Steering Through A Difficult Period
For many business operators, the tough times are not getting any better. Business insolvency is an ongoing problem. Business operators need to be continually looking for the warning signs to try to predict if there's real trouble ahead.
The warning signs can include:
• Payment time by your debtors – according to Dun & Bradstreet, the debtors' days outstanding is currently at 54 days. Whilst this is a long period, there are many businesses that have debtors' days outstanding in excess of 54 days. If your debtors' days outstanding starts to move up further, you potentially have a real problem.
• Stock turn – is your stock turn slowing down and your investment in stock increasing? Perhaps you need some 'sales' (and other promotions) to try to sell some stock.
• Are your suppliers trying to impose harsher payment terms than what you've traditionally agreed with them? This could be a warning that the supplier is under some financial difficulties.
• Have you got a few customers who make up the bulk of your sales income? Whilst in good periods of time, this may not be a problem. However, when things are tough, this could be a real problem. What would be the situation if one of those key customers discontinued their trading with you?
• Have you got key suppliers? If you notice some changes in the suppliers' characteristics, perhaps you should be starting to look around to see whether you can source product from alternative suppliers. The change in suppliers' attitudes may well indicate that the supplier has some problems.
• If you're having difficulties in paying your BAS and superannuation payments, this can be a sign that you need to be having discussions with your banker. It's not a good idea to get offside with the ATO. There are laws that make directors of companies personally liable for amounts that have been withheld and the payments have not been made on time to the ATO.
Another key area to consider is the Personal Property Securities Register (PPSR). The Personal Property Securities Act (PPSA) is now fully operational. Unfortunately, a lot of SMEs don't appear to understand how the PPSR operates. You can gain a significantly better level of security by registering some transactions on the PPSR, primarily relating to 'Retention of Title' arrangements. This better level of security also applies to some leases and to a wider range of other business activities, including:
• sale of goods on consignment;
• assets stored in someone else's possession;
• livestock on agistment;
• loans (including loans to associated entities and associates);
• service entities; and
• intellectual property assignment.
There have already been a number of significant court cases in Australia, on the operation of the PPSA. Considerable sums of money have been lost by the businesses that paid for an asset but had not registered their interest on the PPSR. As a result, they've lost those assets to a secured creditor. In most cases, if the business, that had paid for the asset, had registered its interest on the PPSR, it would not have had a problem.
If you would like our assistance on any aspect of steering your business through this difficult period, please don't hesitate to contact us.
Improving Your Business' Valuation
If you're going to sell your business, the key thing to do is to try to improve the business valuation. You should start the process early. The sooner you get started, the greater chance of success you will have.
• To start, you should be treating your business as your key asset.
• How can you maximise the value?
• What are the issues you think will affect the value of the business? Write them down. Discuss them with your team.
• What can you do to remove some of the obstacles that are affecting the business' operations?
Some of the key items to consider, in looking at how you might improve a business valuation, relate to:
• The type of business – some businesses are more sought after in the market. Therefore, buyers will pay a higher price.
• What products or services are you selling?
• Do you have an appropriate product/service range?
• Are there too many, or too few, products or services?
• If your business consists of a number of different business units, have you segregated those business units and appointed separate managements, so there's accountability for the performance of those individual business units?
• What is the level of profit in the business? Could it be improved?
• Are there any environmental factors that are going to affect this business?
• What is the level of technology utilised in the business? Does it need to be improved?
• Has the business developed any intellectual property? Has it been appropriately documented?
• Does the business have any patents, trademarks or trade secrets that will contribute to the value of the business?
• Stability of the business is a big plus when it comes to valuing the business and so is a consistent income.
• The customers' list will have a direct bearing on what a buyer might be prepared to pay.
• How easy is it to sell products? To get orders? To source the suppliers?
• Is all of the business built around the owner? If so, it could be difficult to get a higher value for the business.
• How many customers and/or clients are there? Is there a spread, or is the business income dominated by the few major customers?
• How is the product distributed? Is it a difficult distribution process?
• Do you have established channels to facilitate the distribution?
• If appropriate, do you have well-trained distributors or retailers for your products?
• To improve the valuation of the business, it's desirable to review the profit and loss account and pay particular attention to overhead expenses. Can any of these expenses be reduced?
• Can the business have a lean and mean management approach?
• Does the business have any industry regulations that could affect the business' valuation?
• Are there issues with unions?
• Are the processes within the business fully systemised?
• What is the level of your investment in debtors, stock and work in progress? In other words, the working capital components? If these are too high, it will affect what the buyer is prepared to pay for the actual business, because you're pushing the overall sum of money up too high.
• Are the debtors' accounts well managed?
• What is the debtors' days outstanding and the stock turn rates?
• Does the business have well-trained, motivated key staff, who offer outstanding services to your customers and suppliers?
If you are considering starting the process of reviewing your business valuation, with a view toward getting the business ready for sale, in the near future or over the next four to five years, we'd be happy to have a discussion with you.
In the first instance, we would like to undertake a due diligence review. We will obtain answers to the various questions that have been posed in this article and the questions that were raised in articles in October and November, 'Getting a Business Ready for Sale'. We could then prepare a valuation on the business in its current state and then discuss the development of a strategy with you, to change various operations, to contribute towards the improvement in the valuation over the next few years.
If you are interested in this type of approach, please don't hesitate to contact us for a conversation.
What's It Mean?
Terminology – Personal Property Securities Act – Continued
Commercial Consignment – can be registered on the PPSR. Commercial consignment is a consignment if:
a. the consignor retains an interest in goods that the consignor delivers to the consignee;
b. the consignor delivers the goods to the consignee for the purpose of sale, lease or other disposal; and
c. the consignor and the consignee both deal in goods of that kind in the ordinary course of business.
Commercial consignment does not include an agreement under which goods are delivered to:
a. an auctioneer for the purpose of sale; or
b. a consignee for sale, lease or other disposal if the consignee is generally known to the creditors of the consignee to be selling or leasing goods of others.
Government Grants For SMEs
New Grant – Entrepreneurs' Infrastructure Program
• The Federal government has announced that it will phase in the commencement of the Entrepreneurs' Infrastructure Program, progressively from the 1st July 2014.
• The Entrepreneurs' Infrastructure Program is designed to incorporate some of the aspects of the discontinued Enterprise Connect Program and the discontinued Commercialisation Australia Program.
• The programs to be offered by the Entrepreneurs' Infrastructure Program include:
- Business Management
- Research Connections
- Commercialising Ideas
• The business management stream helps CEOs and managers take time out to work on their business, rather than in their business.
• The program will be supported by advisors drawn from the private sector, who will encourage businesses to develop explicit plans for improvement and will be able to access limited funding to bring in additional specialists.
• The funding is 50/50 basis and up to $20,000 will be available, to engage external expertise to implement projects, recommended in the business evaluation.
• The government has indicated that the eligibility requirements will probably be as follows:
- The business must be operating for more than three years.
- The business must have sufficient turnover levels (not yet announced).
- The business must be operating in an eligible sector, which could include:
information technology and communications;
medical and pharmaceutical;
energy and resource management;
professional services; and
freight, transport and logistics.
• Business Management is scheduled to commence from the 1st July 2014.
• The government has indicated that this program is to assist businesses to understand the value of research and to give advice on how to engage a researcher, to assist with a program.
• The applicant must match funding of up to $50,000 to support the cost of bringing research capability into the business, for projects to be conducted over the next 3-12 months.
• Advice in accessing appropriate research advice from institutions.
• The government proposes to commence the Research Connections Program on 1st September 2014.
• The program will include a range of tailored commercialised services, designed to provide entrepreneurs and innovative businesses access to advice, connections and support, to enhance their prospects of commercial success.
• Matching funding of up to $250,000 is proposed, to assist businesses to progress the commercialisation of their new idea.
• The types of activities that could be funded include:
- The development of a business or commercialisation plan.
- An intellectual property protection strategy.
- Proof of concept work to establish the commercial viability of a new product or service, including prototyping.
- These activities could be undertaken over a period of up to two years.
• To access this funding, projects must involve development of a new product, process or service with a compelling value, proposition and a significant market opportunity.
• The government proposes to commence the Commercialising Ideas Program on 1st November 2014.
Characteristics Of A Well Run Business – Part 10
• To be successful, you need to know what your competitors are doing.
• Develop competitor intelligence files.
• Analyse your competitors' strengths and weaknesses.
• Take time out, about once every six months, to try and understand what your competitors' strategies are, so you can determine your strategies to successfully compete against them.
If you would like our advice on the establishment of a competitors' assessment strategy, please don't hesitate to contact us.
What Services Can Accountants Offer – Part 4
'Think Tank' Meeting
We can undertake a 'think tank' meeting with you, to enable a full review of:
Your concerns for your business
• What's worrying you about your business?
• Have you got some concerns about various aspects of your business?
• Are you worried about cashflow, debtors or succession within your business?
Debtors are a very important area for most small businesses. You are lucky if you don't have to offer debtors' accounts. However, most small businesses have to carry debtors' accounts. June is an appropriate month to calculate debtors' days outstanding, as at the end of May, and compare that figure to the budgeted figure of debtors' days outstanding, to see whether new strategies need to be introduced, to reduce the investment you have in debtors and, in turn, generate more cash for your business.
Stock in another very important area. June is a great time to undertake a preliminary stock take and identify obsolete or slow-moving stock. You may be able to sell that obsolete stock or, at least, remove it from your stock figures and undertake a sale to get rid of it before the end of June.
• Every business needs to be monitoring its cashflow.
• What needs to be done to improve your cashflow management?
• How is your business performing against the arrangements you've made with your bank and your own budgets?
Staff development is very important. It's very important for small business to ensure you employ the best possible staff and to continually train your staff so they can perform at a higher standard for your business. Do you need a staff development program produced for 2014/15?
Are you worried about how your business compares to others? We can organise a benchmark against similar businesses. To do this we utilise benchmark data, prepared by commercial benchmark suppliers, so we can compare your financial performance against similar businesses.
We will also compare your performance against the ATO's benchmarks, if they have published benchmarks for your type of business.
Succession planning is important for businesses, irrespective of the ages of the owners. Succession planning applies to every position in the business. We can have a meeting with you, to discuss the development of a strategy for a succession plan to be produced during 2014/15.