Author Archives: Lisa Townsend

About Lisa Townsend

Lisa Townshend is a Director with BDO Central (NI). She has extensive experience assisting both small and medium sized entities with a wide range of advisory services. BDO Central are Chartered Accountants and Business Advisors, with offices in Napier and Palmerston North. BDO is able to support clients with a comprehensive suite of accounting, information systems and HR services. The firm is an independent member of BDO New Zealand and part of the global BDO network.

Moving to the Cloud isn’t enough

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Over the second half of the last decade we have seen the progression and growth of the tech sector all but explode and stamp its claim on the world’s business landscape. These developments have revolutionised the way that businesses operate and streamlined many of their day to day processes.

Accountants may appear to be on the endangered species list in this era of rapidly-increasing automation, but we’re finding that as Business Advisors we are adapting to the changing landscape, working diligently to stay ahead of the curve and thinking differently to stay relevant in order to assure demand for our services in the future….

The business landscape has gone through such significant changes over the last decade, particularly regarding the utilisation of technology in even the most basic of businesses that it wouldn’t be surprising to envisage a period of stability or cooling-off as business operators come to grips with the raft of tools now available to them – however this seems very unlikely. It is within the next decade that we are likely to see which businesses can thrive in this new landscape and those which may fall by the wayside through their own inactivity or inability to embrace change.

The really exciting element from our perspective is how Hawke’s Bay has managed to position itself at the forefront of this change. Hawke’s Bay is now seen as a booming business economy that has the required elements to expedite the achievement of business goals. This teamed with the Bay’s reputation for true work/life balance has ensured that the New Zealand business community stands up and takes notice of our little slice of paradise. This as well as our own local success stories such as the Napier Port, Ahuriri Tech Hub and the Airport expansion project has enticed a range of business investors and opportunities to our region.

Dynamism is a fundamental component of many successful businesses and the required strategy can dictate short timeframes for growth, sale & purchase and market penetration

opportunities. This means we really need compliance and reporting to run like clockwork, with the data available at our fingertips. Neither we as advisors nor you as business owners can afford to waste time on historical results.

One change by product is how we work to align the current business environment, technology and new generations entering the workforce together. This is a fundamentally important investment for every organisation, and our clients value good advice around what works and what to do when it doesn’t.

Futurists talk of the threat that Artificial Intelligence poses to so many businesses by manipulating the way in which we conduct our business. We see this advancement and evolution

signalling a somewhat inevitable move towards robotics and automation taking over the logical, predicable and monotonous tasks within society. And while the further development and future influence of AI is uncertain, it is another element of the change cycle that businesses will need to take heed of and build into their strategic planning in order to stay relevant.

To address these changes Businesses must embrace cloud- based accounting software in all its glory. Harnessing the cloud for efficient accounting compliance is not enough. The real benefit is in utilising apps and add-ons to provide privately- owned businesses with a broader, more integrated solution that is the envy of larger corporates. It is likely that within the first half of the next decade we will see who can succeed in taking their Business to the next level and those that have been weighed, measured and found wanting.

Which one is your business??

Drive performance by better understanding the numbers

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Hawke’s Bay’s economy is booming.

The region is experiencing growth across a range of sectors and industries, unemployment numbers are dropping, house prices continue to rise and there is an air of business confidence within the region which is encouraging business owners to look to their future and what opportunities these positive developments could bring. One of these opportunities is an increase in business investment which is exciting for both established and developing businesses. With that said, it is important that you have a clear understanding of your business fundamentals so that if opportunity comes knocking, you are in a solid position to best understand the offer on the table. Below we focus on four financial ratios that should be monitored on a monthly basis.

Gross margin

Measured overall and at product level, this formula measures the amount of margin each dollar of sales is contributing toward overhead costs and profit. The result is found by dividing gross profit (subtract cost of goods sold from sales) by sales. A 40% gross margin means that for every $100 of sales, $40 of gross margin is generated to cover all other costs and profit.

Unless you are offering customers a discount, or incurring additional direct costs, your gross margin shouldn’t change whether your sales increase or decrease. We often hear business owners say “I am chasing an increase in sales”, to which we would add “provided you maintain your gross margin”. If sales increase but your gross margin decreases (perhaps as a result of increased commission or discounting), you may be working harder for each dollar of sales but making less in dollar terms.

Measuring how quickly your inventory turns over is a critical measure for many business owners where inventory (or stock) is a significant asset. Slow moving inventory can lead to lower gross margin through discounted selling price, obsolescence, and carrying costs. Understanding your optimum stock levels, particularly how these may trend differently from season to season can help to ensure your costs are measured and justified.

Inventory turnover can be measured in number of days, found by dividing average inventory value by cost of goods sold multiplied by number of days in the reporting period (e.g. 365 if reporting period is one year). A low number of days indicates inventory is selling quickly, however understanding your product mix is important as average inventory days vary widely across product lines.

Cashflow

Money in the bank or positive cashflow is a good indicator that business is going well. Many retail businesses are largely cash based operations, with customers paying for the goods at point of sale, and suppliers requesting payment shortly after delivery. This means that managing and reviewing cashflow is an essential skill for business owners.

Periods of high sale activity and strong cashflow can be followed by lulls which often coincide with GST and tax payment due dates along with fixed costs such as rent and employment expenses.

This is particularly evident over the Christmas trading period for many retailers where high sale volumes during December are followed by significant cash outflows in January.

Forecasting cashflow can help highlight these pinch points and enable you to plan accordingly. There are many tools available to assist business owners with cash forecasting, such as Spotlight and Futrli.

If your business is set to retain its competitive nature during this growth period and stay ahead of the pack it is vital that you plan ahead, and have a good level of financial literacy.

Understanding the numbers is not just for accountants – as a business owner your success depends on your ability to measure the impact of external changes on your business and implement timely changes.

Profitability

There are many measures of profitability, including operating profit, earnings before interest, tax, depreciation, and amortisation, and net profit to name a few. Choosing a consistent measurement to monitor is important as well as an understanding of what is and isn’t included in that measure.

Net profit before tax is a measure of what is left for the owner after overhead costs have been deducted from gross margin. To find the net profit margin divide net profit before tax by sales. A1 2% net profit margin means that for every $100 of sales, $12 of net profit is generated for the owners of the business.

If the owners of a business are not working owners, but are paid a salary, it can be more comparable to deduct their salary cost (or a proxy amount for which they would pay someone to manage the business) from overhead costs before calculating net profit margin. This is called “normalising” so that comparison of profitability can be made with other similar businesses or against industry benchmarks.

Profitability is negatively impacted by increasing overhead costs. Carefully reviewing each overhead item to ensure it is necessary and efficient can be a useful exercise.

Strategic planning for business success

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In our experience, we find many businesses rate strategy as hugely important but don’t have the time, skills or knowledge to implement meaningful strategy in their own businesses. This often stems from business owners being subject to the ‘tyranny of urgent’ – meaning everyday tasks often take precedence over the more valuable and highly necessary big-picture requirement of taking stock of where the company is going.

In today’s modern environment, business value is no longer primarily driven by physical or tangible assets but increasingly by non-financial business drivers. Financial measures are those that can be directly measured; for example, revenue margin, profit, administration costs, debt reduction and cashflow. Non-financial measures are those that cannot be represented by a data point but are more likely to be descriptive or evident by their absence. For example, you may rely on qualitative feedback from customers to determine whether an employee has achieved their goal with respect to providing exceptional client service.

Understanding your value drivers

Success and future strategic positioning depends on the effective measurement and management of these critical non-financial or intangible resources, alongside financial metrics. The first step in this process is understanding your organisation’s value drivers. What are the key non-financial and financial resources in your business? How important are your different resources to achieving your overall value proposition? How strong are your existing resources and how can you use them more effectively? If your existing resources aren’t meeting your needs, what gaps do you need to fill?

Have you considered your overall operating environment, competitive position, benchmarks and market analysis data? Have you considered the key risks for your business both now and in the future?

Measuring business performance

After identifying and mapping the value drivers, you can start measuring your business’ performance, once you’ve decided which are the most important values to measure. An excellent way to determine whether an indicator is worth measuring is to establish what key performance questions you need to answer. For example, what is it that you want to measure? Why do you want to measure this? How do you plan on using this information moving forward? How do you want this data presented? Who will be responsible for this measure? When is the most suitable/appropriate time to conduct this measure?

Using the above questions is a useful tool to ensure all decision makers are working towards the same overarching business goals. It can assist in validating any key changes that may need to be implemented, while also endorsing current practices or procedures within the business that are generating positive outcomes.

Lag and lead measures

Lead indicators are measures that provide information about expected future results based on current performance. For example, marketing investment, research, product development, employee skill development and practice growth trends. Lag Indicators provide information about past performance such as revenue, profits, overheads and accounts receivable.

By combining lag and lead indicators you can not only determine whether you have achieved goals set in the past, but whether you are on track to achieving goals set for the future.

Organisational success measures

Common organisational success measures include:

• Customer satisfaction – referrals, repeat business and customer gain sources

• Product/service innovation – cross selling opportunities/skills utilisation

• Marketing activities – measure effectiveness against agreed milestones and objectives

• Customer profitability analysis – customer segmentation

• Output quality – timing vs service quality

• Staff attraction/retention – proportion of first choice candidates secured and turnover rate

• Profitablity growth

• Value creation – financial and non- financial growth for each quarter and the expansion/review of service offerings

Strategic thinking is particularly more important for business owners in these fast- changing days of disruption. The need to be pro-active towards addressing this changing operational landscape is vital as it will likely determine which businesses flourish, and which will be left struggling to keep afloat. We often ask clients, when was the last time you took time to think about where your company might be in five, 10 or 20 years? And when we persuade clients to make that time to think strategically, they usually end up saying ‘Now I understand why it was important’.