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MANAGING YOUR BUSINESS IN AN INFLATIONARY ENVIRONMENT

Wed, 01 Dec 2021 06:24:10 GMT

Many businesses are facing increased costs. This is not necessarily a new business challenge… but the COVID-19 pandemic is driving significant and unpredictable “price spikes”. Let’s look at what business leaders should be thinking about in this environment.

Many businesses are facing increased costs. This is not necessarily a new business challenge… but the COVID-19 pandemic is driving significant and unpredictable “price spikes”. Let’s look at what business leaders should be thinking about in this environment.

First, what is driving these changes?

Here are some of the important factors influencing the cost of goods and services:

Many manufacturers reduced capacity early in the pandemic. When demand increased faster than expected, they were not able to ramp up capacity to meet the demand.
Prices of many commodities and raw materials have risen dramatically. Steel prices are about three times higher compared to one year ago while aluminum prices hit a nine-year high in June 2021.
The semiconductor chip market is facing global shortages which affect manufacturing capacity of everything from new cars to power supplies.
Global supply chains are unstable, as different regions deal with lockdowns and other business interruptions.
Demand is also volatile as buyers consider their options during a period of great uncertainty.

This results in higher costs and limited supplies of production materials, which are expensive to transport.

What’s the outlook?

The outlook is uncertain. In some cases, we may return to pre-pandemic prices and, in other cases, there have been structural changes which will not be reversed. Business leaders have the tough job of navigating through this uncertainty!

What are our options as business leaders?

One option is to “wait and see”. This may be the most prudent choice in some circumstances but there is a risk that competitors will do a better job of managing their response to increased costs.

Another approach is to try and address some key questions… and then develop a strategy. The list of questions will vary by industry/business, but here’s a general approach:

1. What’s happening in our business exactly?

Which input prices are going up and by how much? Are these increases temporary or permanent? Are the price increases predictable or erratic? Are we near peak pricing? Clarity (or at least a theory) on these basic questions provides a foundation for strategy.

2. What is the (potential) impact on our business in different scenarios?

Whether we “wait and see” or raise prices, we should understand:

What happens to our product profitability as input and sales prices change?
How is customer demand impacted by increased prices (price elasticity)? At what point will customers look for substitute products?

While your customers are critical in this analysis, consider also how employees are affected due to rising costs, e.g. higher energy bills.

3. What actions can we take?

There could be various options such as:

Improving procurement practices: Competitive bidding? Renegotiating terms? Changing suppliers? Hedging? Long-term contracts? Holding suppliers to account should ensure that price increases are occurring due to market forces.
Updating incentive systems for sales and procurement teams: If these are based on lagging costs versus actual achievement, we may not encourage the best commercial decisions.

For those who pass on cost increases to customers:

Price indexing versus price renegotiation: Both approaches have advantages and disadvantages
Customer Communication: A price hike is unlikely to be well-received… but ‘softening the blow’ can positively distinguish a business from the competition.

4. Is our financial reporting frequent and accurate enough?

Management’s challenge is ongoing, not a one-time decision / event. We need:

BOTH analysis of historical data AND an understanding of forward-looking gross margins on a monthly or quarterly basis. This requires transparent and accurate cost accounting.
To understand the time lag between taking action and seeing results.
A dedicated team overseeing this and presenting recommendations. Some businesses are establishing an ‘inflation team’ for this purpose.

An Opportunity?

Not surprisingly, seismic shifts in the business environment present opportunities as well as challenges. Your competitors are dealing with a similar situation, and you may capture additional business from existing or new customers who are disgruntled with other suppliers due to volume or price issues.

And the benefits from revisiting procurement practices to drive margins can be significant and long-term.

Conclusions

The challenge and impact of cost increases are specific to each business. And while things remain uncertain, management should expect the unexpected and make judgement calls, based on solid strategies, market insights, and a clear understanding of cost drivers.

Where necessary get advice from experts in this field.

Source: https://panalitix.com/

SUCCESSION PLANNING - MAKING AN EARLY START

Thu, 15 Oct 2020 06:48:43 GMT

Every business will go through a ‘succession event’. Likewise, humans need to transition their assets at some point. Simply put, things don’t stay the same forever, so we should plan for transitions. And plan early. For an overview on what you might focus on and where the risks and opportunities lie, read on.

As accountants, we like our clients to think ahead… even on a 3 to 10-year timeframe. A major part of this is Succession Planning . Where Succession Planning is concerned, clarity brings opportunity… and the risks of “getting it wrong” can be significant.

Let’s start with a few definitions.

Estate planning:

This means ensuring one’s assets are distributed among the people and organisations of one’s choosing, in the event of death or incapacitation.

Exit planning:

This is the strategy regarding business, personal, financial, legal and tax issues involved in selling or transitioning a privately-owned business.

Asset protection:

This refers to legal strategies which protect assets from claims by various stakeholders; family members, adversaries, partners and so on.

Financial planning:

Here we are talking about understanding an individual’s/organisation’s current financial state and their strategic financial goals so we can chart a path to achieve those goals over time.

Succession planning:

This refers to planning the transition of assets from one owner to another. Succession Planning so can be considered an ‘umbrella’ term for the others mentioned above.

Who needs Succession Planning?

The simple answer is “pretty much everyone”. Business owners will look to transition their businesses and family members (especially the ‘patriarch’ or ‘matriarch’) will transfer their assets, often to other family members. The “Family Business” combines the two situations above.

It can get more complex in certain industries. Take farmers, for example, where there may be large tracts of land owned by the family as well as an operating business, both of which need to be transitioned.

What are some goals in Succession Planning?

Different owners will have different goals, but they can largely be characterised as follows:

Altruistic goals:

In this case, the owner is trying to help and secure the future of other family members by transitioning assets to them. They want to ensure the continuity of their business so that value is preserved.

Wealth creation:

The sale of an asset enables the seller to get paid for the value being transferred. In some cases, the seller may want an income from the business after the sale.

A smooth transition:

Many people have heard “horror stories” about transitions which have “gone wrong“. Families may litigate for years based on poorly constructed succession plans, for example. Reducing risk and stress is a major motivator.

Structure:

Minimising tax is also a priority, though this is secondary to getting some of the other factors above correct.

Business Owners versus Families

There are many similarities between business owners and families transitioning their assets. Both need a plan and seek to maximise the value of their assets to facilitate the transition. But in the case of families, there are often complex relationships (and emotions) involved. These span across generations… and differences in attitude and “culture” can create complexity and conflict.

What help is required?

Certainly Succession Planning requires astute financial analysis, risk management, managing cash flow, tax planning and other “technical” support. But this needs to be combined with a thorough understanding of goals, the stakeholders, communication and other factors. Often asset owners benefit from engaging outside parties to facilitate certain (sensitive) discussions. This process can take years and it is best to start early with a good understanding of all of the risks and opportunities.

What Succession Plans do you have in place? We’d love to discuss these further with you so please get in touch!

Source: https://panalitix.com/

MANAGING (AND GETTING HELP) THROUGH A BUSINESS CRISIS

Wed, 01 Apr 2020 02:22:34 GMT

Recent global events are testing the mettle of even the most experienced leaders. What skills are necessary in this time of uncertainty? What leadership traits will help steer a business through the multitude of challenges and threats? Read on for leadership ideas which can be applied in your business.

Recent global events have tested the mettle of management and boards everywhere. Some businesses will emerge stronger and, sadly, some will cease to exist in their current form.

Skilled leaders have a better chance of navigating adverse conditions so let’s look closely at some of those skills.

Getting a Quick Understanding of the Problem

Usually, a crisis doesn’t happen ‘overnight’ (though the event that triggers the crisis might). Declining sales, insufficient cash, customer churn, rocketing expenses, and other symptoms develop over time. The best leaders quickly acknowledge the problem, understand what’s driving it and identify solutions. This doesn’t have to happen all at once but there should be forward momentum. Mistakes are OK… so long as there is progress towards a solution.

The opposite is to be ‘in denial’, which is a convenient way of postponing difficult decisions. Those decisions tend to get harder over time.

Focusing on Cash

The phrase ‘cash is king’ was probably invented in a crisis! Simply put, will the business burn or generate cash? And which parts of the business contribute in either direction? Some businesses overcomplicate this and study a variety of metrics that are less important. This is more than watching the bank balance. Good forecasting is essential.

Being Self-Critical

‘Self-Critical’ and ‘negative’ are not the same! But the best leaders will look critically at their own performance, the performance of their peers and the business plans ready to make a quick and dramatic change. Building in ‘trigger points’ is a smart move, for example, “if we don’t hit XXX in sales by the third quarter we will completely re-evaluate our approach”. Trigger points are most useful when they tie into the availability of cash.

Benefiting From a Board

The relationship between a board and management will vary depending on company size, shareholder breakdown, the regulatory environment, and other factors. In any case, there is great value where leaders can get input from interested people who are away from the operations and see the ‘big picture’. Boards can offer a useful perspective on risk and they should challenge plans. Good leaders know how to make the most of this.

(Note, the same effect can be achieved without a legally constituted board, for example through an advisory board or a mentoring or coaching relationship).

Generating ‘quick wins’

Any success, however small, is valuable when managing through a crisis. Yes, there needs to be long-term, strategic thinking but sometimes the long-term direction is unclear. So focus on saving a customer, closing a deal, cutting costs to be incurred in the coming week, renegotiating a supplier contract, etc. While these ‘wins’ won’t enable the turnaround of the business, they contribute something… and employees’, customers’ and shareholders’ confidence in the business will increase.

Revising Team Incentives

A business in crisis needs different team incentives than a stable business. In a crisis, incentives should relate directly to the turnaround of the business for which clear metrics are set. Perhaps these metrics relate to available cash, new leads, new sales or a return to (sustained) profitability. They should be clear, relatively short-term and reviewed frequently as the business changes. A motivated team with shared goals can be exactly what is required to get a business out of a crisis.

Making Team Changes, Starting at the Top

The mindset required for managing in crisis is different and some managers will never acquire the right mindset. While they may be good managers in different circumstances, they will not succeed or contribute in times of crisis. Simply put, relieving some senior managers of their positions will usually improve the chances of success. This also sends a signal to other stakeholders that the leadership will act decisively.

Surfacing Talent From Within

Understanding the organization and how it works (so-called ‘institutional knowledge’) can be an important asset in a crisis. This knowledge can reside in people who were previously under-valued but can now contribute much more. There also may be individuals who see the situation as an opportunity to develop their careers, be part of something groundbreaking and make a significant difference. They are the minority while most people worry about job security. But retaining them is key to success and a deal can be struck which is not only about money and bonuses.

Getting the Story Right

Leaders need to convincingly answer some important questions. Why is this worth saving? What’s the path to getting there? What does success mean to all stakeholders? The story needs to be told in a short, simple way so people willingly join in the fight.

Making Good Business Practices into Habits

If you look above at the subheadings, they don’t relate only to business in a crisis. They are, in fact, simply good business practices that should be institutionalized. In fact, if we changed the title of this article to ‘Managing in Good Times’, what would we talk about? Avoiding risk? Managing incremental growth? The nuance would be different but the best leaders bring a sense of ‘crisis-urgency’ and ‘crisis-best practices’ even in times of stability.

Source: https://panalitix.com/

PROTECTING YOUR ASSETS AND SECURING YOUR FUTURE

Wed, 10 Jul 2019 03:39:15 GMT

This article emphasises the importance of acting early to protect your assets from creditors. Getting advice from professionals will ensure your assets (and your family) are properly protected.

The dominant lion may lounge around the place… but when his territory and pride are threatened, he’ll stop at nothing to protect them. And a typical gorilla father will go to battle with other males, who are known to kill baby gorillas as they try to take over the group. Meanwhile, Emperor Penguin dads are super protective over their mates, their young and the nest, possibly because they play an important role in keeping the eggs warm – balancing it between their bellies and the top of their toes!

These animals are all involved in some kind of asset protection ... and it’s often a matter of life and death.

No surprise that humans need to take asset protection seriously too and the stakes can be pretty high. Asset Protection involves keeping your property out of the hands of someone asserting a right against you, perhaps to satisfy a loan or because of litigation. It is sensible to engage in Asset Protection Planning, whereby non-exempt assets (those subject to creditors’ claims) are repositioned as exempt assets (those not accessible to creditors).

Let’s be clear that there are laws in most territories that protect creditors against the transfer of assets with the intent to hinder, delay, or defraud a creditor. These transfers will likely be deemed fraudulent and may be reversed by a court. So Asset Protection Planning needs to begin early on the basis that life is uncertain, business is uncertain and there is always the chance of claims against assets.

Asset Protection Planning is closely tied up with your Financial Plan which is based on analysis of your sources of income, current and future expenses, how much wealth you plan to accumulate and what you want to leave to your heirs. Part of the plan is to reposition (current and future) assets so they are exempt from creditors.

Your Financial Plan is closely related to your Estate Plan which defines who will manage your assets and take care of your family after you die (or become incapacitated). Certain corporate and trust structures may protect your heirs from claims against the family assets, giving everyone peace of mind.

It’s essential to consider this early. And talk to an advisor. Your accountant is well-placed to help you!

Most humans will not have to fight an invader to the death but neglecting to plan can have devastating consequences.

Source: https://panalitix.com/

INSURANCE - DON'T LEAVE YOUR BUSINESS FUTURE TO CHANCE

Mon, 11 Mar 2019 04:00:32 GMT

Every business faces a whole host of risks which can have devastating effects. Understanding and managing the risks is important but achieving the right balance can be tricky. Some businesses neglect to buy insurance with catastrophic consequences and others are ‘over-insured’ resulting in waste. Get an expert who is well-placed to advise you on your approach to insurance and here are seven quick tips on managing your cover.

Anyone for blackjack? How about a few spins on the roulette wheel? Or a bet on your favorite sports team for this weekend’s game? Gambling, in moderation of course, can be a fun pastime which gets the juices flowing and enables banter with friends and colleagues.

How is insurance different from gambling?

Think about it. You promise to pay someone (usually an insurance company) some cash (a ‘premium’, payable in installments) related to some ‘event’ which may or may not occur in the future. If that event occurs, you suffer some loss and the insurance company compensates you for that loss. If the event doesn’t occur, the insurance company gets to keep your cash.

How is this different from placing a bet on the name of a newborn member of the royal family? Or next week’s weather? The difference is that, when buying insurance, there must be the risk of some ‘loss’ – what lawyers call an ‘insurable interest’. That loss can have serious consequences and is something you want to avoid. (No, the heartbreak of seeing your local team lose does not constitute a ‘loss’ for these purposes!)

Your business faces a whole host of risks which can have devastating effects. Understanding and managing the risks is important but achieving the right balance can be tricky. Some businesses neglect to buy insurance with catastrophic consequences and others are ‘over-insured’ resulting in waste.

Tips for managing your insurances

You may want to take advice on your approach to insurance and here are some quick tips:

1. Think broadly about your risks: Could your customers experience harm? Or the general public? Or your directors or shareholders? Or your employees or vendors? What about your facilities or assets? You may need insurance as a matter of statutory compliance or because it is required by contract or constitution. You should thoroughly review your needs.

2. Get expert advice: No two businesses have identical insurance needs. Insurance contracts can be complex, and an expert can ensure you are properly protected. Choose your expert wisely since they tend to specialize by industry or by the kind of coverage.

3. Shopping around: There are usually many providers of similar insurance policies, often competing on price. Always consider a selection before deciding.

4. It’s not only about price: For complex policies, especially in business, there may be specific items you want to insure against. Be diligent about reviewing the entire contract and pay attention to different charges, types and levels of cover, ‘cooling off’ periods and how excesses are calculated.

5. Already have insurance? You can drive prices down by taking a cheaper quote to your existing provider. They may be willing to beat or match your quote immediately or when you need to renew.

6. Consider different ways to buy: You may have an insurance broker or financial advisor who should be proactive in assessing your needs and coverage. Banks might offer this service and there are numerous comparison sites which help you evaluate online insurers. Each channel has advantages and disadvantages, but it is usually best to work with someone who really understands your business and goals.

7. Answer the insurer’s questions accurately: Sounds obvious, but many claims are unsuccessful due to errors or a lack of proper documentation.

Ready to consider your insurance coverage? The starting point is to assess your business goals and the main risks you should protect against. Your accountants are uniquely positioned to support you and then ensure you access the right coverage from the best possible providers.

Please get in touch if you would like to discuss this.

By all means, have an occasional bet when the opportunity arises - but don’t leave your business future to chance!

Source: https://panalitix.com/

THREE FINANCIAL MISTAKES MADE BY MANY BUSINESSES

Fri, 02 Nov 2018 04:09:18 GMT

Many of our clients tell us that they got into business to make more money, achieve a better lifestyle, or simply because they felt they could do a better job than their old boss. Although many do possess business skills, financial acumen is rarely high among them. In this article, we list three common financial mistakes that we observe frequently.

Many of our clients tell us that they got into business to make more money, achieve a better lifestyle, or simply because they felt they could do a better job than their old boss. Although many do possess business skills, financial acumen is rarely high among them. In this article, we list three common financial mistakes that we observe frequently.

1. Fail to plan, plan to fail

Not enough businesses have a working budget and cash flow forecast that is frequently updated and compared to actual results. Consequently, they make important financial decisions without all of the information that they need. A strong budget requires the following information, presented on a month by month basis and adjusted for seasonality:

Sales – Your sales forecast should be broken down by product or service line and calculated as number of sales multiplied by average sale value.
Variable costs – These are costs that go up or down in line with sales and, as such, should be driven by your sales forecast.
Fixed costs – Unless there are any significant changes, these can be taken from your most recent financial statements and adjusted for any known or expected increases. They are the costs that you incur irrespective of sales volume.

Once you have a budgeted profit and loss account, you should then create a cash flow forecast. This differs from the budgeted profit and loss account because it is takes into consideration other cash inflows and outflows. As such, it needs to take into account of how long it takes for customers to pay you, how quickly you turn over inventory, how quickly you pay your vendors, any loan repayments due and any forecasted capital expenditure or drawings that will not appear in the budget profit and loss account. With this information, a forecast balance sheet can be created, which will almost certainly be a requirement should you require finance from a bank.

2. Financing capital expenditure out of cash flow

As a general rule, it is good practice to match cash flow with the lifetime of a purchase. For example, if you are purchasing inventory to sell in the short term, then you should use day-to-day working capital. But if you are buying a new delivery truck with a five-year life, then you should aim to finance it over five years.

Similarly, don’t fall into the trap of spending your business’s money on impulse purchases out of your cash flow if you have one good quarter. Unless you are confident that strong sales will continue, you could be digging a hole for yourself if sales regress back to prior levels.

3. Failing to understand the difference between profit and cash flow

One of the most frequent questions we hear from our clients is, ‘I can see there is profit in the accounts, but I have no cash in the bank – what’s going on?

What is typically happening in that scenario is decisions are being made with reference to ‘book profit’ without properly understanding how cash flow can differ – sometimes quite significantly – from profit. For example, excess drawings by the business owners do not appear in the profit and loss account, but they clearly drain cash. Also, you might close a big deal with a major customer and book the revenue as sales, but if they don’t pay you for 90 days, you could find yourself in a tight spot. Similarly, you might commit the business to a large loan to finance new machinery, but the capital element of the loan repayments will not show up on the profit and loss account.

Solid financial reporting can improve decision making by demonstrating the difference between profit and cash and forecasting the cash position over the next few months.

Our firm has the skills to help you avoid all of these mistakes and we’d be delighted to talk with you about strengthening your financial reporting processes so that you can make more informed business decisions.

Source: https://panalitix.com/