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Where is your business heading? and what can you do to help get it there?

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While being the best in one’s industry is a lofty business goal, in today’s climate it is crucial to set realistic, attainable goals rather than being caught up in the idealistic.

As businesses continue to grapple with the fallout of Covid-19 and government mandates, businesses are left with less operating flexibility and certainty. It is therefore paramount that business owners know their business: where is it now; where is it heading; and what you as an owner can do to get it there.

As we continue to see the consequences of the traffic light system, and the rolling lock downs, I have seen first hand from my recent time in London that traditional business planning is not sufficient, and those who merely roll forward their plans from the previous year will quickly be left behind.

Taking Stock

Taking stock of where your business is truly at (and no, we don’t mean counting everything on your shelves!) is a vital step of the goal setting process. Before you can plan for what comes next, you need to know where you are starting from NOW; not where you’ll be after the summer season, or how you were tracking prior to Christmas. Goal setting is future focused, and given the current climate, comes with a lot of uncertainty.

The process needs to incorporate a fine balance of ambition and challenge, but also be realistic and attainable. This can only be achieved by having factual, accurate and timely information. Check out our take on the Traffic Light system below to see where your business may fit.

RED – “With the lockdowns and operating restrictions my business has been severely impacted and any cash reservesI held have been depleted.”

If your business fits into the above, you may be looking to set goals around business wind up, reviewing your operating model or succession opportunities/options. For any business in this situation, it is crucial that you have accurate and timely information, and that you start having conversations with key relationships now. Bringing in your banker, business advisor and investors provides a fresh take on what is often a very tense situation and can ensure that all bases are covered, all options are explored and that you have a team around you to support you through this transition phase.

ORANGE – “Covid has been tough on my industry; profit margins and cashflow has been squeezed, but with clever, timely planning we’ve done ok and survived the worst of it.”

Those in the Orange section may need to take a more conservative approach to their goal setting. Funds may be lean for investment opportunities therefore ensuring that key revenue streams are strong and protected are essential for future growth. For example, you may be faced with the likelihood that a large percentage of your business is now conducted online as opposed to over the counter. Ensuring that your website and infrastructure can handle the increase in volume, is an investment decision that is worth evaluating.

GREEN – “Covid, what Covid?” Some businesses have been fortunate to thrive during these tumultuous times, by either finding themselves in the right business at the right time; or by pivoting their resources to capitalise on opportunities (check out our earlier article on the Business Pivot!).

Businesses who have been fortunate to experience this level of growth often find themselves playing catch up rather than setting strategic goals for the future. Take the time to think about what’s next for your business, and what steps you need to take to get there.

Keep in Mind

Regardless of where your business may fit above, when setting business goals, it is important that you are able to answer the following: What is your point of difference to your competitors? What future barriers will your business face?

And what infrastructure can you invest in to minimise the impact of these? Once you have an accurate picture of where your business is currently, you can set strategic, realistic, achievable goals. Keep in mind that COVID-19 is unlikely to be going anywhere anytime soon, so flexible goals that are regularly reviewed are key. Witnessing first-hand the constant lockdown waves in the UK, it was evident the businesses that understood the key metrics of their business and those that were constantly reviewing their plans. These businesses were able to control the direction of their business and capitalise on opportunities as they arose.

The one silver lining with Omicron is that the health impacts are potentially less severe than other COVID-19 strains, and we can draw on the experiences of other countries that have already gone through their peaks to see how we can minimise the impact on our business here. One thing that is already evident, is that those businesses that have proactively responded have fared the most favourably.

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.

Show Me The Money

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After a long period of low inflation and low wage and salary rises pressure is building in the remuneration market. There are a number of factors having an impact, most of which have featured prominently in the media.

The new Government’s pledge to increase the minimum wage will be good news for those on low wages and will undoubtedly also have a ripple effect to workers on rates above the minimum, where previous margins between the rates of different groups of employees will be eroded.

Shortages of skilled workers are being experienced now and in certain occupations are predicted to accelerate as digital transformation occurs across industries and occupations. Employers are having to pay more to recruit and then may also need to address internal relativity issues with existing employees whose pay has not kept pace with the market.

The cost of housing in Auckland is putting pressure on wages and salaries and also contributing to labour shortages. Employers struggle to recruit in occupations with national public sector salary scales that do not reflect the cost of living in Auckland and we are seeing Aucklanders relocate to the regions (for many good reasons as we know).

The Government pay equity settlement for 55,000 care and support workers is likely to have far reaching effects as those costs come to bear on large numbers of low paid workers over the next five years. They certainly deserve better remuneration but their supervisors and colleagues who now see their pay relativity diminished and wages compressed will very likely be seeking a consequential adjustment.

All of these factors are driving up expectations that potentially will hit businesses hard if they are not in a position to pass wage rises on through price increases to consumers. These factors will impact differently depending on whether you are in the private sector, not-for-profit or public sector and whether you are in Auckland or the ‘rest of New Zealand’ and the extent to which skill shortages may affect your business.

There is plenty of research to show that for most people salary is not the primary motivator of performance or retention. Other factors drive employee engagement which in turn is linked to performance and retention, including:

  • Learning and development
  • Career opportunities
  • Work that has purpose and meaning
  • Work life balance
  • Quality of leadership and people management

However, feeling valued is very important and may become the thing that tips the balance for existing staff to look elsewhere if your remuneration gets too far behind the market. Likewise it can be the deciding factor in which job a candidate chooses if all other things are equal.

You don’t have to be the best payer to recruit and retain staff but it certainly helps if you can manage remuneration well. There are a range of factors to consider that can make a positive difference to your remuneration and recognition practices:

• Aim to keep in reasonable touch with the market for your industry and/or location. Use remuneration surveys or your networks to regularly check what’s happening.

• Have a clear remuneration structure and process. Make sure people understand how pay levels are set, how it links to performance, how they can progress.

• When people reach a ceiling at the maximum salary the job is worth or don’t have career progression available, be transparent and creative about how to keep them challenged and rewarded. Consider one-off payments instead of base salary increases or other non-monetary benefits. Try to assign interesting projects or extra responsibility that provides development and satisfaction.

• Keep your promises – do salary reviews when they are due and communicate well about the reasons for pay rises or the lack of them.

• Consider the total package you offer employees – are there benefits aside from salary that are cost-effective to provide and attractive to employees? Make sure these are visible and not taken for granted. When communicating about remuneration remind people about the extras they receive (such as funding for study, phones, health insurance, car parking, extra leave)

• Be active and deliberate about non- monetary recognition for good work and commitment. Thank people often, show appreciation with a small gift or morning tea. Acknowledge birthdays, length of service, passing exams and other milestones.

• Celebrate success and recognise achievements in front of peers with awards, a certificate, commendations at team meetings or in newsletters.

Pay attention to the drivers of engagement noted above to promote retention and engagement of existing staff and make sure you tell the story of your culture and work environment to prospective employees to support your market reputation and to ensure you attract the attention of desirable candidates.

Stick to what you know

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The topic of how difficult it is to find a tradie with capacity is a popular one at the moment, which leads me to believe that accounting, paperwork and tax will not be top priority for those in the industry.

Now is a great time to look forward and decide what direction you want your business to go in 2018. For those in the building and construction industry, it seems that an increase in profitability features high on the wish list.

Here are five tips to help make 2018 the most profitable year yet.

Tackle compliance

Tradies all say that dealing with paperwork and compliance is one of the toughest, most time- consuming parts of the job. Invoicing, payroll and GST is not everyone’s forte. Falling short in any of these areas can have significant and costly consequences.

A good accountant with knowledge of cloud- based applications is a great asset. They can recommend the best online accounting systems and job management software that best suits your business. Accounting software such as Xero, Reckon and MYOB give you details of your financial performance in real time, eliminating the need for spreadsheets which remain static and error prone. These platforms also offer integrated payroll systems, which can take the stress out of each pay period. GST is automatically calculated and ready for filing directly with IRD. Customised invoice templates can be set up to save you time at the end of a job, which look professional and are easy to read.

Job costing

Even though you may be charging big bucks for a job, it often turns out that you are only just

breaking even, or worse, are costing you money. This is where job management applications are hugely advantageous.

Workflow Max or trade industry specific apps such as Fergus, Tradify and Service M8 will guide you from job costing and quoting through to invoicing and payment. Each job is made up of various tasks and costs with estimated dollar values applied. Labour cost is calculated based on employee pay rates and hours required. At any given time, a jobs progress can be viewed to ensure all costs are being captured and billed. Knowing how much money your jobs are likely to make you, will help you avoid work that would dig you into a hole, and allows you to pick winners right from the start.

Get paid sooner

Invoices for trade/construction work tend to be on the larger side, which clients can often put off paying. Whether you are a subcontractor on a big job site, or a sole trader doing residential one-off jobs, you should be getting paid regularly and on time. Online invoicing from cloud-based applications mentioned above means that you can send all invoices via email instantly. Customers can then view their invoice online and you can see the exact date and time they opened it – no claiming the invoice was not received! You can even connect online payment services like PayPal or Stripe so that clients can pay on the spot. Enforcing strict payment policies is a good idea too, a 7-day payment term is perfectly reasonable. For high value projects, it may pay to agree on a payment schedule throughout the life of the project with your client. An early payment incentive can also work a treat!

Minimise bad debts

Debtor management in any business can be tough and the construction and trade industry is no

exception. Chasing bad debt is never a pleasant task. Fortunately, there is an easy way to automate the pain away. Xero and most other apps will send late payment reminders automatically to allow you to chase bad debt without lifting a finger. Xero integrated app Debtor Daddy even provides you with a receivables manager that will call your clients on your behalf if they do not respond to reminders. Minimising bad debt levels makes a huge improvement to your business, and really lifts profitability.

Stick to what you know

Many business owners take care of the books themselves, when in fact it is far more efficient and cost effective to pay someone else to do it. Information can be sent seamlessly to an accountant via cloud apps, which will enable them to take care of compliance and provide you with meaningful financial reports without having to chase you. Invoices from suppliers can be scanned or snapped by a smart phone and filed directly into Xero ready for your accountant to process. Employees can prepare their own timesheets using job management software on their own devices and submit for payroll processing. HubDoc or Receipt Bank apps can be used to extract key information from supplier invoices that have been scanned or emailed directly to the app for automatic data entry into Xero.