Monthly Archives: November 2015

The perils of discounting

I bought some fuel today and picked up a drink in the process.  As I did so, I saw one of those usual attractive deals – only an extra $2 for a drink (costing around $3.25) when buying a sandwich for $5.  The service station will have worked out this all out but it reminded how often small business owners get it wrong when discounting.

Take the situation of a firm which sells 10 items a day at $10.  Their costs of sale are $50 (so their gross margin is 50%) and their overheads are $30.  They make $20 profit a day.

Let’s say they offer a 20% discount.  Their cost of sale will remain at $50 (unless they can arrange a better deal) so they are now breaking even as their gross/trading profit is the same as their overheads.

Many clients get this but not all do.  However, what many clients fail to understand is how many more items they need to sell to make the same profit as before.  The answer in this example is a 66.67% increase sales – they now need to sell 16.67 units a day up from 10.  Or to put it more simply, if they sold 3 before, they now have to sell 5 just to hold their ground.  Is that possible?  May be it is, may be it isn’t.

The outcome of reducing prices in your business and the required increase in the number of transactions to make the same profit will depend on your margin, your cost structure and the level of discount.  We can show you this number simply.  With that knowledge, you can then make an informed decision.  All too often, people don’t know the result of making such a change and walk into what was an avoidable disaster.  Let us help you make an informed decision – in situations like this as well as many other scenarios whether they be quoting for work or responding to a customer’s’ request for a discount.  You have everything to gain and nothing to lose as we don’t bill possible clients for their first meeting.

At times it is appropriate to discount such as with getting rid of dead stock.  However, discounts are often a path to ruin.  If you are going to discount, make sure you do so understanding the variables at hand and therefore the likely outcome.

At MRS, we will spend today planning for your success tomorrow.

 

Avoidable disasters

Our March estate planning seminar was booked out.

As every client couldn’t attend, we passed on at that time a few vital considerations for everyone’s consideration.  One issue was to ensure others know where your most recent will is located.  Another one of those considerations was to make sure that someone knows your passwords.  In today’s world, it is possible to have a minimal and at times even a non-existent paper trail.  Unfortunately, we met with a widow during last week who is battling this very issue.

This can be a real issue with shares.  The ATO might provide us with a list of (most) companies that have paid dividends.  We will not though have the holder number which is required to sell shares for all holdings other than those sponsored by Chess.  It can also be an issue for assets that don’t generate income.  One client recently received a surprise to find out that they were the owner of real estate they didn’t know their late husband owned (he owned more than a baker’s dozen).  It’s worth a bit so its lucky it came to light – otherwise it may well have become someone else’s under adverse possession laws.

The only thing I know for certainty about everybody is that we will all take a final breath.  The only variable is when.  The above two considerations are just two ways you can minimise the stress and financial loss for your intended beneficiaries.

At MRS, we will spend today planning for your success tomorrow.

 

If only – part 1

We have just finished the 2015 financials for a client. They have had a good year.  They know their industry well, move with change and make good decisions.  But with our cutting edge analysis software, we have identified that:-

  • For each day they reduce their stock turnover (i.e. days stock held before sell it), they will untie $959 of cash. So, if they reduce the days stock is held before it is sold by 10 days, then they will add $9,593 to the bank balance.  $10,000 may not sound like much to most businesses but it is very important to a manufacturer who sells custom made product and which has high wages and rent to pay on time every time.
  • Net profit increased but their gross margin fell. If they had obtained the best margin from the last 5 years then they would have made an extra $21,360 of net profit. I’m aware of one good and acceptable reason as to why their gross margin fell but isn’t it interesting to know things such as this so that proper informed decisions can be made – which traditional accounting systems nor most accountants don’t tell you.
  • As they have grown, so too have their costs.  Consequently, their break-even sales have risen.  Moreover, we will tell them what their margin of safety has become (being how much their sales can fall at their current cost structure until they fall to a break-even situation). Interestingly, for a successful business, they can now only afford for their sales to fall by 15.8% before they start to lose money.

As I said, most accounting systems and accountants don’t tell you these important things.  Now wonder most small and medium business owners scratch their head when trying to figure out what their cash and profit figures are what they are.

We will discuss those three matters (as well as many other matters) at our upcoming meeting with our client. Does your accountant help you measure and understand such things about your business?  If not, the best decision you can make is to speak to us.  Your first meeting is free so it won’t cost you anything.  Your greatest cost may be stay with your existing accountant.

At MRS, we will spend today planning for your success tomorrow.

 

WorkCover injury poster

There are a number of obligations under WorkCover.

One of the fundamental ones is to display the If you are injured at work poster which you can access at http://www.rrp.com.au/safety-blog/workplace-noticeboard-requirements

If you are visited by a Victorian WorkCover official then they will most likely ask to see it – and you will be fined if you don’t have it displayed.

If you employ workers (and some types of contractors) interstate then you will also need to comply with that state or territory’s obligations (which can also be checked at the above web page link.

At MRS, we will spend today planning for your success tomorrow.

Part 2 – your break even point

Two weeks ago, I wrote a blog on the need for business owners to understand their break-even point. Gordon Ramsay thinks it is critical to know; I couldn’t agree more.

The blog generated a fair bit of discussion and on the back of those conversations, I would like to explore one aspect in greater detail.

I stated that the break-even point to monitor is not the point at which one starts to make a profit but one which also includes a fair return for the effort, time, finance and risk that an owner invests in a business.  This means that the expenses used in the break-even calculation should include the following items:-

  1. A market salary for the skills and time worked in the business. In this regard, we find that small and medium sized business owners don’t allow enough for the hours they work (being significantly more than a 40 hours week). We often find with new clients that they are earning a good income but working 20 more hours a week to do so.
  2. Interest on any loan account balance for monies owed by the business at say home loan rates. If you put money in a bank account, you would want to earn interest on it. If you lent it to someone you would want to earn interest on that loan. The real return on a business should therefore also include a fair return on the money loaned and invested in the business.
  3. Being in business carries risk. Some businesses carry low risks, others are quite significant including such thing as risk of bankruptcy and fines for non-compliance measured (often in the tens of thousands of dollars). If you invested in a risky investment, you would want a higher return. Likewise, your desired return from your business should reflect the risks taken.

The common problem is that what most businesses record as owner’s remuneration doesn’t reflect this real break-even number. This is because business owners pay what they can pay, sometimes underpay themselves and/or the results are skewed by tax decisions.

We have advanced software that will adjust the real numbers to either increase or decrease owner’s remuneration so that the business reports on its real numbers. And from that knowledge, proper decisions can be made.  Why not talk to us about what your real break-even point is and the actions you can take to improve your situation.

 At MRS, we will spend today planning for your success tomorrow.