A friend of mine recently asked for some assistance in analysing how his business was going. The few jobs we looked at in more detail were actually done at a loss, and it was clear fairly quickly that his business was in trouble. So we sat down and listed what his income and expenses were (to work out his cash flow) as well as what his Assets and corresponding liabilities were. I was fortunate a few years ago to have a mentor who had a saying he drilled into me: “Always know your numbers”.
Whilst he was from an Accounting background, this really is part of running a business 101. Even though most businesses require some form of Government licensing, there is no degree or even management experience required to run a business. Whilst it’s true that there are many good business people that don’t have a piece of paper to show some form of business education, they compensate their own lack of skills or lack of time by employing people who understand the importance of being on top of what keeps a business alive (cash flow).
Having a sustainable business means so much more than looking in the bank account to see if there is money there to pay the bills. My friend provides his customers a high level of service, but really didn’t know what the cost of providing the service was. Doing the basic business analysis from scratch was a good process that highlighted quite a few things, and I dare say he is not alone in not understanding the full implications of not staying on top of the numbers. Just ask people like Clive Palmer and Nathan Tinkler. Having your own business means you are suddenly expected to be capable of all facets and requirements, including knowing over 90,000 pages of legislation affecting business – which is just the Qld portion. Add in all the Federal requirements including Fair Work laws and it’s a bit like painting the Harbour bridge – once you think you’ve been through it all, time to start all over again to check for any updates. However whilst the fundamental part (making sure the business is viable) carries next to no regulation, the penalties can be severe as trading whilst insolvent is a jail-able offence. The important thing is to identify if the business is in trouble early enough that you can do something about it. When it’s too late, the banks are not your friend; in fact, you quickly lose control of the situation.
So what do you need to stay on top of?
If you are not good at certain things, outsource it to someone who can help you. Some of the pertinent things to stay on top of at all times are:
- Timely invoicing – you won’t get paid until your customer has received their invoices. Delaying this or getting it wrong could also mean you forfeit the ability to charge.
- Know all your Expenses – incurred and pending
- Profit on each job
- True value of your Assets
- Loan status – amount owing, payout figures, monthly costs, when debt falls due
If you want to take it a step further, stress test yourself. What would happen if you lost your largest client, or they went broke on you? How long can you afford to keep a machine parked up?
Role Models
QUT’s Business School recently did a survey of more than 400 students. 57.3% said they had a high level of understanding of Budgeting and 67% said they knew how to save. Even though I’ve been a long time critic that we don’t teach basic Financial skills in primary and high school, I still would have expected these percentages to be even higher, seeing as we’re talking about quite educated upcoming business persons (although in the survey most were under 20 years of age). But the really scary part is that only 4.4% of them were able to answer how long it would take to save a certain amount given a budget with income and expenses! Are these really the future leaders of our businesses and country?
In reality though, what role models have they been exposed to? Most youths look up to some sports or entertainment star, rarely to successful business people. If anything, the media seems intent on cutting down the tall poppies that have done well for themselves. Not that I agree with the pay structures of many listed company Executive Teams, but we don’t need to look much further than how often the media reports on executives as being overpaid. Yet when was the last time you heard the same comments about an actor or ball player (whether it be Golf, Tennis, Soccer or anything else) who often get paid significantly more?
None of our Governments can show that they can balance a budget either, and keep spending even though there is no money there left to spend. Even at currently low interest rates, the Federal Government is borrowing over $100 million PER DAY just to pay the interest bill – a total waste of money as it’s all been spent on recurring expenditure as opposed to having an Asset to show for it.
If you look at the role model of households, we find that only 17% of the population is going to be able to fund their own retirement – the rest will rely on the pension. Or the fact that 52% of households having nothing to spare from their pay after living expenses, and a quarter of households have no buffer if they were to lose their jobs. Credit card debt is a burden to a lot of people, with current National credit card debt of over $50 Billion costing over $450 million per month in avoidable interest charges.
So where are people expected to take examples of good financial behaviour from???
Isn’t it Ironic?
In conclusion, thought I’d share some recent ironic events. They’re amusing, if they weren’t so serious.
Class Action – Class Action Lawyers Slater & Gordon look to be on the receiving end of, um, a class action. The share price has dropped from $7.85 per share in April to under $1, and the share holders aren’t happy to have lost $750 million from poor management. Slater & Gordon makes a living from ambulance chasing against unfortunate businesses using “no win, no fee” enticements, as well as class actions. Yet the reason for the share price fall is that they possibly have insufficient cash flow to meet creditor payments (insolvent?), and have recently acquired a legal firm in the UK that basically lost most of its market pretty much immediately after purchase because the UK laws are changing by clamping down on fraudulent “whiplash” claims and the like. In responding to the media, the company responded by saying the company was healthy because: “…this year our lawyers will serve more clients in Australia than we have in our history, and we are extremely proud of that”. Yes, this is the same company that a recent Prime Minister grew up and learned in. Looks like it’s easier to sue people trying to run a business, than to be capable of running something themselves?
Don’t fence me in – ironically, at the same time as pool fencing laws are about to be enforced through hefty fines (from 1/12/15), there is an advertising blitz on highlighting that most drowning incidents occur in rivers. I researched and wrote about pool fence laws here. The pool fence laws have added yet more regulation and substantial cost to households, sadly for absolutely no benefit. Not one pool drowning death would have been prevented because of these laws. Please start evaluating the cost of Government regulation against some measure of benefit, and let some common sense prevail.
Customers come first? – tried contacting a well known business recently through their preferred means of contact (email). Within seconds, had an auto reply back:
“PLEASE NOTE: Attachments only will be processed. Any text in the body of the email cannot be viewed or actioned.
1st webbased XXX software in Australia
simply more efficient”
Yeah, more efficient, for whom? Not your customers. I’m still waiting on a call back days later, and I’m guessing because my simple question was in the body of the email (should I have scanned it?), they have no idea what to answer…
The only industry worse than the one above seems to be telecommunications – you can’t call them (they don’t answer), you need to email so they can email back… What was that product they sell that everyone was supposed to need? Oh, phones…
As always, onwards and upwards!
Fred Carlsson
General Manager
