Profitability & Cashflow- The Keys to a Successful Business

This is frequently the biggest loss-maker in well-run businesses.

Failure to calculate product/service gross margins is often the reason many businesses fail to reach their potential. Out of all the issues facing business owners this can have the biggest impact.

Sales volume & price. Brexit. Business funding. Product gross margins. Competitor actions. Slow-paying debtors. Cash shortages. Increased regulation. Employee issues. Suppliers. Operational issues. Currency movements. Management capability. Staff efficiency & motivation. Customer complaints. Quality issues. Getting Government grants. Far East competition. Multinational buyer power. Lack of profits. Taxation. Cyber threats.

EI support to improve competitiveness of exporters to the UK

Full marks to Enterprise Ireland who have announced a scheme of funding support for existing exporters to the UK whose businesses may be adversely affected by Brexit. For successful applicants, EI will commit to pay 50% of the total cost up to an expenditure level of €10k.  The funding support covers consultancy costs to investigate diversifying into new markets and market segments, investment in innovation, improvement in operational competitiveness, and/or enhancement of strategic financial capability.  This is a terrific opportunity for exporters to the UK to prepare an action plan to deal with the consequences of Brexit.

This support is geared towards improving the competitiveness and market reach of Irish exporters.

Nine areas of exposure:

  • Slowdown in UK marketpossible market contraction and price pressures
  • Currencyimpact on profits; delayed decision making due to uncertainty
  • CustomersBrexit will also impact customers of our clients
  • Competitionexpect new and increased competition
  • Supply chain – impact on cost, certainty and quality
  • Transport and logisticsestablished transport routes may no longer be optimal
  • Regulations and standardsmay change for exporting to and importing from UK
  • Customs, tariffs and taxationmay see an increase in administration, cost and time
  • Movement of peoplepossible restrictions.

Four strategic areas:

  • Competitiveness: Optimizing people, equipment, technology, and information in sourcing, production and delivery of goods and services.
  • Market diversification: Diversifying into new international markets and new market segments within the UK and elsewhere.
  • Innovation and R&D: Development of better solutions (new or improved products services or processes) to provide a strong competitive edge.
  • Financial Management: Strong operational finance in parallel with strategic financial planning.

 

Driving in the dark and failing to grasp nettles…

For a long time, the two most common management failures I’ve seen in business are down to two key things:
• Failure to grasp nettles and
• Driving in the dark.
Failure to grasp nettles is failing to deal with those issues and people that are preventing your business from running as well as it should, but where you feel you’d rather leave dealing with them until some other day. It’s like not going to the doctor until that chest pain becomes really painful.

Driving in the dark is the term I use when business owners are running their business without a clear lack of visibility of how they are doing and what’s the best road (course of action) for them to take on the things that really matter in their business. Not a good idea, either in business or on the roads.

Like many things in life, sometimes good-quality, up to date accounting and management information is only really appreciated too late in the day. That’s when it’s either not available or received too late to make any difference to changing things.

Three very recent instances where business owners were frustrated and shocked at what had happened as a result of not having the ‘right’ information. By ‘right’ information I mean information that enables business owners to prevent losses and make the profits they expected when all other things are normal.

Instance No 1 – A business owner (not a previous client) got me to do a comparison of his business with his competitors. The information I was able to give him (showing his excess labour costs, lower margins, higher investment in equipment) came as quite a shock to him. Competitors, whom he had deemed as ‘inferior’ were in fact shrewder operators in terms of making more profit from their business.
The solution to the poor performance of his business was to ‘grasp a nettle’ that he had previously avoided grasping i.e. allowing a manager to ran things the way that best-suited the manager rather than what was best for the business.

Instance No 2 – A business engaged in the contracting sector with a vast array of different products and contracts. The business in general, is very well run with good systems insofar as they were implemented. Despite numerous previous recommendations, this business had not got up to date cost information on each project and was operating in a vacuum as regards where management action was most urgently needed. The end result on a couple of projects was a shock to management in terms of the margin they had expected versus what was achieved. Had they had up to date cost information more action could have been taken to achieve better results.
In this case, the problem was a case of ‘driving in the dark’ without the proper management information to see where they were going.

Instance No 3 – A high-growth business which had achieved serious growth in sales in a short time. The owner had done nearly all the right things but had a deficit in accounting information with no management accounts available until some time after the year-end.
End result was a shock. Was this where that business owner expected to be? No. Could the results have been different if the ‘right’ information been available sooner? Absolutely.
Unfortunately for this owner, this was another case of ‘driving in the dark’, running a high-growth business without the proper management information to chart the route ahead.

Getting the right information and making the correct decisions are the keys to running successful businesses. Even when business owners do everything else right but neglect these two, the results can be very damaging. Not unlike failing to visit the doctor when you should.

Hoping for the best….or Doing your best.

I’m usually interested in the results of surveys amongst business owners and managers.  Usually there’s nothing too startling in these.   But some results from InterTradeIreland’s Business Monitor Report for Sept-Dec 2016 recently released really surprised me such as:

  • 98% of Irish companies have no plan in place to deal with the consequences of Brexit.
  • Only half of businesses with cross-border sales were concerned with the Euro/Sterling exchange rate.

I would have thought practically all owners/managers have been thinking quite a lot about Brexit.   No matter whether you are entirely domestically or partly/fully export orientated it’s going to have a significant impact on all businesses.     When I read that 98% of companies had no Brexit plan I just assumed it was meant to indicate they’ve no really serious, detailed plan of action as distinct from having no plan whatsoever.   But when this is combined with the other finding of only half the businesses doing cross-border trade are concerned about the exchange rate you begin to wonder how well they would be prepared for Brexit and volatile exchange rates before it happens.

Some other results from that survey include:

  • Around 1/3 of firms say that they are running at just break-even and 78% are already running close to or at capacity.
  • Half of respondents mentioned rising energy and other overhead costs as concerns.
  • Many businesses are struggling to find good staff.

Although many results from this survey were showing quite positive trends (a majority of firms operating close to capacity, construction activity growing strongly, exporters doing better than domestic-focused businesses etc.) when you examine the findings, some elements of complacency seem evident.

The downsides and any potential upsides of Brexit have all been explored at length elsewhere.  But irrespective of the actual final nature of Brexit, the most likely outcome for Irish businesses will be that those well-prepared will get through it, while those ‘just hoping for the best’ could be in for a very difficult time.

Even if your business is operating at almost full capacity, just breaking even, with rising costs, difficulty getting good staff (or possibly likely getting the best out of what you’ve got), then you can still look at improving your situation rather than just hoping everything will just work out okay.

On the other hand, if you’ve got a proper handle on all your business activities with plans for Brexit etc. you are doing much more than ‘just hoping for the best’.  You are doing your best.

Moving from hoping to doing isn’t too difficult.   As the Nike ad says: ‘Just Do It’.

Jargon-Busting and Plain English

At the recent Kilkenomics festival one of the shows (Jargon-Busting) featured economists & comedians give their interpretation of many economic terms. Aside from the normal economists interpretation the comedians gave their ‘alternative’ interpretations many of which seemed to be closer to reality than the normal meanings.  No wonder economics is called the dismal science as very few economists apart from Colm McCarthy and David McWilliams have the gift of translating it into plain English that makes great sense.

It started me thinking about the proliferation of jargon and the over-complication of language.

For a long time, I’ve had an issue with the language used by solicitors in legal documents which to me seems to be written not in English but in their own entirely different language called ‘legalese’.   Their practice seems to be to use as many words as possible to over-complicate rather than to make documents transparent. Accountants, IT providers, tax experts can all fall into the same trap if they aren’t careful.   Some ‘Lean’ consultants seem to put as much focus on learning some Japanese terminology as ensuring delivery of the actual process improvements.   Why do we need Japanese terms to describe waste elimination, process improvements and for the mission, vision, goals, and annual objectives to be communicated effectively throughout organizations?

But I hear you say that business is complicated and that’s why ‘jargon’ has increased. Do business owners need to deal with Jargon-speakers or should they demand plain English in all their communications?

As Leonardo Da Vince said: ‘Simplicity is the ultimate sophistication’.    This applies to systems, structures and terminology.   With over-complication of systems, structures and language there a danger of losing sight of the actual business fundamentals?

Most business owners need to focus on whether their business is getting the correct solutions to some simple & basic questions such as:

  • Who are my key customers as distinct from just customers?
  • What are their crucial needs in terms of quality, price, service etc.?
  • What is my USP that attracts key customers?
  • How can I extend this to a wider audience?
  • Do I have the right metrics to determine my most profitable products/customers etc.?
  • Have I measurements on weekly sales & profits?
  • Do I have adequate finance for the next 3-6 months?
  • Have I explored alternative sources of finance?
  • Are all my staff working towards the same goal as myself?
  • Are there problems that I’m avoiding dealing with?
  • Have I applied the 80:20 principle to determining where and how I can improve my business performance?

If you or your business is inhibited by any element of over-complexity or jargon-speak from economists, accountants, lawyers, bankers, solicitors or advisors then perhaps it’s time to look for some jargon-busting talk and plain English.

Now is the time for real Brexit planning and action

Very few businesses in Ireland will be unaffected by Brexit which is probably the most serious threat to the future economic prospects of Irish businesses.   Even if you don’t import or export your customers may now be looking at cheaper imports from the UK with a weaker sterling.

Initial optimism of major opportunities for Ireland in the wake of the Brexit vote have since been tempered by the swift move of the UK to reduce corporation tax rates, tie up trade deals with non-EU countries and avail of the export opportunities presented by a weaker currency.

Five weeks after the Brexit vote many long-term consequences remain uncertain including:

  • whether Ireland can attain a special dispensation concerning having to implement a fixed land border
  • Whether a free movement between Ireland and the UK can be maintained irrespective of whether the UK wishes to restrict this between itself and all other EU countries
  • Whether Ireland can achieve any ‘special status’ in a trading relationship with the UK when the Brexit is complete.

If your business exports then you might be advised to intensify your efforts to win a share of the many opportunities that will exist for the next few years whilst still exploring other markets.  The UK’s National Infrastructure Delivery Plan envisages huge spending on more than 600 projects in all sectors across the UK, up to 2021 and beyond.   This plan and others include investments of £483bn in 10 waste projects, £256bn in 167 energy projects, £134bn in 329 transport projects, €6bn for communications and £5bn for science and research plus many billions to be spent on flood and water infrastructure.

Opportunities in these and many more sectors exist for Irish businesses who have the expertise and ability to tender for and win significant contracts in the UK.

Irrespective of the outcome of the eventual Brexit negotiations the consequences are that Irish businesses will inevitably face a more difficult operating environment and will need the following:

  • A Business Plan adapted for the new scenario with plans to deal with each outcome of the negotiations.   This will entail both short-term and long-term plans.
  • A structure which will ensure their plans are achieved.
  • For exporters a very careful scrutiny of their costs and margins at each exchange rate and determination of the point at which exchange rate the UK market becomes uneconomic.
  • An intensification of efforts to find other export markets for their goods.
  • Ensuring their plans are formulated to avail of all Enterprise Ireland supports for exporters.
  • For businesses just serving the Irish market they will need a strategy to ensure they can compete effectively with cheaper UK imports?

If you need advice on any aspect of this feel free to give me a call.

Competiveness complacency?

Yesterday’s update on Ireland’s ranking in world competiveness placed Ireland 7th out of 61 countries surveyed, an increase from 15th place in the previous survey.

This is good news for the country and could give the impression that most Irish businesses might have a relatively easy job selling their products/services on home and international markets.

After all, if we as a country are in the top 7 of most competitive countries then it would be expected that most well-run Irish businesses would be right up there with the best internationally.

Unfortunately, it’s not quite as simple as that.

This survey ranks countries on a wide range of macro factors such as GDP Growth, Flexibility and adaptability of people, Investment Incentives, National Culture and Finance Skills. All very important things in their own right but not meaningful enough for individual businesses or typical SMEs.

No doubt our politicians will make great play of this improved ranking.

But Irish businesses are facing increasingly significant challenges including increased costs in insurance, bank finance, payroll, local authority rates etc. These are in addition to previous cost increases levied by governments in the form of withdrawal of redundancy rebates, increased PRSI costs and a failure by energy companies to pass on oil price reductions. Add to these the likelihood of further payroll costs increases coming from rising house prices and rent increases and the outlook is challenging to say the least.

But for businesses with the right approach and strategy these are challenges to be overcome. For business two of the key measures of success are profitability and cash flow.

If you would like a free guide on practical measures you can implement for increasing your profitability and cash flow in your business just request my report from the home page.

With the right approach many businesses can make very significant improvements and can make Irish businesses as competitive as possible.

Brexit planning – Wait until after the vote

Brexit planning right now (pre 23rd June 2016) is a waste of time.

Not my words but those of the boss of one of Ireland’s larger companies who earns a large slice of their sales from Irish-UK trade and tourism.

Most business owners already had enough to worry about before Brexit came along.

The possibility of the UK voting to leave the EU in next month’s referendum is drawing a varied range of responses from Irish business leaders on their intentions to deal with it. Practically all agree a Brexit would be extremely bad for many sections of the Irish economy. But aside from appealing to all UK voters to remain in the EU their immediate plans of actions are quite varied. We all hope the UK voters will decide to stay in the EU but if they don’t then what should Irish businesses do?

The boss of Irish Ferries (Eamonn Rothwell) says “it’s a waste of time preparing for Brexit at the moment as it might take two years to conclude a deal on the exact terms and many more years to arrange trade agreements between the UK and EU”.
My own view is that any business planning any long-term investment in the UK will delay it until the vote is over and review their intentions if the vote is in favour of a Brexit.

If Brexit happens then all businesses need to evaluate the potential impact on their sales, customers, suppliers etc.

More important than spending time thinking about Brexit right now the real issues that should concern most business owners at the moment are more likely to include:
• Getting sufficient sales at the right margin – not just more sales!
• Getting paid on time.
• Ensuring their business is as cost competitive as possible in a climate with costs increasing in many areas.
• Ensuring their business has adequate funding and the appropriate mix of funds.
• Ensuring their products/services are keeping pace with changes in consumer trends, tastes and preferences.
• Reviewing the activities of competitors and devising plans to keep ahead of these.
• Reviewing their product development plans.
• Exploring potential export markets.
• Ensuring their employees are properly motivated to give their business a competitive advantage.

When all of the above are fully looked after the Brexit issue might take some consideration but only if the ‘Vote to leave’ is carried on June 23rd.

Sage survey highlights value of mentors to SMEs.

Closing the ‘mentoring gap’ could help Ireland’s 200,000 SMEs to increase their chances of success. An international survey run by Sage has found 94pc of Irish SMEs acknowledge that mentoring can help them to succeed but less than a third are currently making use of business mentors. The survey found that closing the ‘mentoring gap’ could help Ireland’s 200,000 SMEs to increase their chances of success and that businesses that do not have access to, or choose not to make use of business mentoring are at a disadvantage. Mentoring can help businesses to make the right changes at the right times, develop new skills, navigate diverse company growth decisions and understand how to deal with people and problems.

Same income but different tax liability

Self employed and proprietary company directors should support the ISME campaign to stop the unfair and discriminatory tax treatment levied on these groups.
Get writing to the Taoiseach: http://isme.ie/lobbying/current-issues

Employees are entitled to claim an additional tax credit (currently €1650). The credit is not available to Self-employed or their spouses or civil partners, if paid. This alone means self-employed pay €32 per week more than employees.

Recent Revenue figures show there are 105,000 self-employed on less than €50,000.

Why then must a self-employed single person on an income of €15,000 pay 8 times more tax than her employee on the exact same income and also have a lower entitlement to social welfare benefits.

Now on top of the extra tax, the self-employed suffer a minimum charge of €500 PRSI and pay 4 per cent of our income; employees pay no PRSI if their income is under €352 per week and a percentage thereafter

Make this ‘the best small country to do business’.

Contact Sean Donnelly