Profitability & Cashflow- The Keys to a Successful Business

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’.

Achieving 2015 performance and profitability targets

Now that we are well into 2015 it is worth reflecting on how our initial profitability expectations for 2015 are materialising and how we expect to achieve them.

If we feel our business needs improvement over 2014 do you feel you have the best plan and the means to make it happen?

The facts prove the majority of businesses achieve lower profitability levels than what they initially expected at the outset. Most business owners follow all the rules and operate to the highest standards they can. Taking advice from auditors, solicitors, tax advisors, marketing experts and others they try to follow all the changes in tax, company law, employment laws as well as trying to satisfy changing customer tastes, preferences & demands. Despite following all the rules and trying to do all the correct things up to 2/3 of businesses in some sectors are deemed to be at high risk of business failure. Even in lower-risk sectors the risk of business failure is still around 50%.

Unless business owners have the best approach & standards in

· Reaching their potential customers with their messages

· Getting their product/service offerings accepted by customers

· Ensuring their they deliver these at profitable rates

· Getting all the elements of the business operating to the required level

they are unlikely to be successful even in the short term.

Using a cooking analogy the best meals result from not only having all the right ingredients but in the preparation, cooking, presentation and service. Business success also needs not only the best ingredients (marketing/selling, production & finance skills) but also in having these work together in the best possible manner. Throwing the correct ingredients into a pot and turning up the heat with an occasional stir might not produce the best outcome either for a chef or a business owner.

Late payments problem worsening… but a potential solution.

Last week’s survey results from Close Brothers Commercial Finance in which 20% of SMEs report that the issue of late customer payments is worse now than a year ago highlights the importance of businesses having excellent credit control practices and policies.

According to the Close survey almost 60% of those negatively affected by late payments say the situation hasn’t improved in the last year. Of those affected by late payments, almost half claim that they have had to write off up to 10% of their turnover on average in the last 12 months whilst 31% have had to write off between 10% and 25% of their turnover. Very few businesses could survive having to write-off amounts of this size.

Far more businesses fail from lack of cash flow than lack of profits. Many profitable businesses have failed through lack of proper cash flow procedures and policies. One of the most common signs of businesses where profits are less than what they should be is poor or inconsistent credit control policies. In many instances proper credit control policies are not implemented at the order acceptance stage but some token policies are haphazardly implemented at the debt collection stage. This is far too late in the chain of events to make the necessary difference if the debtor does not have the capacity or intention to pay the debt when it becomes due.
One possible solution to the whole debt collection process is to outsource it either in whole or in part. One excellent company who handles either the entire collection process or part of it is: CMO Cash Flow Fulfillment (http://www.cmo.ie/). CMO specialise in credit control, cash flow and bad debt management services.

If the credit control and cash flow policies are run properly attention can be given to the other aspects of generating profits and cash flow such as increasing sales, identifying and rectifying unprofitable products/services and customers, sorting out funding problems, increasing productivity, re-assessing priorities and resources etc. I will deal with these in future posts.

If you need advice on any aspect of improving profits or cash flow why not give me a call.

For more see http://www.seandonnelly.ie/helpful-resources.html
or contact me on 056-7761461 or 086-6488002

The New Company Law – What directors really need to know… and what they need to do.

The New Company Law – What directors really need to know… and what they need to do.

The Companies Act 2014 is due to be enacted in law in June 2015. It aims to simplify the masses of existing legislation (3097 pages) into a new more straightforward piece of legislation. There are 1448 sections in the new law but what directors really need to be aware of are that the role, responsibilities and duties of directors will increase in 2015 and beyond. The Act sets out eight duties of company directors as follows:

1) Act in good faith in what the director considers to be the company’s interests;

2) Act ‘honestly and responsibly’ in the company’s affairs;

3) Act in accordance with the company’s constitution (1 page document);

4) Not to use company property for their own or others use unless approved by the members or in the constitution;

5) Not agreeing to restricting the director’s power to exercise an independent judgment;

6) Avoiding conflicts of interest unless released by the members or by the company’s constitution;

7) Exercising care, skill and diligence; and,

8) Have regard for the employees and members of the company.

Directors will also be required to ensure that the person appointed as the Company Secretary is suitable and has the necessary skills as required under the Act. Whilst much of the new legislation may seem not seem too different to the casual reader the likelihood is that the new legislation will be implemented to the letter of the new law. In particular, directors need to be aware of the following:

Officer in Default’ is frequently mentioned in the Act.
Loans to directors need to be properly authorised and meticulously recorded.
Option to seize the personal assets of directors (S.53) in the event of default where regulations have been breached.
More prosecution & disqualification of directors of insolvent, un-liquidated companies.
Directors cannot walk away and abandon an insolvent company. If they do they face disqualification from acting as directors or managers of any business for a minimum of five years.

In reality the increased enforcement will almost certainly mean that the enforcement of the rules will be precisely as outlined. When this new legislation is combined with High Court precedents that have established that directors cannot evade their responsibilities by either ‘ignorance of the law’ or ‘failure to review regular management accounts’ then the scope for personal liability is massively increased.

More on this soon.

High Court Judge says directors need regular management accounts.

Top company law expert Brian Walker in his seminars on the Companies Act 2015 which will come into law on 1st June 2015 highlighted serious risks for company directors who fail to manage their businesses properly. The onus on company directors now extends to having knowledge of:

1) Basic Corporate Governance Rules including the relevant sections of the new Companies Act 2014.

2) Other enactments such as Health & Safety Law, Employment Law, Equality Law, Revenue Law, Data Protection, Waste Management, Fire Services Acts, Food Safety & Hygiene etc.

3) Common Law derived from previous and higher court decisions and now established as precedent.

4) The constitution of the company replacing the old Memo & Articles of Association.

5) Directors of companies subject to audit will need to certify a Directors Compliance Statement.

As previously mentioned, ignorance of the law is not an excuse for non-compliance and the new Act increases the onus on directors to be fully compliant. Two High Court cases are very relevant:

1) In a 2009 High Court case Mr Justice John MacMenamin held that brothers Michael and David Rochford, directors of MDN Rochford Construction Ltd, Blanchardstown, Co Dublin, had acted irresponsibly in running their company which went into liquidation. He said “it was the directors’ responsibility to ensure there were monthly management accounts available to them to ascertain whether the company was trading profitably”. He also stated” It was not unusual for company directors to confuse and misconceive increased turnover as improved profitability but this was no excuse”. (The bothers were found guilty and banned from acting as directors or managers of a company for five years).

2) ‘Wife/Spouse’ directors are as responsible as ‘full-time’ directors as determined in a High Court case (Durty Nellys, Bunratty) over 30 years ago. Equally directors from a technical background who would not have been familiar with company law and who may have relied on other directors to look after such matters are equally responsible when things go wrong.

Excuses such as “I was not responsible/aware of what was going on in the company” will cut no ice. The Office of the Director of Corporate Enforcement (ODCE) will be using the new laws to ensure all directors fully comply with all their responsibilities.

I believe the challenge now is for all company directors to fully grasp the realities of the new laws. For those who’ve operated on a ‘It will be alright…’ basis in the past, they need to realise they must carry out all their responsibilities and they might actually be held accountable for actions or failure to act.

30+ Ways of Improving Cash Flow

1. Increase cash sales as a percentage of overall sales.
2. Reduce direct and indirect costs and overhead expenses.
3. Defer discretionary projects which cannot achieve acceptable cash paybacks (e.g. within one year).
4. Increase prices especially to slow payers.
5. Review the payment performances of customers – involve Sales Reps in the collection process.
6. Implement more selective credit terms.
7. Seek deposits or multiple stage payments.
8. Reduce the amount/time of credit given to customers.
9. Invoice as soon as work has been done or order fulfilled.
10. Improve systems for billing and collection.
11. Use the 80/20 rule to control stocks, debtors and suppliers.
12. Improve systems for paying suppliers.
13. Generate regular reports on debtors aging and collection status.
14. Establish and adhere to sound credit practices – train staff properly.
15. Use more pro-active collection techniques.
16. Add late payment charges or fees where possible.
17. Increase the credit taken from suppliers.
18. Negotiate extended credit from suppliers.
19. Make prompt payments only when worthwhile discounts apply.
20. Reduce stock levels and improve control over work-in-progress.
21. Sell off or return obsolete/excess stock.
22. Use invoice discounting or invoice factoring facilities to accelerate receipts from sales.
23. Defer or re-stage all capital expenditure.
24. Use alternative financing methods, such as leasing, to gain access to the use (but not ownership) of productive assets.
25. Sell off surplus assets or make them productive.
26. Re-negotiate bank facilities to reduce charges.
27. Seek to extend debt repayment periods.
28. Net off or consolidate bank balances.
29. Enter into sale and lease-back arrangements for productive assets.
30. Defer dividend payments.
31. Make medium- and short-term cash flow forecasts and update them regularly.
32. Raise additional equity.
33. Convert debt into equity.

Poor management skills hampering growth of SMEs

Now it’s official! Results from a major UK research project show “poor leadership and management skills and a widespread failure to adopt management best practices are constraining the performance and growth of a large number of SMEs.”

The research also shows that SME performance was closely related to levels of leadership, management and entrepreneurial skills as well as the tendency to adopt management best practices. In the study these factors were consistently positively related to both turnover and productivity

There is no reason why SMEs cannot adopt the best management practices such as strategic planning, implementation of proper systems and controls to increase business performance and tackle inefficiencies. This UK survey (from Warwick Business School ) covering 2500 SMEs highlights the strong correlation between good management practices and increased growth in turnover and employment. Ensuring these convert into profit and cash flow growth is the critical remaining challenge and one where many businesses without key management skills fail. Of course it’s not just a matter of throwing money and resources into a business. It’s a matter of identifying the critical issues and tackling these.

Are Irish SMEs any different to UK SMEs and are the same tendencies not applicable here also? Unfortunately the results of companies filing accounts in the CRO suggest the same problems apply even stronger here but there’s no reason why we cannot change this. Usually it just means a business owner deciding ‘there might just be a better/different way of doing some things’ and seeking some remedies

The second half…

Now that we are past the half-way stage of the year many businesses will be looking at their performance in the first half and wondering if they can improve things in the second half.

Even in many amateur sports most teams and individuals have a half-time assessment, look at their performance and decide what they need to change for the 2nd half.   Besides the actual score other factors such as the amount of possession, tactics, defence and attack policies, weaknesses & strengths of our own team as well as those of the opposition all have to be taken into account.   Team sports for instance have analyses of team & individual performance on possession, shots on and off target and player’s speed, distance covered by individual players etc.

Unfortunately some businesses don’t even know the score at half time score for quite a long period afterwards.   Without it they cannot have a good judgement of how well their tactics are doing or assess their real strengths, weaknesses or further opportunities lie.   This analysis does not take place weeks or months after a game – It happens on the spot and particularly at half time when there’s an opportunity to change things for the future.

The notion that sport is ‘only just a game’ is long forgotten in most competitive sports, amateur and professional.

When we look at business however and see the lack of measurement of many critical performance measures in some businesses it would be very easy to think business performance measurements are not taken as seriously as in sport.  The reality for many businesses is that they don’t have any real indicators of their performance until months after their year end, never mind any half-time assessment.  If a Martian landed on earth and looked at the performance measures commonly used in amateur sports and also looked at those used in some businesses they might very well be confused as to which is ‘only a game’ an which is the ‘serious’ business.    Of course all business owners make the best efforts at running their business but in many cases the critical analysis and assessments of where improvements can be made is missing. In some cases the assessments might be done by those playing without any outside involvement.

In business a half-time review is not just about calculating the score.    It’s a matter of finding ways to improve things in the second half.  It’s about looking for ways to increase sales, improve margins, increase cash flow, cut costs and finding where opportunities are won and lost.  It might be time to consider different tactics and perhaps a change in direction?   Perhaps it’s time to introduce a substitute such as a different product or service or perhaps move one of your team into a different area where they can make a bigger contribution and achieve some real scores.

Even at this point in mid-July the top teams have already reviewed their first half performance, re-assessed their market and competitors , where they’ve done good and poorly in the first half and where they can really score in the second half.    They are already well on track for implementing these changes.

Here’s hoping your business has a good second half.

It’s hard to argue against the business logic of a billionaire.

Especially one who has built a €5bn business empire from scratch.

But I’d fundamentally disagree with Richard Branson’s comments on business plans as reported in the Sunday Business Post of October 4th.    Following the launch of his Virgin something or other in Dublin he was reported to have advised investors to “forget about business plans and just go with your gut feeling.”     He maintains investors should ignore business plans and trust their instincts about the team and the idea.   From the perspective of investors he says business plans are not worth the paper they are written on!

That’s pretty strong stuff.

But it isn’t good advice either for start-ups or established businesses looking to expand and grow.

Having spent many years reviewing and advising on business plans I’ve seen my fair share of good and bad plans.

Many plans with lavish financial projections of sales and profitability at the initial concept stage have been built on foundations of sand without the proper, thorough, business-case scrutiny.    But you can’t rubbish the whole process because of the faults of some or be swayed by the comments of a master self-publicist like Branson.
The real value of a business plan is in the elimination of poor business decisions, the minimisation of risk and business threats and the concentration of focus on the key areas that can grow sales, profits and enable a business to get an edge on their competitors.

For any business plan I’m asked to review I look at the strength of the business proposal in relation to what market it’s targeted at.
I’d go along with Mr. Branson in his ‘gut feeling and instinct’ on issues such as:

  • The likely demand for the product or service.
  • How will it fare against existing and new competition?
  • Changing market & consumer trends and how it is likely to fare against these.
  • The strength of the promoters and their previous record.

But I’d be very wary of any business proposal that has not undertaken a thorough SWOT Analysis, market research and financial projections built from the ground up.

Investment funding is available from a multitude of sources. But only on the basis of proper, well-prepared business plans.

If you are expecting funding on the basis of “Just go with your gut feeling and lend/give us the money” you’ve no chance.     Unless of course you are seeking investment from Mr. Branson himself!

Wishing you success in your business planning and the delivery of the expected results from these plans.

Contact Sean Donnelly