May 2006
This month, the Reserve Bank increased interest rates by 0.25 percent to 5.75 percent. While that’s not a large increase, the psychological impact on consumers under pressure from rising petrol prices is likely to dampen spending. It’s time to take a strategic look at your business and put in place a few simple steps to insulate against an economic contraction and the burgeoning cost of doing business.
Managing the cost of cash
Most banks have already passed on the interest rate increase to consumers so you are already paying more for your money.
Typically, we take on debt at different times and it is often linked to a major purchasing decision or event. As a result, it is not uncommon to be carrying multiple debt commitments. If you take a moment to have a look at your various debts you are likely to find that they are quite different from each other. Interest rates, the life of the loan, whether you are repaying the principal of the loan or only the interest costs, the ability to accelerate repayments – all of these may be different and the difference may not be to your advantage.
Much of the focus at the moment is on official cash rates. But what about the rates for other forms of debt? Investment loans can be 7-8 percent, overdraft rates 10-12 percent and credit card debt 16-18 percent with store debt sometimes 20 percent plus. When you utilise these forms of debt you may find that your cost of borrowings escalates quickly. If you have a mix of business and personal debt then chances are that most of your business debt is charged in the 8-12 percent range. Put into perspective, for every $100,000 of borrowing you have, you may be paying up to $6,000 per annum more than you need to.
Generally your cost of funds is determined by a range of factors. These include:
- Whether the debt is secured or unsecured;
- The nature of security offered (property security will generally attract the lowest interest rate);
- The level of borrowings to security provided (below 65 percent will generally produce the best rate);
- Whether the interest rate is fixed or variable;
- Your income and if in business, your level of profitability;
- The type of borrowing you have taken out;
- The debt provider.
One way of improving your debt position is through debt consolidation; reducing the number of individual debts you have and merging them into a larger single debt or changing your debt mix so it is in line with your current business needs.
Debt consolidation needs to be about getting the right mix between debt cost, term of repayment and your present cash flow availability. If you have not had a banking review done for some time, now is the time to do it. Contact us today for assistance and we’ll help put you in touch with specialists who can work with us to reduce the cost of your cash while we ensure that any change takes into account your strategic business and taxation needs.
Managing a tightening economy
There are three key areas that you can manipulate inside your business to insulate against an economic downturn: liquidity; marketing; and overheads.
Keys to managing liquidity
- Stock levels – with a slow down in sales, keep a tight check on trading stock and when necessary, let stock levels run down. Be prepared to take a more active role in managing stock levels.
- Tighten debtor control – take a look at the way you manage debtors and where the payment process can be tightened up. Late payers need to be brought under control now before they impact on your cash flow.
- Capital Expenditure – If you are considering any major capital expenditure, depending on your cash flow position, you might want to consider a deferral.
- Cash Flow Projections – Take a look at your cash flow projections in the event of a slow down. If you are likely to need more cash, speak to your bank now before it becomes a crisis. Rolling 3 monthly cash flows are a good idea.
Keys to managing overheads
- Staffing – As staffing is a major expense, try and keep tight controls on the use of this valuable asset. If sales are likely to be slow, look at how to manage your staffing levels. Staff may want to take annual leave over this period, or you may be able to look at the mix between casual and permanent staff. Don’t carry more staff than you need.
- Wait and see – you might want to take a wait and see approach to overhead expenditure where it is discretionary.
Keys to managing marketing
- Ramp it up! – Your marketing effort may be the key to overcoming your customer’s reticence to buy over the next three months. Take a look at what differentiates you in the market and how you can get closer to your customers to overcome any buyer reticence.
- Don’t compete on price alone – Anyone can offer sales and discounts to attract the attention of buyers. Look carefully at your cash flow position before launching into a discount strategy. It’s not always price that customers care about.
- Weigh up the costs – weigh up the costs of any marketing effort before launching into a massive spend. Soft dollar marketing may be a much better idea.
For assistance to strategically manage your business, speak to us today.
Business owners are often surprised to find out the real value of their business. We all expect a great return for the years of stress, hard work and time committed. One of the most misunderstood and often overestimated components of a businesses value is goodwill. Major international companies like Coca Cola, Pepsi and Nike have a high goodwill value. But what about the average small business, do you have goodwill and if so, is it worth anything?
In general, there are three main types of goodwill: corporate, personal and location. You may have one or a mix of these. Different types of goodwill have different values. Typically corporate goodwill is the most valuable. Let’s have a look at each:
Corporate goodwill is the value items such as brand, business presence, an excellent client database, and repeat customers add to the value of the business. When we talk about a brand, we are talking about something that is recognised, not just a logo. For example, if a potential customer needs to buy a product that you sell, is your brand the first one they think of? This type of brand value can simply be relevant to the area you operate within.
When we ask business owners what differentiates their business from others, one of the commonest responses is “personal service”. Your customers or clients come to you because they like dealing with you. That’s personal goodwill. Your customers stay with you because of the strength of the relationship that you have developed with them. That’s excellent if you are the owner but when it comes to selling your business, personal goodwill is generally worth less to the new owners. They will need to establish their own relationship with your customers, and some may be lost along the way.
If this sounds like your business, then you should think about how you can broaden your goodwill so that the value attaches to the business as well as the person.
Location goodwill is where the location of your business delivers a result for the business. For example, a service station on a major road that is convenient for motorists to enter and exit. If you have location goodwill, the value of the goodwill is determined by factors such as whether you own or lease the location, how long your lease is for and anticipated changes and development in the area.
Every business owner should operate with their end position in mind regardless of whether you expect to sell or hand your business down to the next generation. For assistance to build your business value, talk to us today.
Bought a luxury car lately?
The Tax Office is data matching the records of 600,000 individuals and entities who bought cars for $70,0000 and above. These will be electronically matched with certain sections of Tax Office data holdings to identify non compliance with lodgment and payment obligations under taxation law.
Or sold a property?
The ATO is doing a lot of data matching lately. They have also mounted an active campaign data matching State Revenue information on the sale of property. Many property investors have already been caught not paying the appropriate amount of Capital Gains Tax on the transaction.
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