The Good News Blog

If your business is made up of a number of departments, use your statement of financial performance to think about how they’re performing in relation to each other.

Your statement of financial performance records all transactions relative to any product or service that you have developed for sale to customers or any expenditure that is not on a long term investment asset or loan repayment.

When the various components of the statement of financial performance are added and subtracted, the resultant figure will be the profit or loss for the business.

If the business has separate departments or readily identifiable separate products, then the financial statements should be prepared so that the results of those separate departments or product lines are clear.  Key items such as sales, purchases, and stock, and direct costs such as advertising, wages, rent and interest are allocated on a department or product basis, so that meaningful financial results can be determined.

If your business has five departments and you don’t dissect the income and expenditure relating to those departments into separate categories, how do you know if one or two of the departments are performing very poorly and dragging down the performance of the overall business?  While the overall profit and loss might be showing a profit, you could find that if you analyse the individual departments that two of them are losing substantial funds and that they are being subsidised by the other three departments.

If you know that this is occurring and you are allowing it to continue for a specific strategy, then that is a deliberate management decision.  The bigger problem is if you don’t know it is occurring and the poor performance of those departments is dragging down your overall performance as a business.  This can ultimately lead to real problems.

Reading your statement of financial performance with an eye for issues like this will put you in a better position to take action sooner.

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All businesses need regular financial statements.  One of the key attributes of successful SMEs is that they receive regular financial statements throughout the year and not just at the end of the financial year.

You cannot trade for twelve months and then have a set of financial statements prepared and expect to be successful in business.

The periodic financial statements that are prepared should be detailed.  Typically they should contain a lot more management information than would be included in the financial statements that are part of your business’ income tax return.

As the business owner/operator, it is essential that YOU understand your financial position at ALL times.

While there are variations with particular businesses, in general these are the key components of financial statements for SMEs:

•       Departmentalised Statement of Financial Performance with Gross Profit Percentages
•       Statement of Financial Position
•       Supporting Verification Workpapers
•       Statement of Cash Flow
•       Debtors’ Aged Analysis
•       Stock Analysis
•       Work in Progress Analysis
•       Creditors’ Aged Analysis
•       Capital Expenditure Summary
•       Bank Account Analysis

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• Do your customers say ‘WOW’?
• Do they recommend your business to their friends?
• Does your staff understand the lifetime value of a customer?
• Do you give guarantees?
• Do you send letters to new customers thanking them for their patronage?
• Do you acknowledge long-term clients for their continual support of your business?
• Do you have a customer database?
• Do you encourage customers to give you referrals to their friends and associates?
• Do you understand the demographics of your customers?
• Have you got procedures for handling complaints?

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When you’re running your own business, it’s easy to fall into the trap of thinking you have to be expert at everything.  And when you’re an experienced business owner, it can be hard to admit there are key financial concepts that you’d really like someone to go over again in plain English.  The MYOB Australian Business Survey 2004 identified that many SMEs desired advice from their accountants on business analysis and interpretation. 

Sometimes you know intuitively that there’s a way to use the available data to take the next critical step forward but you just can’t see it.  It’s always worth asking for more information. 

For instance, ratios derived from financial reports can be very revealing.  Ratios are calculated so as to assist management in understanding the information contained within financial reports.  They can help you establish more accurate key performance indicators in your business.  This way you can set clearer goals and be able to measure your success more accurately.

Common ratios include:

• Breakeven Sales
• Stock Turn Ratio
• Debtors’ Days Outstanding
• Gross Profit Percentage
• Mark-up Percentage
• Net Profit Percentage
• Return On Investment
• Wages To Turn Over Percentage
• Sales Per Person
• Cost Of Goods Sold Ratio
• Current Ratio

If you would like to discuss ratios that are applicable to your business to assist you in the interpretation of financial accounts, give us a call.

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In business you can never be everything to everyone.  To be successful you need to come up with a specific proposition or compelling claim that is targeted at your customers in such a way they would be foolish to go elsewhere.  This is your 'differentiation' - your 'competitive edge'.  You’ll also hear people talk about a ‘point of difference’.

In developing your competitive edge you need to consider what you have to offer that someone else hasn't:

•     What competitive edge can you present? 
•     Have you got happy customers? 
•     How do you create happy customers? 
•     What are the benefits of a small business in dealing with clients?
•     Have you considered what the 'moment of truth' is in your business?

A 'moment of truth' occurs every time your business and a customer come into contact.  This may be direct contact, as in face-to-face, by telephone, by direct mail or indirectly by way of the delivery firm that you use as a sub-contractor.  What your customers experience at these times will have a lasting impression.  You need to know when a moment of truth will occur and ensure that your team members have been appropriately trained on how to react at that time.

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And the award for this month’s good news item in the transtasman stakes goes to … Openside’s own partner company Xero.

Here’s one of a slew of upbeat reports on the success of the “New Zealand accounting minnow” in pushing into the Australian market during a challenging economic time (and which has enjoyed its biggest gains during the past six months).

The Sydney Morning Herald piece quotes Xero founder and CEO Rod Drury as He saying he expects accelerated demand now that the partnership with Telstra T-suite is on-stream and with the continuing involvement with banks and card providers through data feeds onto the software.

The amping up of media interest across the Ditch in Xero has also been noted by this country’s major daily, the New Zealand Herald, which also offers a market perspective on Xero’s doubling of clients during the past year

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So John Key provided his speech on the Tax Working Group report and his intentions for the review of taxation across NZ.

Fundamentally, I agree with the increase in GST rate. Yes it does impact on those on low incomes proportionally more than on the wealthy. But is also is a consumption tax. And was it not excessive consumption one of the issues that was cited as a causal factor for the recession. It is also a very transparent and equitable tax across the whole economy. Someone wryly pointed out that even drug dealers get hit by GST. But being an accountant I am thinking how will this work in practice. 15% will be a pain to calculate compared to 12.5%. That is, to get from the GST inclusive amount to the GST exclusive amount you just divide by 9 and multiple by 8. Nice round numbers. But at 15% the divisors and multiples are not even close to whole numbers. The best option would be 16% (divide by 6.25, multiple by 5.25) or 20% (divide by 6, multiple by 5). Let’s keep it simple. I do not have access to the numbers to work this out but if we did lift GST to 20% (note the UK is 17.5%) then income tax rates could come down even further – say to 25% or even lower.

Equally I also support the flattening of tax rates. Again this benefits the wealthy. But are we striving to improve our wealth and futures or are we wanting the state to encourage us and others to seek one or more subsidies due to the cash benefits they offer.

The targetting of property is in my opinion a bit of a red herring. Each asset class has its pros and cons. If there is sufficient change to encourage investment away from property then we may have a bigger issue as the demand for housing stock is already being signalled as exceeding the construction being undertaken. And the resulting negative impact of reduced investment in property will flow through to the trades and manufacturing activities that depend on building.

Bring on the May budget and lets focus on creating wealth.

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Openside is holding a client function where we have invited Tom Reidy of Catalyst 90 to come in and talk about Social Media.

It’s a great way to extend your knowledge and also the possibility of expanding your client base.

Look forward to seeing you there!

Where: Openside, Level 14, 49 Boulcott St, Wellington.

When: 15th of February 2010

Time: 5:30pm Start.

Numbers are limited please reserve your place here.

Once we reach room capacity we may have to turn people down.

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