By Bruce Gleeson and Mark Marlow
If you are ill or suffering pain, you are likely to go and see your doctor. The illness or pain will either not be too serious, and the doctor will prescribe a remedy, or it may be more serious but because you went to see them early there is more chance of recovering from what ails you as attention to the problem can commence straight away.
In many ways, such example also applies to your business. Early identification of a problem and putting a strategy in place to address issues of concern will hopefully see the business back on track with no long-term damage. It is much more difficult to address problem/s if they have been allowed to continue for a long period in the often-forlorn hope that things will fix themselves or if I just get that big sale everything will be ok, or I just did not know. It might work out but, in my experience, having a successful business is more about planning than hope.
Importance of a Plan
How can we identify problems before they become too difficult to overcome? An excellent way is to plan, monitor and benchmark your business. Ideally the preparation of a business plan to follow and check back too as your business progresses is an ideal way to identify issues and opportunities on a timely basis. Any business plan should be conservative, based on realistically achievable goals. All businesses need a business plan of some description. It can be an extremely detailed and thorough plan prepared in consultation with your trusted advisors or a more simplified plan that sets out your business goals, strategies on how to meet those goals and budgets which you revisit and compare to actual regularly. There are plenty of reputable on-line tools to help get started here. See www.business.gov.au
Owning the Plan
For a plan to be successful you need to own the plan and review it regularly to see how you are going. It should not be fixed, rather flexibility to adjust your business strategy when required is the key. The basis for any start up business is to plan to make a profit, i.e., can your idea or dream work, if it can work, how long will it take to work and what investment is needed to get to that point? For an existing business it helps to identify changes that will enhance the business and identify and hopefully turn around any issue/s that are impacting the businesses bottom line. Many businesses prepare business plans so they can get finance from a bank, but it is not much use if you are not a believer in the plan submitted.
Vital Elements of Plan – particularly for SME businesses
The first concerns the business funding and includes associated aspects such as:
- what is the likely cost of your products/services?
- what is the profitability of your products/services?
- what level of sales do we need to break even?
- are our prices competitive? and
- preparing and maintaining a cashflow budget so that you are aware of the timing of cashflows.
All too often we see that SME businesses do not truly appreciate ALL costs associated with the provision of their products/services.
The second aspect concerns strategic planning and includes aspects like:
- what is our market and can we be competitive in that market?
- what key resources do I need both internally and externally to succeed?
- what about unplanned events (ie director health issues etc) and how will the business respond; and
- what external factors and how a change in government policies might affect my business that were not there in the past.
Considering the above and regularly reviewing them will help identify key aspects a business needs whatever the stage of its life cycle.
Some Takeaway Examples
Recently, we were asked a question that often comes up, “my sales growth is good, but I have no money in the bank”? This is an example of how you might have identified this problem early from the first steps mentioned above. The business owner came to us to discuss the possible need for a Voluntary Administration (“VA”).
Upon closer review of the business, it ironically might have needed a VA in the future if the cashflow issue was not addressed as if sales suddenly grew rapidly it would create a bigger funding gap in the business that would have been more difficult to fill had the owner not acted now and addressed the issue before it became critical.
The solution for that business was made easier because the cashflow problem had been identified early, the issue being that it manufactured and imported parts from overseas for assembly and sale to clients here in Australia. The terms of trade were such that the business was paying 100% of the costs well before any income was derived from the product they offered. There was profit in the sales but no money in the bank because as soon as they were paid, they needed to invest those funds received and more (if demand for orders grew) in procuring the next order.
Trade debtor finance was discussed and implemented with the assistance of the external advisor so that the business had cash in the bank much earlier than when invoices were due for payment from sales made, thus the company was able to leverage its debtors to put funds into their bank account much earlier to meet the growing demand. It became easier to place forward orders as the cash was in the bank to meet the terms of payment for the next order, the negative cash cycle was turned around with suitable finance that worked for the business, it did not need an insolvency appointment. Had the business owner ignored this issue, it is likely supplier payments would have fallen behind making it difficult to fill growing orders, remittances for GST, superannuation guarantee and PAYG etc. may have been overlooked to fund supply which may have led to the need down the track to make a formal insolvency appointment.
Whilst it would not be impossible to turn such a situation around via a VA restructure and a proposal to creditors, the early recognition of the problem made the solution more palatable and less expensive for the owner and the vital stakeholders in the business continued to get paid. Whilst this solution might be viewed as a short-term fix as the cost of this type of finance can be quite high and can impact on profitability, in the short term it provided much needed cashflow and helped improve the business value to enable further sales growth.
A small retailer we came across was a great salesperson and a likable person who was adept at getting sales. They were was struggling to make ends meet in the business and sought advice on whether they should invest a further $100,000 into the business as they were about to settle the sale of an investment property he owned.
After reviewing the business’s available financial information, we determined and recommended was that the investment would likely be a poor one as sales would need to increase by about 170% for the business to break even based on its current pricing model. They determined from this analysis that they could not achieve this and subsequently placed their business into voluntary Liquidation. Perhaps if they had taken the time to put planning tools in place to give them the ability to monitor the performance of the business, they may have discovered the business was not viable much earlier and would not have injected the significant amount that they had previously invested in the business.
None of us are experts on everything, the most successful businesspeople rely on trusted advisors to help them in their business. Planning and monitoring of the performance of a business on a regular basis allows the identification of problems. Then a decision can be made on how to address where your plan is deficient and adjust it to put you back on track. It is also likely your plan will assist you in understanding your business on a deeper level and keep you focused on what is critical.
If you would like to have a further discussion around any of the above, please don’t hesitate to get in contact with us.