Governance

The Three Profits of SME's WCP 2013

The Three Profits of SME’s

 

Most SME operators tend to think that good management, innovation, hard work and productivity will result in a profitable business, well they should but that’s not the whole story.

Not all profits are created equal and indeed some are much more valuable and more quickly and easily attained than others. Ah there must be a catch I hear you say; there is no catch but understanding the Three Profits of SME will make a significant difference to the way in which you view and manage your business.

The First Profit

The First Profit of SME is the easiest profit you will ever make and could account for a substantial amount of the total profit your business generates over its lifetime. The First Profit flows directly from your cost of entry.

Once you decide on starting or buying a business be it a hardware shop, bakery, call centre, IT service or a property development, do your research. Look around for a similar business in distress or even facing or in administration or receivership. There are many reasons businesses fail but most often its insufficient cash or poor management, if you are a good manager and you have cash get out there and buy well.

Most businesses fail within the first two to three years. I have bought near new businesses out of distress for less that 10% of the cost of establishing that business. Plant and equipment as new, some customers in place and ready to go. If you can run that business and cash flow it you make a 900% profit in your first 2 years because well run the business should be worth at least its true set up costs.

The Second Profit

This is the only profit some people think of; the operating profit that flows from good management, business planning, innovation, hard work, productivity and sales effort. The Second Profit most importantly sustains your cash flow, pays the bills, allows you to further develop the business and should leave you with a healthy profit after drawing your wages.

The real key to the just how large The Second Profit is relates to the lessons of the First and Third Profits. Put simply the keys to strong operating profits are how well you control the cost of the goods and services you offer and how well you price them.

Do the maths. You are much better off and your business is stronger selling a lower number of products or services at a higher margin than going for volume at a discount.

Look for ways to offer a significantly better service to your customers than your competitors are and lift your prices. Treat cost controls and buying as seriously as sales, manage your stocks to achieve maximum stock turn at minimum inventory. Establish and monitor your KPI’s. Motivate and reward your staff. Build a happy and united team.

The Third Profit

This Third Profit if planned carefully and executed well will bring you a profit as relatively easy and large as your First Profit. We are talking here of your exit strategy, the day you sell your business. Whilst this seems a long way off when you start your business you should be planning and working towards the exit every day.

The Third Profit will directly reflect the desirability of your business to a potential buyer. That buyer will need to be very comfortable with your business if you are looking for a premium priced exit.

From day one work to a detailed financial budget and business plan, report against it monthly; draw up detailed monthly accounts, (it’s so easy today), hold monthly board meetings with an agenda and minutes, even if the directors are you and your wife. File all tax returns and corporate documents on time and constantly update your corporate register. Imagine how comforting 3, 5 or 10 years of such well-maintained records are to a potential buyer.

Lock as many customers as you can onto long term supply or service contracts and do the same with your key suppliers. Look after, reward and motivate your staff so that your retention rate will be high. Another three prospective purchaser concerns answered.

Typically a purchaser will offer a multiple of earnings (EBIT) plus stock at valuation as a pricing mechanism. If the accounts, customers and staff look ad hoc the multiple offered is going to be between 1 and 2 times earnings and stock over one year old will be discounted to $0.10 in the $1.00 and over six months old $0.50 in the dollar.

With solid accounting, tax and corporate records, good budgeting, a regular stock turn, sound supplier and customer relationships, and loyal staff a potential purchaser is going to look much more favourably on your business and a multiple of 4 to 6 times EBIT plus SAV at full cost is a likely outcome.

Another strategy is to approach your major competitor; a consolidation of the two businesses could bring about significant efficiencies and cost benefits thereby lifting to value of your business to a multiple of 6 to 8 times EBIT.

I hope you take on board The Three Profits and prosper from them. Good Luck!

Neil Steggall.

The Barking Mad Blog

SME Advice with bite!

1 November 2013

http://wp.me/p401Wv-8E

 

www.wardourcapital.com

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Power Press IronyOne for me and one for you.

Why do the Rich and Powerful think rules are for

someone else?

The airwaves and social media are throbbing with outrage about politicians claiming allowances for private trips and businesses using bribes to win valuable work.

This is the kind of behaviour that most people know they would never get away with – even if they wanted to.

What makes it worse, in the mind of the average person, is that the people being exposed are already so privileged and powerful. Tony Abbott can easily afford to fly to Wangaratta for the wedding of a colleague, why would he charge the taxpayer $1094.64 for the trip?

Sydney Morning Herald columnist Peter Fitzsimons made a good point over the weekend, when writing about Attorney-General George Brandis charging the taxpayers for the cost of a trip to a radio host’s wedding.

Brandis had justified his actions with the comment that, with the wedding guest list dominated by media people, most of the time was spent “talking about politics”.

Retorts Fitzsimons: “Exactly. And surely the guiding light on such matters is whether or not you’re talking policy, not merely politics. Politicians pay for the politics, and we pay for the policy development, would [that] seem to be fair?”

It is notable that the Labour opposition has not exactly been shouting from the rooftops about these “wedding cashers”, leading to the suspicion that this sort of practice has probably been commonplace in Canberra.

But all this is small change compared to the allegations that Leighton Holdings had paid multi-million dollar kickbacks to win work – and claims that the then CEO, Wal King, had approved it.

And then there are the ongoing investigations into the business activities of the former NSW Labour ministers Eddie Obeid and Ian Macdonald, as well as questions about why the new NSW Opposition Leader, John Robertson, did not report the offer of a $3 million bribe by businessman Michael McGurk, who was murdered in 2009.

Of course, these are just the cases that are in the media today and many of them may not account to actual illegality or corruption – no such findings have been made in the travel claims allegations or against Leighton Holdings, Wal King or John Robertson.

But the frequency with which such allegations are made about our leaders makes you wonder about what goes on that we never find out about.

The big question is: why do they do it? What makes successful people more likely to bend, break and flout the rules? It is not like they don’t know what the rules are – they generally make them.

Hypocritical tendency

To investigate whether power corrupts, or if power merely attracts the corruptible, Joris Lammers at Tilburg University, in the Netherlands, and Adam Galinsky at Northwestern University, in Illinois devised an experiment that suggests that power promotes a hypocritical tendency to hold other people to a higher standard than oneself.

According to a report in The Economist: “These results, then, suggest that the powerful do indeed behave hypocritically, condemning the transgressions of others more than they condemn their own.

“But another everyday observation is that powerful people who have been caught out often show little sign of contrition. It is not just that they abuse the system; they also seem to feel entitled to abuse it.”

“People with power that they think is justified break rules not only because they can get away with it, but also because they feel at some intuitive level that they are entitled to take what they want. This sense of entitlement is crucial to understanding why people misbehave in high office.”

Another interesting finding from another study is that people tend to think that rule-breakers are powerful.

A study in the Social Psychological and Personality Science journal says when people have power, they act the part.

“Powerful people smile less, interrupt others, and speak in a louder voice. When people do not respect the basic rules of social behaviour, they lead others to believe that they have power . . . ”

“Norm violators are perceived as having the capacity to act as they please”.

In this way, we law-abiding people play our part by unconsciously colluding with the rule-breakers, admiring them for their chutzpah and not taking them to task when we should.

If you have already read my previous rant on those wonderfully powerful people at the Reserve Bank of Australia and their minor and quite understandable transgressions I apologise but……………..

The Barking Mad Blog

SME Advice with bite!

9 October 2013

http://wp.me/p401Wv-5k

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