Kundun Consulting

One of the greatest sins that I see small businesses committing surrounds their invoicing procedures.

As I mentioned yesterday getting the money in the bank is critical to the whole process of success. Too often I see clients who do the work but don’t invoice immediately. They wait until a certain time before the end of the month and then do all their invoicing at once.

Stop it.

Invoice the client immediately upon completion of the job. Make it a rule to get your invoice emailed to them within 24 hours. You will be surprised at how quickly payment will occur.

Let me explain how Financial Controllers operate. Each week they will run through a list of what needs to be paid and will select urgent bills to pay. They will also select invoices for companies that they know will call their staff quickly after the due date - as they want to avoid any hassle where they can Then a few days after month end they will pay whatever else they can. The last companies paid are the ones who rarely follow up the payment and who are easy to deal with - sad but true.

A fantastic strategy that really annoys Financial Controllers is to get their email address and send them emails. If your client is slow payer then getting to the Controller of the payment process will allow you to stay at the forefront of their mind. A simple email each month when the payment is due will work wonders to get the payment made.

So the moral of the story is that to avoid missing the boat you need to be part of the process early. Then regularly follow up the progress of your payment, politely and you will greatly improve your collection success.

You have not made a sale until the money is in the bank - simple.

What brings down most businesses is not a lack of profitability, although they certainly doesn’t help. It is a lack of cashflow. Robbing Peter to pay Paul is a very significant problem and one that often begins a downward spiral that is very difficult to escape from.

You know the cycle. You use money that was supposed to pay Supplier A to pay Supplier B because you needed to get stock to sell to customer A. Customer B is late paying but needs stock that you need to get from Supplier B but you don’t have the cash to pay, so you lose Customer B who takes even longer to pay and bang the writing is on the wall in big red letters.

I do a lot of work in franchising and the majority of these businesses are under-capitalized from the start. So this cycle starts very early. The franchising industry is very good at distorting the actual number of business failures as it is in their interests to keep this under wraps. The franchisor will broker a deal to ensure that the business is sold and he maintains business continuity and his royalties. However I know from experience that these businesses can and do fail and cash is often the reason.

Get control of your cash flow is my simple answer. Practically this means:

• Make sure that you email statements to your customers.
• Make sure that you remind them to pay. Have a good AR administrator call them when the payment is due.
• Put shorter terms on your invoices - it is amazing how higher up the list 7 day suppliers get!.
• Allocate a percentage of each sale into a GST offset account so that you are managing your liabilities.
• Ring clients personally within 24 hours of the invoice becoming due and payable.
• Plan the expenses that must be paid from month to month and make sure non negotiable’s are met.
• Don’t supply to customers who owe you past your credit terms.
• Set credit limits and follow them.
• Get deposits on large projects before spending your own money.
• Take a fair payment for a fair weeks work for yourself. Don’t bleed your company dry by taking every dollar that is free.

Cashflow is the barometer of your business. Manage it we’ll and everything will fall into place - manage it badly and get ready to say goodbye.

I have used too many different accounting packages to list and I am increasingly frustrated with the way that they all work. In reality there are good and bad features in all of them, however the single greatest problem that I see with accounting packages is the ability to delete a transaction. As an accountant I see too many changes where staff can just willy-nilly delete transactions and not leave a trail behind that can be followed at a later stage.

Let me give you an example of why it is an issue.

Betty makes a sale for $100 over the counter. She enters the transaction into MYOB and takes the cash. She marks the invoice as paid and then gives the client his purchase and his receipt/tax invoice. Betty then decides that $100 in her pocket would be better than yours. She recalls the invoice in MYOB and deletes the transaction. All history and the ability to trace is eliminated at that point, and she is now able to pocket the cash. You MAY pick it up in a stock take - reality is though that it will simply be stock written off. She may be unlucky and have the customer come back with the purchase for a refund. But in the majority of cases she is scott-free. Your only means of making sure that there was a sale that you received the cash for has disappeared with a simply click of a mouse.

MYOB has a nice little function that allows you to turn off that functionality. It forces all transactions to be reversed and as such the above is a little more difficult to conceal. It will annoy the hell out of your accounts staff but it is a significantly more secure method of running your business. QuickBooks also has a similar feature and will also allow you to lock periods and password protect that security to ensure items are not removed after all of your reporting has been performed for a period.

I would strongly suggest that once your file is established and transactions are current, that you should be turning off the ability to delete transactions. It will create a little bit more work on occasions however the discipline will be well rewarded with an improved system of internal control and more confidence that the work that you are doing is being rewarded with the value going into your pocket.

Much of my background has been developed in the franchising arena. I have been a senior member of a franchisor and operated as and employee, consultant and franchisee in a number of different franchise organizations. I believe very strongly in the concept and for every bad scenario or experience I can point to 10 or 20 successful ones.

A few years ago I was pushed into reading the E-Myth revisited by Michael E. Gerber - a very good review can be found here. http://www.intuitive.com/blog/review_of_the_emyth_revisited_by_michael_gerber.html

In a nutshell Gerber’s premise is that every aspect of business can be broken down into a set of systemised processes that once defined allow you to continually streamline and eventually replicate what you do.

Now whilst I am not a disciple of Gerber’s I do truly believe that many aspects of a small business can be broken down and once documented and systemized can allow you to create virtual economies of scale that allow you as the owner to delegate minor tasks away from your set of responsibilities.

Implementing a system is not as difficult as it seems. Let me provide a practical example. Bob is a small business owner who has grown his business from himself, his brother and his wife into a business turning over around $2m annually and employing some 15 staff. He has a huge amount of intellectual property (IP) caught in his head, and whilst each person employed is understanding of what he is trying to achieve, the fact is that if he got hit by a bus - goodbye business.

In steps Bob’s trusty consultant and within a day they have put together a Board strategy document that has finally articulated where Bob wants the business to go - and a question is asked about how the website is backed up and secured to ensure protection of the business’ IP. The answer provided identifies that there appears to be a lack of security as Bob is the only person who knows how to access the safe, which stores the backups of his website and allows the business to continue operating should a major catastrophe occur.

So Bob and the consultant create a one page summary of what needs to be done to access the safe, the contact list of everyone required to assist in the website backup restore process, and a step by step process to get the data back onto a test environment server that will allow the external consultants to take over the restore process. Thus a mini disaster recovery program has been formed, an d whilst still needing work it is the at least provides comfort that this could be done without Bob’s involvement.

Every small business out there has ample opportunities to make basic tasks a simple affair that allows anyone to pick up where someone else has left off. By creating systems you ensure that there is continuity in the activities of the business regardless of who is there or not.

The process can be as simple as a basic checklist of how to create an invoice through to a detailed policy that defines the HR offering of your business. Either way it is a process that forces everyone to review what they are doing and make sure it is being performed in the best possible manner.

It is an invaluable process that every small business owner must go through in order to allow their business to mature to a level that ensure the business is more than just giving you a job.

I am often suspired at exactly how little my potential and new clients actually know about the financial affairs of their business.

They have little understanding about the drivers of their business, they can’t tell me the breakeven position of their business each month, they can’t tell me how many units they need to sell to ensure that they can meet their obligations, they don’t know how much fixed cost is lumped into their business, they don’t know how old their debtors book is and they don’t know what the gross margin of their business is.

If you have just skunked off into the corner with an elevated temperature then shame on you!

The drivers and financial metrics mentioned above are the key aspects that you need to know - but there will be others that are unique to what you do. You cannot make any decisions without the knowledge about how that decision will affect the performance of your business as a direct result of affecting these business drivers. Gut fell is by no means the right way to manage your business.

Have your advisor sit down with you and work out the information that you need to see each month to understand the key fundamentals of your business. Then once the reporting is altered to capture and provide this information, put it up in lights! Have a white board or a 1 page daily summary of actual against forecast of the key drivers of your business. Make sure that you know what they are and that your staff are also on board. Keep them at the foremost of your thinking and you will be amazed at how successful you actually are at improving your performance.

But most of all - understand them and how to affect them. Knowledge is only the starting point to improving performance - you actually need to work and manage these aspects to ensure that your business is not a runaway train just waiting to career down that mountain.

Following on from my post of last week a few of you have asked to go about selecting and managing staff correctly. Well I will at least provide some practical steps to the process that I implement with my clients.

1. Select correctly in the first place.

If you establish a routine for selecting the right candidates in the first place then you have a far greater chance for success. So rather than just spending 45 minutes in a question and answer session, actually engage the candidate. Make them feel that this si the place that they want to spend a significant portion of their lives. And get them to do some work before the interview.

Don’t just accept a candidate because they are the nest of a bad bunch - make sure they fit.

2. Establish the right KPI’s

Key performance indicators are more than just a means of measuring. They are the fabric which should guide the way that the person works. They are also the mechanisms that you have determined will allow a person to have a serious impact on your business. So if you haven’t worked out what drives your business and how each person can impact those then you need to take some serious time right now and pout it in place.

3. Review and manager your staff.

Every staff memebe4r at some stage falls away from what is expected of them. It is human nature that unless you have a stake in what is being done, then a person is simply not capable of maintaining performance at the highest level forever. Unfortunately people are emotional beings and often their perception and their personal beliefs kick in and they don’t work as hard or are not quite as focussed as they should be.

If you have not established a rapport or at least a regular meeting with your staff then how can you manage that process? Get in there and make sure that everything is on track. Motivate and re-focus them as necessary and let them vent their frustrations. A good clean out can often be the mechanism to allow a person to get back to doing what they need to do.

4. Be honest and don’t treat them like mushrooms.

I have been in both camps - where I have been the “treatee” and the “treator”! Trust me people will work longer, harder and with greater success if they feel that they are contributing and if they feel what they are doing means something. They will engage with you - regardless of the seriousness of situation, if you keep them in the loop with the ongoing issues that your business is facing. They will often also provide a great set of unbiased eyes to a problem and may in fact provide a solution.

I honestly believe that there is very little confidential information that must be kept from your staff. A significant change in business strategy or structure is probably the only area that requires discretion, however be warned that it is often very difficult to keep this information away from your staff. Treat them with respect and let them know of issues that are effecting them and they will be more loyal and willing to ride the bumps.

No-one likes being treated like an idiot.

Further, I am a very strong advocate of providing financial information to your staff. We in Australia are too locked into a mentality of secrecy and in my opinion this does more good than harm. As an example, as a small business owner how many of your staff believe that you are very wealthy? There is often a real belief that if you own a business then you are somehow walking on easy street. Oh how far from the truth is that!

So give them the facts - not the nitty gritty but certainly a high level snapshot and let them see what is happening. You will be amazed at how things change amongst your staff.

Practically, implementing any people management process is a time consuming task but one that will provide significant rewards for those of you who attempt to do it. It will be an ongoing process and one that will have its many trials - but your business will certainly benefit.

Virtually every client that I take on has a similar issue that we need to address - PEOPLE.

It is clearly a cliché purported to be fact by far too many companies that their people are their greatest asset. All too often that is just replicated through the actions of the business - and equally staff often act like the company owe them the world.

Time and again I see bad recruitment choices, bad goal setting regimes and bad reward and remuneration practices; having a detrimental effect on a business’ performance.

Many years ago when I was still forging a corporate life a wise man told me something that has stayed with me for life. He ran an extremely successful retail business that had staff turnover of around 2%. His attitude was that when he employed someone he felt PRIVELAGED that the employee had selected his business to be a part of, and as a result he had an obligation to do everything he could to make them never regret that decision.

He never paid above award or normal wages, however was able to attract and retain staff through a variety of different initiatives and benefits. One that stuck in my mind was his Monday morning ritual of reviewing the previous week’s sales figures and personally ringing his 25 managers to thank them for their efforts. The store that had the greatest level of success over their benchmark would then receive a personal visit from him sometime in the next 7 days. It was purely a “hey that was fantastic” type of meeting where all that was expected was that you accepted his personal gratitude. He created an atmosphere where people felt that they contributed to the success of his business and by default then felt engaged. He felt and I concur that financially the job must be satisfactory, but in essence people wanted to be comfortable, secure and appreciated.

So what does this mean to you?

Quite simply it means that you need to engage your people and make sure that they WANT to contribute to what you are trying to achieve. It means that people need to know what is expected of them and that they don’t feel like that are being treated as idiots. And it means that they should be THE MOST IMPORTANT part of what you do.

In these important times of full employment and low skilled employee availability there is a need to work damn hard at maintaining great employee relations. Take it on board and look within to see how you would react to the way your treat your staff.

Hopefully as a small business owner you have come across the term depreciation. If you think that depreciation is simply something that your accountant does to at the end of the month or year which effectively reduces your profit, then read on!

The text book definition of depreciation is:

“The gradual decline in the financial value of an asset used to produce income, due to its increasing age and eventual obsolescence which aims to represent the decline in an asset’s value spread over the asset’s economic life”

In non accounting speak; depreciation is simply the allocation of the cost of the asset over the period in which it can effectively help make your business money.

What it is trying to do is show that the asset assists in producing your revenue in periods greater than one year, and as a result your costs should include the portion of that cost, so that you get a true picture of what it has actually cost you to get your revenue.

Most businesses will simply see that charge go through and use it as a tax deduction. What should be happening is that each period when the depreciation goes through your profit and loss statement, the funds should be set aside, so that the asset can be replaced. Now that is probably a radical concept for many people to get their heads around, so for those of you who have stayed with me, let me explain.

When you purchase an asset you do so because you need that item to help you do business. As an example, I need this computer to write this blog (amongst other actual revenue producing ventures!) In three years this PC will be virtually useless (if it is running Windows then that period will be drastically shortened!) I will need to purchase a new PC at the end of that three years so that I can continue operating my business. If I have not saved the funds needed to purchase a new PC over the previous three years then I will have to come up with the funds in some other way - usually via credit.  

By definition, if we are charging depreciation on an asset then it has a finite useful life and it MUST be replaced. So why don’t we make sure that this is actually possible by having the funds available to do so. The tax department is allowing us to do this as they give us a tax deduction for the amount. Your accountant is suggesting that you should do this by charging an expense against your revenue. And finally you admit that this is required by determining how long the asset will be useful in helping you make money. So isn’t it a no-brainer - use lay buy to get your replacement asset!

My proposition is simple rather than try to again find the finance to purchase the assets that your business actually needs why not use the revenue that the asset has produced over its useful life to fund the purchase.

Debt is not what it is cracked up to be. If you can self fund your operations then this is a smarter way of managing your affairs. Allocating your depreciation charges allows you to actually do this - with just a little effort and some discipline.

One of the great sins that I see far too often from small business owners is the phenomenon of not paying themselves what they are truly worth.

In my opinion no person should ever work and not get paid for it. You would never expect an employee to put in a weeks work and not get paid for it, yet I would suggest that at some stage in the last year the majority of small business owners did not pay themselves what they should have earned.

I know the reasons:

“I need to cover the tax payment this week, so I will take my wage next week!”

“The wages are due on Friday - I will pay myself next week.”

Etc.

Etc.

That is wrong. If you are not earning significantly more than you would in an employee position, then you must ask yourself the question - are you wasting your time? In my opinion if you do not pay yourself - before everything else - then you are wasting your time. If paying the owners of the business is the last consideration then there are fundamental issues surrounding the business’s operations and decisions need to be made quickly to ensure that this is not a long term position.

Now let me clarify something here. As a small business owner myself I have been guilty of doing exactly what I am saying you should not do. I have had a major purchase that I needed to make and so I left the funds in the business to allow that to occur. I have needed to make a tax payment, so I left the funds in the business. I have had to meet contractor and staff wages - so I have not taken my salary. I have caught it up when cash flow allowed, however I have failed in exactly what I am preaching.

The reality is that you do need to be flexible. It is simply a fact of life that sometimes other things become more important - and I simply cannot ever say that you should never meet those other requirements. However if it occurs more that on an irregular basis, you need to explore the reasons behind why it occurs.

The rewards must cover the risks that you are taking and provide you with the fruits of your labor. If you cannot work out a strategy to change the position - then maybe not being in business is an alternative that should be explored.

As a consultant it is in my best interests to make my role critical to business success. The more difficult that I make the role that I am performing, then the longer I spend doing it- and ultimately the greater profit for me.

Well I think that is just plain wrong!

I recently went through a CPA program that was intended to groom potential public practitioners to allow them to set up their practice. It was a regulatory requirement and I completed the task duly for the piece of paper that allows me to represent myself as a CPA offering public accounting services - apparently that makes you - my potential client - convinced that I am capable of doing what I say I can. (Apparently it is irrelevant that I actually have the experience to do what I claim to be capable of doing!)

During the 2 ½ day seminar, I was put through my paces with 40 other aspiring public practitioners and whilst I did discover some excellent contacts it was nothing more than a regulatory requirement. The value was really not there. Mist disturbingly, we were told a story about by a partner in a serious accounting firm. He told us a longwinded story about how his team performed a routine task for a client. In the first year the fees were around $25k for the work. In the second year due to the knowledge gained and the improved performance of his staff the fees came in at around $15k. However rather than change the client that, he charged $27k and then spoke to the client about how grateful he should be that the cost was not much more given the increase in turnover that the client had achieved in the second year.

Which brings me to my point - as a client do you feel that you have received value for the job performed when told that you have been charged 20 hours at $ XXX - and there isn’t even a result.

I have been at the other end as well. As a client, whist I was employed by a company, we engaged a firm to do a business valuation. The quote was for the range $7k to $8.5k on a time and materials basis.

Have a guess what the final figure was - $8,400.

So what I hear you say - the quote met expectations so all is good - right. Well the problem was that I did not feel that there was value.  I stated to my Managing Director before the engagement had been confirmed that the cost would be $8500 as this was the upper end of the quote. There was simply no way that they did the work that warranted the cost. As a consultant I have performed business valuations and the work whilst in depth, does not warrant some 72 hours of peoples time to complete.

In my practice I offer my clients some certainty. I perform a set range of tasks at a fixed fee. Whilst it is based upon my guess of the hours that will be required to complete the task and the applicable hourly rate that I need to charge - the cost is fixed. If I run over, except where the issue is not related to me or my staff - e.g. the client may change the requirements mid way through the engagement, then I wear the cost. The client still gets the fee as per the quote and I deliver the result required.

There is no reason why your accountant cannot provide a fixed fee for a set range of monthly, quarterly or annual tasks that you would like performed and that allow you to budget for effectively.  You get a guaranteed result and he/she gets the opportunity to cover the fixed costs and get a very good result if they are efficient enough.

Go on - ask them - what do you have to lose!