Do you know that cash flow is not the same as profit? 

Let’s face it, accounting can be confusing at the best of times. That’s why it is important for you as the business owner, to understand the key financial ratios, reports and also, how to forecast cash flow. After all, how can you improve your profit if you don’t have a handle on cash flow and the numbers behind it.

Cash flow is the lifeline of your business. Without consistent, solid flowing cash flow, you will be constantly chasing your tail in managing income vs. expenses. You will have trouble setting aside funds for working capital, you will experience a reduced ability to borrow, and your business will struggle to grow.

Understanding the true costs of running a business and the factors influencing cash flow and profit 

We recently advised a wholesale business that was experiencing large fluctuations in its sales, profits and cash flow. The business supplies goods to rural businesses and carries a large amount of stock and has significant credit accounts with its customers.

Recent Covid-19 events resulted in significant stock write-offs. The owners, Daniel & Tracy, wanted advice on how to improve their profit, better manage their cash flow and prevent the loss of income from future unplanned events.

However, there were some key issues the clients had to solve. To begin with, they did not know what their break even sales level was. They did not understand the benefits of ratio analysis and budgeting. They lacked working capital and they had inadequate business insurance.

Combined with these issues, Daniel & Tracy wanted to sell the business and retire within 12-months. In order to get the value they wanted from a potential purchaser, they needed to sort these things out.

Here’s how we resolved the issues for them

• Breakeven Sales 

The first step was to establish the breakeven sales point so that they would know exactly what they had to bring in each week in terms of sales to break even. 

To achieve this, we reviewed their fixed costs which when totalled, came to $350,000.

Then, we reviewed their gross profit margin on all products and determined an average of 55%.

This determined that our minimum weekly sales required was $12,250.

• Improving Profit 

To better manage their stock, we completed a series of key profit ratio calculations with Daniel and Tracy. This included Gross Margin Return on Inventory and Gross Profit Margin. We suggested to Daniel and Tracy that they upgrade their stock management system to improve their gross profit margin and to reduce shrinkage.

• Improving Cash Flow

In order their improve cash flow, we completed a series of cash flow ratio calculations. This included Accounts Receivable, Stock Turnover and a Funds Statement. It was agreed that Daniel and Tracy would prepare a cash flow budget every six months to determine their funding requirements, until such time as they sold the business.

• Improving Funding 

We were able to negotiate an extension on Daniel and Tracy’s business overdraft limit to meet their working capital requirements. Note: this would not have been possible without determining their key financial ratios and producing the cash flow reports to show the lender.

• Improving Insurance Coverage 

Daniel and Tracy were woefully under insured and this oversight had cost them dearly. We analysed their coverage and determined that they were without Business Disruption Insurance. We promptly organised the appropriate cover to prevent the business from a loss of future income. 

 As you can see from our case study, there is a lot to be mindful of in being cash flow confident. 

Daniel and Tracy saw an immediate improvement in their cash flow position as a result of the recommendations we made. Fortunately for them they listen to our advice and have gone one to achieve their business goals and succession objectives.

Get in touch

If you are confused by accounting and not confident about your cash flow management, or feel like your finances are getting out of control then get in contact with us today via email to organise a free no obligation chat. Also, If you need an accountant in Auckland – feel free to reach out. We will listen and then formulate the best strategies to help you achieve your goals. Alternatively, click on the Book A Call button now to get started.

BOOK A CALL

Are you struggling to make your business work?

Insight CA Limited is a team of experienced Auckland-based chartered accountants and business advisors who can help. We’ll give you the power to see what’s really happening in your business, so you can take control and start making progress. Click here to learn more about how we can help you achieve your goals.

The time could be right to sell your business

There comes a time in the life of every successful business owner when selling your business looms on the horizon as a means to cash out and get the payday you deserve as part of your retirement plans. It is estimated that by 2028, the number of plus 65’s in New Zealand will be 1,320,000. Therefore, it is possible that there could be close to 20,000 businesses being sold by baby boomers in the next 5 to 10 years.

I’m sure you’ll agree that getting the payday you deserve when cashing out of your business is the aim of every business owner or entrepreneur. However, it is not just as simple as giving the prospective purchaser your financial statements.

There are a number of steps you need to take in order to get the best return on your investment. It starts with collecting all the relevant information and preparing a ‘Selling Memorandum’ to present a favourable proposition to a prospective purchaser. There’s a reason it’s called selling your business.

Ideally, the process of selling your business should begin 2 to 3 years prior to you wanting to exit. Therefore, given that the target date could be some time away, you need to start compiling the necessary information into a ‘Selling Memorandum’ in order to earn the best return when you eventually sell.  

So, what exactly is a ‘Selling Memorandum’? 

A Selling Memorandum contains vital business information and documentation along with details of the unique features of your business. It details all the relevant business information and is provided to prospective buyers during preliminary discussions relating to succession of the business. 

A Selling Memorandum will assist prospective buyers to make an informed decision about the purchase of your business. Therefore, it is essential that prospective buyers are provided with the most accurate and up-to-date information relating to your business. A Confidentiality Agreement should also be prepared, and signed by prospective buyers and possible successors, before handing over your Selling Memorandum to them.

Why is a Selling Memorandum so important? 

If buyers have a high degree of confidence in the accuracy of the information provided to them, this will be reflected not only in the sale price, but in the entire sale process.  

The Selling Memorandum is a simple tool that is used to demonstrate the uniqueness of your business. Think of it as an advertisement, so why not make your proposition stand out from the rest. Don’t underestimate the buyer. They will be looking at two to three other businesses in your market i.e. your competitors. So, if it contains all the relevant sale information which will assist in sale discussions why not make the buyers decision easier to go with you.  

A massive benefit of the Selling Memorandum is that it will increase your opportunities for sale and at the price you want. Having a stand out memorandum could result in multiple bidders for your business giving you options about who you pass on your legacy to.

What does a Selling Memorandum contain? Some of the information to be included in your Selling Memorandum includes:  

• A confidentiality and non-disclosure agreement
• The products or services you provide  
• The history of your business  
• Complete details of your clients  
• An overview of employees and employee agreements  
• Details of business achievements  
• Company policy documents  
• Business alliance agreements  
• Details of your unique selling points  
• Financial information  
• Business Plan  
• Marketing Plan  
• Licences & Accreditations  
• Register of information available for buyers’ due diligence – including financial information and documentation. 

One of the key inclusions in your Selling Memorandum is your unique selling points. Your unique selling points are the features that distinguish your business from your competitors. Some examples of unique selling points could be:  

• Your high value client base  
• The business specialisation 
• An amazing business culture  
• A breakdown of net fees as a % of total income  
• Your level of sustainable income

You must only include true and accurate information. Provide a copy of your Selling Memorandum to your professional advisers to confirm its accuracy.

What documentation is required during the sale process?

Set out below is a list of the activities and documents typically required from enquiry to sale:

Want to know more?

If you are thinking about preparing your business for sale or handing it on through succession, then get in contact with us today via email to organise a free no obligation chat. Also, If you need an accountant in Auckland – feel free to reach out. We will listen and then formulate the best strategies to help you achieve your goals and we can even help you with preparing your Sales Memorandum. Alternatively, click on the Book A Call button now to get started.

BOOK A CALL

Are you struggling to make your business work?

Insight CA Limited is a team of experienced Auckland-based chartered accountants and business advisors who can help. We’ll give you the power to see what’s really happening in your business, so you can take control and start making progress. Click here to learn more about how we can help you achieve your goals.

Every Best Practice Business Has Value

Building a best practice business takes planning and the execution of documented processes and tasks. You must set goals, have strategies, tactics and action plans. If you are a business owner, then you will understand the driving forces behind competition, supply and demand.

But are you aware of what best practices your business needs in order to perform at the optimal level and stay ahead of the competition and meet your supply and demand expectations?

When there are more businesses for sale, lower prices result. With fewer qualified buyers, a buyers market ensues. In a buyers market, buyers can be selective and value driven – hence the importance of creating value by ensuring you have a best practice business. 

So, how do you go about ensuring your business has value?

You can start by becoming a best practice business through putting in place goals, strategies, tactics and action plans that build value into your business systems.

A business with good systems, that is not reliant on its owners, is important so that the business can always function seamlessly without the presence of its owners. Ultimately, your business will be more attractive to prospective buyers where you have the systems and processes in place if your plan is to sell at some stage in the future, or if you have a succession plan in place but still want to retain full or part ownership.  

A best practice business has all its systems and processes documented, and this includes your planning documentation, that should be regularly reviewed and updated.

Each unit of the business should be aware of its function with clear and concise processes that are organised into a ‘Manual Set’. Each business unit should have clear goals and objectives with strategies, tactics and actions plans to guide them towards achieving the goals. As a business owner, it is your role as the senior leader to ensure that each and every one in your team is equipped with the ‘tools’ to perform their roles so that the overall company goals are achieved. Each individual contribution is connected to the whole.

It is not your role as business owner to execute on everything, but ultimately, you have the overall responsibility to ensure that all plans, tasks and actions are executed. That is why it is important to have trusted lieutenants to help you with the implementation.

But, what are goals, strategies, tactics and action plans anyway and why are they so important because you have a business plan, right?

It’s a good question, and one we get asked a lot. But here’s the thing, when I ask a prospective client to share their business plan it often surprises me (well actually, I’m not surprised), how little detail they have in their business plans. More often than not, their ‘plan’ is just a ‘guide’ of where they want to be. While this is a good first step, a plan must have a detailed ‘road map’ of how to get to where you want to go.

The challenge that I see is that not every business owner understands the difference between goals, objectives, strategy and tactics.

A business goal should be the target of what you want to achieve i.e. a revenue goal – we want to achieve $1million dollars in total sales by X. 

Objectives are the specific steps you need to take in order to achieve your goals.

A strategy is the; What, Why, Who and How of your plans. I.e. What do we need to do, why are we doing it, who is responsible and how are we going to do it. In most business contexts a business strategy is driven by a competitive need.

The tactics, like in any competitive game, are the moves you make that support the overall strategy. 

The action plan defines who will do what and by when.

When you have these attributes clearly defined, then you have a solid business plan in which to guide your business in a best practice framework. 

I often get asked – well, thanks for defining what I need to have in place. So, how long does my business plan need to be? Well, here’s the short answer, it needs to be as long as you need to cover everything that you can think of to get you to where you want to be. And, once you are at that point, you can actually distill all that information into two pages. Two pages I hear you say incredulously – yes indeed, I say, only two pages. You can download our example here.

Case Study

We recently started a client on the path to building a best practice business. Our client is an engineering firm employing 12 staff and turnover in the $3 to $5 million range. 

Our client purchased an engineering business and merged with another to create a larger customer base with a new brand. The problem was that combining two businesses came with a number of headaches. Different systems and processes, pricing and ways of working all contributed to sleepless nights for the owner.

He knew he needed to make some changes and organise everything to become a best practice business – he just didn’t know where to start.

Our process to help our client involved streamlining systems and processes into having one set of documentation and one way of working across the entire organisation. 

We gathered the financial data and benchmarked performance using tools such as our Business Risk Assessment to work out the gaps and determined areas of focus. We guided the client on documenting everything and helped them pull all the information into a business plan distilled into the one-page-plan I mentioned earlier.

We worked with the client on the drivers of business value, namely: looking after loyal customers, benchmarking performance and working with staff to embrace the changes that had happened in the business.

The four key areas of focus to grow value were identified as follows:

1. Increase the numbers of customer types that he wanted to do business with
2. Increase the number of times customers returned for help with further jobs
3. Increase the average value of each sale
4. Increase the effectiveness of each process within the business that ultimately benefited the customer

A best practice business owner continually monitors their Key Performance Indicators (KPI’s), and we put in place KPI’s across all key focus areas and benchmarked performance against industry standards to ensure the business was reaching or exceeding its potential. Tracking KPI’s is the result of sound reporting principles and the ability to extract information in a timely and organised manner is crucial to establishing business value.

The Outcome 

It will come as no surprise that the biggest challenge for our client has come from his team adapting to change. Generally speaking, humans don’t like change, however when you put in place a structure that has a logical set of best practice principles, over time even those most resistant to change will come to see that process driven ‘change is for the better’ now each and every team member is clear on their roles and responsibilities and how this impacts the business and the customer.

We are pleased to report that our client is following the plan we created for him, and combined with ongoing monthly guidance from us through our Virtual CFO service and Board of Advice programme he is on track to growing the value of his best practice business. 

Want to know more?

If you know that your business could benefit from having a best practice structure but are too bogged down in the day-to-day minutiae, then get in contact with us today via email to organise a free no obligation chat. Also, If you need an accountant in Auckland – feel free to reach out. We will listen and then formulate the best strategies to help you achieve your goals. Alternatively, click on the Book A Call button now to get started.

BOOK A CALL

Are you struggling to make your business work?

Insight CA Limited is a team of experienced Auckland-based chartered accountants and business advisors who can help. We’ll give you the power to see what’s really happening in your business, so you can take control and start making progress. Click here to learn more about how we can help you achieve your goals.

What is Value Gap Analysis?

Value Gap Analysis is a critical step in order for you to get the best return when you sell your business. I’m sure you’ll agree that getting the best return when you sell your business is the aim of every entrepreneur or business owner. However, it is not simply a case of contacting a business broker and putting a price tag on your life’s work.

There are a number of steps you need to take in order to get the best return on your investment. 

Ideally, the process to sell your business should begin 2-3 years prior to you wanting to exit. Therefore, given that the target date could be some time away, you need to have in place a solid action plan of how you will get the best return when you eventually sell the business.  

A good place to start is to determine what the business is worth now and what the business could be worth in 2-3 years time, if you put in place a comprehensive plan to maximise value. 

Often, we find that there is a disconnect between what the business is currently worth based on a bank accredited valuation for example and what the owners expectations are. 

We recently completed a business valuation for Sandy who operates a chain of healthcare retail stores. Sandy wanted to sell her business in 3 years and retire. Sandy didn’t really know what her business was worth.

In her mind, a figure of $1.2 million sounded about right for 20 years worth of hard work. However, a bank accredited valuation determined the business was only worth $750,000, a shortfall of $500,000 which equated to another 40% in value that Sandy would have to build. 

As part of the valuation, we conducted a Value Gap Analysis that identified a future value of $1,050,000 for the business at the time of sale for Sandy to achieve her desired retirement lifestyle. Based on Sandy’s current profit growth rates, we calculated that it would take another 7 years to achieve this sale price.

This case study highlights not only the unrealistic expectations of some business owners as to the actual value of their businesses, but also the importance of strategies to improve value and profitability by completing the sensitivity analysis calculations.   

In Sandy’s case, her path to target improvement in value was weekly sales and we’ll come to more on that shortly.

So, let’s summarise Sandy’s situation:

• Sandy needed to determine an accurate business value, not a best guess
• Through using the Value Gap Analysis calculation, a growth in value was needed to ensure the desired retirement lifestyle was met 
• In order to achieve that growth in value, what needed to happen?

So, how did we resolve Sandy’s issues? This example, like any that fall into the ‘Sales Price Reality Check’ category, can be solved in 4 steps. 

Step 1: Establish the business valuation

This can be done using our ‘Business Capitalisation Rate Calculator’ (BCRC) which is a patented algorithm that Insight CA Limited subscribes to. 

Put simply, a business capitalisation rate is a valuation tool ideal for SME and ME owners to determine a multiple of profit that then becomes the asking price. It is a fully automated calculation that enables us to benchmark your profit, capitalisation rate and value to comparable businesses across ANZSIC industries.

How we arrived at the BCRC Business Value for Sandy’s business:

You will recall that Sandy’s sale price expectation was $1,250,000.
However, our BCRC Business Value for Sandy’s Business was $750,000

Step 2: The Value Gap Analysis

Once Sandy’s value was calculated, when completed the Value Gap Analysis to determine the business value.

You will recall also, that we calculated Sandy’s future business value at $1,050,000.

Therefore, the equation looks like this:

Current business value $750,000 (3x Profit of $0.25m)
Future business value needed $1,050,000 (3.5x Profit of $0.30m)
Future profit target p.a. $300,000
Growth in profit required p.a. $50,000

So, $50,000 is our magic number. Let’s address that figure in steps 3 and 4.

Next comes the Sensitivity Analysis 

Step 3. $50,000 in extra sales

By completing our valuation and profit sensitivity analysis calculations, we identified for Sandy that she would need an increase in annual sales of around $50,000. This increase would still maintain her current EBIT margin of 10% however. The extra profit would thereby achieve the value needed at the time of sale.

Step 4. The plan to get to the business sale point

It’s all very well determining the magic figure of an increase of $50,000 in annual profit as numbers on a spreadsheet, but you actually need a growth plan to achieve that figure.

Sales tactics needed to be employed. Sandy asked each of her four locations to deliver an additional $2,500 in sales per week. 

The answer was for Sandy to implement a simple, but effective sales incentive plan for her retail staff. The retail staff were asked to focus on growing sales of products with high profit margin and rewarding staff for achieving their targets. 

The incentive, on the right products, has really resonated with the retail staff and sales started  growing immediately along with profit.

The Outcome of our analysis

We are pleased to report that Sandy is following the plan we created for her from the Value Gap Analysis, and combined with monthly guidance from us through our Board of Advice programme she is on track to achieve her target sale price in a little over 18 months.

Want to know more?

If you are thinking about preparing your business for sale or handing it on through succession, then get in contact with us today via email to organise a free no obligation chat. Also, If you need an accountant in Auckland – feel free to reach out. We will listen and then formulate the best strategies to help you achieve your goals. Alternatively, click on the ‘Book A Call’ link now to get started.

BOOK A CALL

Are you struggling to make your business work?

Insight CA Limited is a team of experienced Auckland-based chartered accountants and business advisors who can help. We’ll give you the power to see what’s really happening in your business, so you can take control and start making progress. Click here to learn more about how we can help you achieve your goals.

In this communication we will address the subject of SUCCESSION PLANNING, of “WHAT IS KEEPING YOU AWAKE AT NIGHT”, based on the research of B Star, a research house based in Australia.

Succession Planning was tabled as the number 2 concern. There are good reasons for this.

But first, what is succession planning?

Succession Planning is Forging the future of your business beyond the boundaries of today and this requires strategic planning and an in-depth understanding of tomorrow’s potential.

“It’s a family business, and since father passed away recently, I am concerned that my brother doesn’t want to continue in the business. We never did any succession planning, and I don’t know what we are going to do”.

Research has indicated that business owners were evenly divided between those who saw succession planning as an urgent need and those who saw it as something to be deferred.

Often business owners assume that their children, or other family members will take over the business, but have not discussed this those involved, and don’t have any idea of how it would take place.

Generally, business owners indicate that while they see succession planning as necessary, they are not comfortable with it. 90% of businesses included in the report did not have a succession plan in place. Less than 10% had a buy/sell agreement or business succession agreement in place.

RISK

Risk is one aspect often ignored by SME. Without understanding or reviewing their business’s operation, the business owner can be unaware of the risks they are running day to day. Awareness is needed before action can be taken to reduce those risks

A useful example is the key person risk, which is very common in SME’s. Approximately 30% of those surveyed believed their business could operate without them. The majority have a clear KEY PERSON RISK. But few SMEs were addressing that risk.

Approximately 30% of those researched had business and key person insurance in place to protect the business from illness or injury to owners or key staff

Approximately 50% of those researched were not willing to deal with succession- instead deferring consideration in favour of retaining control and remaining in business.

“I love what I do. I don’t want to retire. In the future, I want to still to work 2 days a week, on the tools”

“We haven’t done anything about succession. I am working on building the company so that it is sustainable for people coming up either from the family or key staff”

Less than 10% of business owners indicated that they have a reasonable understanding of succession planning.

SME’s, generally have not taken advantage of external succession options, such as insurance. Less than 1 in 3 had arrangements in place to deal with the owner’s ill health, such as key person insurance, or other insurance. Where there was a buy/sell agreement in place approximately 20% of business owners had life insurance in place to implement the agreement

STAFF AND SUCCESSION PLANNING

“I am not really interested in personal succession or estate planning. I am more interested in business succession. I don’t have a plan yet”

SME’s have small staff numbers. The impact of ineffective recruitment or the loss of a key person is much higher in an SME. As a result, staff issues are of a higher risk, particularly if not handled well. BStar’s research confirms that SME’s are doing little, or in many cases, nothing, to manage their staff or planning to reduce staff risk

Approximately 70% of SME’s were not acknowledging their risks in this key area, or taking any steps to manage them

Day to day operations remain heavily reliant on the SMEs owners, and one or two key staff. This continues unless the SME grows large enough to obtain, or afford, specialist internal or external HR resources.

So in summary

Why do I need a Succession Plan?

It begs the question, Is planning really necessary, do you need professional advice and if you have firm ideas on what you intend to do, is that not enough? Well the answer is a common sense one. If succession is really important to you, and if you do not want to leave things to chance, then planning, independent advice and early action is critical.

A steady and progressively managed transition, when started early, will provide certainty and assurance to you and to future generations in an environment of continued growth and compounded wealth

Benefits of Succession Planning

Succession is all about outcomes. It is about ensuring you achieve what you want to achieve for your business, your family, your wealth and yourself. By listing some common goals for succession you will quickly see why they should not be left to chance:

• Grow and maximise the capital value of my business
• Allow me to be actively involved in my business for as long as I want, at the level I want and as long as l can make a valuable contribution
• Build my wealth and ensure I have enough capital to do things I like and to be able to enjoy life when l begin to wind back from the business, and then finally retire
• Provide for my family and ensure my wealth is not lost by the next generation
• Receive value for my effort
• Transfer the business over to the next generation in a manner that will provide for its continuity, growing profitability and capital value

A few of my friends are business owners that are now finding there at that age where their business has matured, like them. It’s still profitable and able to sustain a nice lifestyle and it’s still fun to work there too. The children have grown up and left home so discretionary spend is now spent on more elaborate trips overseas, i.e. it’s being spent on them not the kids, and those trips are becoming more frequent. Without knowing it they are already changing their lifestyle to life after work, and they like it.

You may ask, “Why would you think of an exit strategy when you’re still enjoying yourself in the business?” Well, you need to think of it this way – your business is an asset, one in which you have poured a lot of time, energy and invested money in over the years. While it may continue to support your current and immediate lifestyle, focus now should be on increasing its value so that when the time comes, you are able to take full advantage of the additional wealth that brings, to then fund the next chapter or venture in your life.

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