you – roadies and stuff, yup
No, I meant CFO, Accountant, numbers people, advisors – right, of course… why?

Here’s where it all goes so horribly wrong!

There are countless, singers, sportspeople, actors, lottery winners that have made a lot of money and not too many years later, grace the (web)pages of TMZ with their finances in tatters. Gone are the Lamborghinis, incredible homes and flashy clothes. Right now, I’m actually thinking of a particular basketball player who earned more than $105m during his time as a pro and 5 years later filed for bankruptcy. Wait, what? Ok some of that would be due to corrupt practices and that is really, really unfortunate but even in those cases, having good people with even better advice around you proves invaluable.

We’d like to think that prolific and (we hope) enduring artists such as Ed Sheeran continue to understand the value of what they do and how it will shape the future of those they care most about. If that’s the case, you could assume that a CFO type is weighing up risk versus reward on financial growth opportunities, accountants are ensuring that only the right amount of tax is being paid out and trusted advisors have told Ed not to branch out into hard core death metal music… or business school administration.

If you recognise that a trusted team of numbers people will keep your business on song, do contact us to chat or test drive an accountant that can help you.

Thinking BIG will save your business pt 1 – think structure, save $$$

Entrepreneurs who want to change their world and possibly even rule it, constantly think big picture and act accordingly. They paint their destiny in bold brushstrokes and display it for all to see. This isn’t for everyone of course. Some prefer to stay out of the limelight and achieve some form of success on the smaller commercial stage and leave it at that. Either way, business is business and there are ways to help set you up for success regardless of what success and/or satisfaction looks like to you.

Ignore the “get back in your box” crowd

Don’t grow too big too fast, stick to what you know, stay in your lane, don’t overstretch, carve out a little niche for yourself, go it alone – sole trader’s the way to go. These are pieces of advice that have some merit but too often they limit the thinking of the ambitious and stunt the natural growth potential of small business owners. The truth is that even if, for whatever reason, you as a business owner wanted to focus on a certain clientele, keep your operations small and limit your exposure, thinking big will help you, protect you, maybe even save you.

There are dozens of reasons why thinking big(ger) structure-wise, will help even the smallest operator in a niche market. Here are just three to start with:

Flexibility – you may want to stay small or start small and that’s fine but if you remain open to the possibility of growth, when opportunities comes around (and they usually do when you least expect it), you’ll be ready – if you want to be. The last thing you want is to recognise the opportunity of a lifetime, only to find that you are structurally ill-equipped to take advantage. Be ready!
Protection – the right structure means better protection. What I mean by that is that a Company structure provides better protection for you and your personal assets than when starting out or remaining in a sole trader structure. A lot of people see the increased costs of setting up a Company versus the low cost of a sole trader and make their decision based on initial outlay. Unfortunately, this may leave them open to actions that may put at risk their house, car, profits… Speaking of which…
Tax minimisation – sole traders can often find themselves in the unenviable position of handing over half their profits to the tax man – unnecessarily. By thinking big and structuring your business accordingly, you protect more of your company’s profits and pay only 30% to the tax man.

One of the keys to sustainable success in business is knowing what you want to achieve and how, remaining open to opportunities and being equipped to protect your profits. Thinking big will help achieve that. Think about it.

Avoid the “vanity” lease and preserve your profits

Every Friday we just want to stop the world for a moment and give you a couple of real tips to think about that will make a real difference to your business and in your life.

There is a fine and potentially very expensive line between securing the right workspace for your business and ego-driven extravagance. At the polar extremes it’s pretty obvious what represents a sound investment and what’s just plain silly. However the grey areas are where even well-meaning and sensible business owners can fall under the subtle spell of extravagance. Here are a few tips to help you spot the difference and avoid getting the stink-eye from your business, your associates and your accounting team.

From the garage to the… penthouse? Don’t do it!

A lot of businesses start out in a friend’ basement, a garage with a desk or even from a bedroom with a laptop and a borrowed printer. Eventually, and hopefully sooner rather than later, the commercial entity will have grown to the point where a work environment that reflects the progress made and where the business may be heading is required. Sooooo… half a floor on the 30th floor of a CBD office tower. Sweeeeet!

Okay, not many people would go that far. That’s the extreme that I mentioned. But plenty of people go ahead and lock themselves into a pricey lease based on the euphoria of recent success, overconfidence and a near lethal dose of not knowing their numbers. One or two big contracts in the bag and we are heading to the top… (tire screech)… (crash). How do you avoid that collision with reality?

Tip: work out your business’s income, expenses (including tax, paying down debt but excluding rent), the amount you get paid for both working in and on the business and a contribution to your profit war chest. Essentially your “magic number” minus the rent. Okay, now what do you have left at the end of your typical month according to your calculations? That number is what you can afford to pay for commercial space.

Once you have that figure, you might find that your brand will be represented just as well working from a co-workspace, a smaller office, something closer to the 10th floor maybe…

In short, when thinking about locking yourself into a long term lease that looks fantastic (especially from the private balcony that leads to the roof or that cool loft, open plan in the heart of the creative district) – think long, think hard, think again.

Tip: If you’ve done the numbers and all ledgers point to that big office with the extra storage space and cool reception area, shop around for a lease that doesn’t lock you in beyond the foreseeable future if possible. Nowadays there are a number of purpose and brand fit spaces for different types of businesses that have flexibility – you just have to ask.

Remember, you may think that visual impressions are the be all and end all (or at least very important) but what really counts is your bottom line.

And that’s the bottom line! Have a great weekend.

Breaking even is the new Breaking Bad. It seems okay… until…

If you survived year one of your business ownership and you’ve broken even – well done and congratulations. You’ve made some massive personal, financial and emotional investments and on paper, you’re no worse off than you were when you started. In fact, if you think about it, you’re better off because that ten, twenty or forty thousand you outlaid has also come back to you so again – well done!

Let’s fast forward to the end of year two. Still breaking even after putting in the hours, embracing the blood, sweat and fears. And you’ve broken even again. You’re in a better position than many and a far better position than some. But let’s face it, after say, three years of breaking even, maybe breaking even doesn’t seem as magical as it did at the end of year one. In addition, you’ve now had three years of just squeaking by, not a lot of growth but a whole lot of practice at accepting that you’re “not quite getting ahead of the game”. In simple terms, this is bad. And it gets worse because it can bring a subtle shift that gets you to set your sights just a little bit lower. Also bad.

Things are broken and it’s all bad

We humans are masters of adaption. Ask any anthropologist or physiology expert. Humans adapt and change to protect themselves from harm and that absolutely includes psychological distress. Coming to grips with breaking even and worse still, accepting it as not only normal, but embracing it as a year on year goal means that something is definitely broken and that’s worse than bad.

How long can you tread water?

That’s something you hear kids ask each other a lot down at the local pools during a hot summer. It’s probably fun competing against your friends and family in your own pool or at the aquatic centre. There are lots of laughs to be had when you feel your arms and legs getting tired (I’m not the strongest swimmer in the world) and you start to struggle as you start heading towards the shallow end for safety. However treading water in the open and often choppy seas of small business is no laughing matter. You can only tread water for so long before things become very grim.

Chances are that if you have dipped a toe in the uncertain waters of small business, you’ve also decided that you are someone special, that can create something brilliant, so your family can have something wonderful. That’s huge, exciting and inspirational, but it doesn’t sound much like treading water or even breaking even.

Don’t get me wrong, there will be times when breaking even will be a good result: early stage expansion, trying a new product extension or service and so on. But breaking even should never be the endgame. Not for you and certainly not for your family.

6 Reasons to book your holiday right now!

You’ve heard the saying, “make hay while the sun shines”, right? It means that you should work as hard as you can, for as long as you can while the money is still on offer. It makes some sense but workaholics and people who feel they have to keep pedalling hard to keep their business afloat, comfort themselves with this saying when, for the longest time, they’ve not been able to:

Spend any kind of time at home with the family
Invest some serious recuperation time in themselves
Take a holiday

Let’s look at that last one. The holiday. When we know there’s a holiday on the horizon, perhaps it’s just a month or two away, we tend to initiate a bit of a countdown clock in our heads. Sometimes we simply respond with a knowing nod when someone says, “how long to go now?” Perhaps you shrug and mumble, “Aw, soon, I guess.” But you know and it’s good to know exactly how many days until your well-deserved break. It’s important to you, your business and for your family. Why?

Because you deserve a break

“Hard work is its own reward.” Have you heard that one? Again, there are elements of truth but even the hardest of hard-core, hard-driving business owners recognises that there has to be more to work than more work. Recognising that you and your business have done well is just step one. Rewarding yourself with a getaway is the big one. Take the leap!

It’s a deadline – get your ducks in a row

Deadlines work. When a motivated person is given a mission and a deadline, you’ll find they’ll work harder than ever to accomplish it in full and on time. Your departure date is your deadline. If you’re anything like us, you’ll have some goals in mind that need to be achieved before you take-off/ sail away/ start trekking. Take advantage and use that pre-departure, nervous energy to get everything sorted.

Because you need a break

Work life: it’s a long season made up of many games. Sportspeople rest after every game, don’t they? Why are you trying to play a whole season of games, one after the other with no break? Keep your body healthy, your mind sharp and your motivation high by taking regular breaks and of course, the all-important, all-enjoyable getaway.

It’s good to put distance between you and your business

You’re too close, you need a fresh set of eyes to properly assess your numbers and formulate and understand your next steps. No one said those eyes can’t be your own. They can be, just not yet. You just need to walk away for a time and then come back for a second look after a first look at Mt Fuji or Uluru or the Caribbean, for example. Come back with some perspective and a clear head – you’ll see aspects of your business much more clearly than when you last looked.

A good gap analysis works best without you

When you leave for a short break to sip umbrella drinks, does the business disappear into a huge “you-shaped” hole? If you mean everything to your business because you are doing everything in your business, you may be in trouble or at the very least, handcuffed to your job. Time away will show you where the gaps are, where you need help and what needs to happen to redress the situation.

Cancellation policy

The chief reason you need to act now and book those flights is so that you’re locked in and committed to leaving it all behind for a short time. Most airlines have some fairly unattractive fees and charges for changing a flight or cancelling altogether when departure is quite close. Lock yourself in. Commit to spending some awesome time away with friends and/or family… but do it now.

Arrivederci!

Share your brain or feel the pain. How to avoid insulting business valuations and low-ball offers

It’s a disheartening fact that many people have a fabulous business, with a healthy turnover but routinely get slapped in the face with low valuations. It can be very disappointing and from time to time it can be insulting. How does this happen? What’s going wrong in a business that appears to be going so right – and has done for many years?

Would it be rubbing salt into the wound if I said it was all your own fault? No?

It’s all your own fault! (I mean that with love)

It may not be by the way but I’m about to outline an all-too-common trap. Okay what are some of the obvious things an investor, a potential business partner or even a co-owner would look at before handing you a duffel bag full of cash for a slice or all of your business? Profit? Definitely a top 5. Operating costs? Sure, that’s important. What about the magic number – how much has to be earned to ensure that some debt is paid down, expenses are covered and ownership gets their fair share? A must.

And of course sustainability – how long will the business continue to produce the necessaries? Is the future bright or bleak? What needs to be done to ensure that your business meets expectations well into the future? If the answers to those questions depend largely on you, there’s a problem and it needs to be addressed.

The most attractive businesses to buy or buy into and therefore attract the highest multiple, are those that will keep ticking along, producing the numbers that matter, regardless of your presence and direct input. Think about a donut shop (delicious) and how it might work. Machines automate the process, staff run the shop and man the front of house, you work on the brand building side and drive the culture. Great, so what happens when you take a two week trip away with the family. No significant change to process, protocols, profits? No? Great. An interested investor may well consider an offer that looks at your annual profit and multiplies (hence multiple) it by say 3 to arrive at a figure. That’s not a bad start.

But this one is. Same donut shop. However, you yourself mix the dough to a secret recipe handed to your grandmother by a visiting gipsy. It’s done by hand and only after you yourself have received the secret ingredients under cover of darkness from an unnamed courier, mixed the dough and cooked the treats, can your staff go ahead and sell the sugary delights. This is a huge red flag because without you, the business will absolutely fail.

This is an extreme example but there are numerous versions of this scenario in evidence today. Unfortunately for them, some owners don’t want to or can’t bring themselves to share the knowledge they’ve locked up in their brain.

Three ticks to maximise the value of your business

Keep in mind that nobody wants to buy into a problem. You can almost see a potential buyer or investor pushing back from the table when things start looking complicated or there’s an obvious over-reliance on what’s locked away inside you. Here’s what to do:

Document your processes and procedures be the product, manufacturing or back-office related. It may take a while but a complete and simple “how to” guide for your business is literally, worth its weight in gold.
Empty all your knowledge, proprietary information and commercially sensitive difference makers into a storage device with the promise of sharing it with your trusted team. Ensure security of course, don’t be reckless but understand that with trust comes value.
Invest time into training up a 2IC, someone who can run things pretty much as you would in your absence. Remember, as unique and irreplaceable as you undoubtedly are, what’s the use of owning a business that only works if the person that’s away on holiday is at the helm?

Regardless of whether you intend to sell or whether or not you’re looking for investors, this represents sound business practice and it’ll stop people from hurting your feelings as well.

To remain calm in the face of negotiations and be pleasantly surprised by valuations that reflect the true worth of your hard work, do contact us to chat or test drive an accountant that can help you.

How much do you want for your business?

Every Friday we just want to stop the world for a moment and give you a couple of real tips to think about that will make a real difference to your business and in your life.

Now there’s an interesting question to ponder over the weekend. If someone made you an offer to consider, for the sale of your business, what price would you find acceptable? If someone asked you to “name your price”, how many zeroes do you think you could scrawl on that napkin and not have it screwed up and thrown back in your face. Or even worse – have them shake your hand so quickly that you couldn’t help but feel that you’d undervalued your years of hard work.

Having a realistic (and accurate) grasp of the value of your business is as important as knowing how much money you are going to make or need to make over a given period. If you have hopes, dreams and aspirations for your family, your business and how you get to live your life, you simply have to know what your business is worth at any one time. And not just because an investor with millions burning a hole in their pocket may be eyeing of your commercial enterprise with growing interest. It’s important to know what you’ve got, how far you’ve come and how long until the next milestone sparks party-poppers and high fives in the meeting room/kitchen/workshop.

Let’s see what your business might be worth

There are a number of ways to value your business. There are calculators online with varying degrees of difficulty, formulae both easy and hard to interpret and professionals out there whose job it is to value and assess businesses. That’s a lot of info. Again, keep in mind that understanding what you’ve got is absolutely necessary, so it’s worth going through a little bit of brain strain.

Tip: Start with the simplest of simple formulae.

Profit x Business Sale Multiple = Business Value.

So an accounting firm that make $100,000 Profit could sell the business at a multiple of 3.5 times profit, making his business worth $350,000.

The other side of the coin is worth more – wait, what?!

Yeah, that’s right. So on the one hand, your standard reporting protocols (BAS for example) tell you what you brought in and what you paid out. However, a particularly good quarter that is not followed by a compensating drop off, may actually increase the value of your business so long as your profit figure has increased as a result. In this case, it works like a multiplier effect or even compound interest in some ways. However, if you don’t know what your business is worth, you won’t be aware of potential increases in value (for sale or otherwise).

If you’d like help understanding and potentially increasing the value of your business, we can help you. Have a great weekend.

Profits are down soooo… do I take a pay cut? The “business $100 note” can save you from yourself

Every business faces a period when revenue drops below expectations for a time. Hopefully this occurs at the beginning of your ownership journey, not the end. It’s at this time that knowing your numbers will provide comfort and reasons for optimism, or indicate that you are sailing far too close to the rocks! Either way, knowing your numbers, listening to what they are saying and taking action should see you back in calmer waters.

Sounds soooo simple but… it isn’t. “Overcorrection” means that you’ve seen the danger, you’ve reacted and taken action. Too much action. And now you’re facing danger again. If you’ve ever been skydiving and the safe landing zone is quite small, you’ll understand what we’re talking about, particularly the consequences of overcorrection.

I want to be correct without overcorrecting

Correct! And to ensure that you don’t go too far with say, budget cuts or frenzied reinvestment plans we use a humble(ish) $100 note. Your business $100 note. Let’s start with a few easy ones. Of every $100 that flows into your business, how much is assigned to:

Paying the tax man
Your pocket in the form of your pay
Profit, which is the jewel in the crown of your business

If you don’t have the numbers to hand, your business might just be costing you an arm and a leg because too often owners take a pay cut when they don’t need to and shouldn’t. Unfortunately, ignorance is not an excuse when it means that you’ll be bringing less money home to the family or spending more time away from them. Okay, lecture’s over, let’s look at a typical example.

We find that a lot of businesses split their $100 notes like this:

Profit – $0.30
Owners pay – $11.00
Tax – $15.00 (and this really does depend on your structure and the advice you receive)
Operational expenses – $73.70 which in some cases can’t be helped but surely it’s worth a closer look.

Replacing the numbers above with the numbers that are specific to your business is an important step towards reducing the correct costs. Isn’t it strange that we’re in business for ourselves, hoping to provide for our families and when push comes to shove we blindly start hacking away at costs (including profit and our own share) without seeing the full picture. That has got to stop.

Look closely once again, at your $100 note and its break up. When push comes to shove, perhaps it’s the tax component, the company car use and premium delivery services that come under the spotlight for a month or two.

Your pay, your profit and your time should remain sacred. Take note.