04 Tax changes
12 Tips for franchisees
13 Cash flow control
issue four summer 2011
What you need to know
Steps to success
Advice for staying ahead
beyond the numbers
| keeping your business future fit
A happy collision Why Hauraki Panel and Paint is in good shape
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Combining forces
Behind the scenes of the T 3 group
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Auckland super city
Ready to do business?
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A healthy prognosis
Monitoring Pharmacy One’s success
Find the profit potential in your business
What impact would an increase in your price have on both your cash flow and profitability? What impact is the time to collect debtors having on your business? Should your primary focus be on increasing sales through growth, improving margins, or reducing costs? The Profit Optimiser tool will help you: + Highlight the key drivers of profit, cash flow and cost in your business. + Conduct ‘what if’ scenarios to examine the impact of potential business strategies on your profit and cash flow. + Identify the strategies that should be employed right now to make a real difference in your business’s profit. + Find the extra profit potential in your business. For more information contact your Hayes Knight Adviser or Business Improvement specialist Mike Atkinson. T: 09 379 7013 E: mike.atkinson@hayesknight.co.nz W: hayesknight.co.nz
i ssue fo ur
contents
beyond the numbers
| keeping your business future fit
features The New Normal? There has been a lot of talk recently about the economic factors facing New Zealand and the world. Almost all sectors in New Zealand are still experiencing difficult times out there. While our country is faring better than other parts of the world, it is likely to remain tough domestically for quite some time to come. There is no question that we would all like the economy we face to be more buoyant. But here is the interesting point: we’re all facing the same economy. This means that the secret to success is often less about whether the wider economy is optimistic and more about ensuring your organisation is fit to make the best of the current reality. It’s easy to keep moaning and blaming the economy, but the key to success lies in accepting this as ‘the new normal’ and then objectively looking at every part of your operation to ensure it is fit for purpose. To be truly objective, we also need to be wary of our habitual thinking. Adopt a different mindset and seek alternative perspectives. We are all familiar with the popular definition of insanity: doing the same thing and expecting a different result. However in the current environment maybe this definition needs to change to: doing the same thing and expecting the same result! What has worked for us in the past may not continue to work in this new environment.
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Tax changes
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Great minds thinking alike
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Local government
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Prescription for success
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In good shape
Weighing up the effects of recent reforms
The T3 group brings business heads together
How to do business with the new Auckland super city
Pharmacy One Group benefits from a dose of good advice
Hauraki Panel and Paint’s strategy for growth in tough times
News, views & tools for success
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From my desk
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Business advice
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News & updates
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Hayes Knight news
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Innovation showcase
This is the new normal. Enjoy!
Craig Fisher
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The last word
The Hayes Knight team prides itself on going beyond the numbers and assisting clients to see their organisations in an objective manner. We can help by being a fresh set of eyes to enable you to see the issues and opportunities more clearly.
Chairman, Hayes Knight New Zealand
Hayes Knight CEO, Mathew Bellingham, shares his views
Focus on franchise success; cash flow
Changes to auditing; end of LAQCs
Celebrating outstanding achievements; Out and About
Three bright companies thinking outside the box
Someone’s changed my backyard
The information and advice contained in Beyond the Numbers cannot cover every financial situation or requirement. If you have further questions, we encourage you to contact a Hayes Knight business advisor for advice tailored to your specific circumstances. Hayes Knight is an independent member of Morison International and Hayes Knight Group.
Beyond the Numbers is published for Hayes Knight NZ Ltd by Tangible Media www.tangiblemedia.co.nz Account Director: Lisa Morton Designer: Alice Huang Cover Photo: Robin Hodgkinson
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tracking tax changes
2010 Tax Reform – how has it affected business? October 2010 saw the largest overhaul of our tax system in years, so how are we placed a few months down the track and what do we think of the changes? To put things in context, this is not the first time we have had sweeping changes. Think back to the eighties when the top personal income tax rate was reduced from 66% to 33%, and the corporate income tax rate reduced from 48% to 33%. Between then and now, tax rates have moved up and down with Labour and National Governments.
GST and other tax changes
GST has changed too, moving from an introductory rate of 10% in the eighties, to 12.5% and now 15%. The overwhelming response from commentators is that the latest changes will further improve our tax system (an OECD report in 2001 described our tax system as one of the most neutral and efficient) and assist our corporates to trade with partners on a more level playing field, whilst also encouraging investment and innovation.
Other changes are that the thin capitalisation safe harbour of 75% will be reduced to 60% from 1 April 2011 and foreignowned companies will only be able to claim tax deductions for interest payments on debt up to 60% of their local asset value. The intention is to avoid foreign-owned multinationals loading excessive amounts of debt onto their New Zealand subsidiaries to reduce the amount of tax due. It also brings New Zealand’s safe harbour allocation rules in line with rules in the US.
Company Tax Rate cut from 30% to 28%
Effect of GST rise on inflation
New Zealand’s new company tax rate of 28%, effective from April 2011, will be more competitive than Australia’s. It also brings it in line with the average company tax rate in the OECD; this stood at 26.3% in 2009. The move has been well received; with most agreeing that this puts New Zealand at an advantage over Australia, boosting competitiveness. It should also reverse the trend of declining business investment, which fell by 10.4% for the year to the end of March 2010.
The move has been well received; with most agreeing that this puts New Zealand at an advantage over Australia, boosting competitiveness.
GST went up to15% in October 2010. Apart from planning and logistics issues, along with the need to absorb some of the increase depending on price breaks, most businesses are essentially in the same position: paying and charging more GST, but also claiming more back.
Commentators expected that the GST increase would result in a rise in inflation of 1.7% to 2.3%. Results published on 20 January showed a 2.3% increase for the quarter and 4% for the year to 31 December, indicating that the predictions were correct, and that inflation due to the GST hike was around 2%.
Business investment is forecast to grow at 6.2% for the current year to March 2011 and at 10.3% the following year, before easing off. This growth spurt will be further encouraged by the cut in personal tax rates.
This is good news in that we are unlikely to face interest rate increases, however given that petrol sky-rocketed (up 6.8% in the quarter) it would also indicate that many businesses absorbed the GST increase or continued to discount over this period to hold up their sales. This means that several companies will be faced with shrinking margins and must either find operation efficiencies or look to lift prices gently over the next few months.
Personal Tax Rate cuts
Overall
The cut in personal tax rates reduces the individual tax burden for business owners and should ease the tendency for skilled staff to head over the Tasman. Retaining these skilled staff will help to make businesses more competitive. When combined with the changes in the way income (or losses) through property investment is treated through the elimination of depreciation and the dismantling of the LAQC regime (more on this on page 15), the government has made a strong statement to try to lure people to move away from investing in property by making business investment more attractive.
The changes appear to have lifted confidence, and the negative effect of inflation appears to be offset by the company and personal tax cuts as well as the changes to investment income. Businesses are cautiously optimistic about the coming year, or at least do not think that things will get worse. As always, they need to carefully manage their costs and invest in productive assets to improve efficiency and therefore increase margin through methods other than straight price hikes. So, three months down the track our verdict is a solid thumbs up to the changes.
beyond the numbers
Great minds thinking alike To ensure we meet our clients’ current and future needs Hayes Knight set up the T3 group.
T³ is based on three layers of thinking: thinking about today, thinking about tomorrow and thinking about the future (what’s next?). T³ is a select group of around 15 businesses run by innovative and entrepreneurial owners who are leaders in their industry. The group meets every six weeks on a Monday night. During these sessions Hayes Knight enjoys discussions with clients and strategic partners about current and future business, environmental and societal trends, how these will impact on all of us and, most importantly, how we can collectively use ‘breakthrough thinking’ to create opportunities. Participant Stacy Colyer from Greenscene Ltd says T³ brings people from different, yet vibrant, companies together to share ideas and opportunities that will grow everyone’s businesses. “We use the group as a sounding board and bounce around ideas we have. We’re all on a journey together,” he says. “We’re cutting teeth at the moment. The idea has spawned into something very successful. The quality of the presentations has been very high, with an equally high level of engagement. There’s a lot of interaction and discussion. Hayes Knight invites guests to deliver some of the presentations and they help us think and get the group talking.” Among the topics discussed at T³ gatherings over the last year has been trend-spotting using the STEEP model to review socio-cultural, technological, economic, environmental and political trends in local and international newspapers. Another session looked at sustainability and encouraged participants to reflect on how relevant sustainability is to their business/industry; what sustainable strategies they have in place; how they measure and report on sustainability; and the hurdles they face. The evening provoked lively discussion and highlighted some common problems, such as the hurdles of money and ensuring all staff were on board with any sustainability strategies. Branding, image and communication formed another T³ discussion topic. While an efficient and scalable business model combined with innovation is necessary to stay ahead of the competition, these aren’t enough to make a successful brand or to generate brand value. Five more components are required: a great brand experience, clear and consistent positioning, a sense of dynamism, a sense of authenticity and a strong corporate culture.
Another evening was based on the topic of culture and authenticity. The group reviewed examples of authenticity in companies and leaders. Kate Billing from Blacksmith spoke about culture and the changing attitudes in business connection. There is a shift from logical connection, which leads to compliance, and emotional connection, which leads to commitment, to brand connection, which generates engagement. The final event for the year looked at strategic thinking, using Edward de Bono’s Random Word Thinking and Six Hats Thinking. These techniques were invaluable in helping the group think through challenging and strategic issues. For example, the six hats technique enabled one participant to think deeply about the decision to buy a new business, simply based on the word ‘box’. The key thing the Hayes Knight team has noticed is the willingness and openness of the T³ members to share and collaborate with each other. It’s been fantastic to see the group bond during the year and work being cross-referred to each other. It’s been exciting to form an energetic group that demonstrates how Hayes Knight goes beyond the numbers. “The next step is getting others involved by regenerating the group,” says Stacy Colyer. “I’d like to see new, like-minded people joining the group.”
The key thing the Hayes Knight team has noticed is the willingness and openness of 3 the T members to share and collaborate with each other.
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local government
Doing business with the Super City Never before has Auckland seen such a major and also controversial shift in local government, nor one that has generated such debate and concern over its impact on the local community. Many businesses will have invested a lot of time and effort into establishing relationships with the individual councils and positioning themselves as a preferred supplier.
The ‘Super City’ is here and whether you like it or not, it’s here to stay. Going into this transition there was an air of uncertainty about how both residents and local businesses would be affected and although the long-term implications remain to be seen, some emerging trends will likely provide some clues about what to expect over the coming six to 12 months. Recognising these trends and understanding the drivers impacting change will allow local businesses to best position themselves to take advantages of opportunities and protect themselves from potential impacts. A key objective of consolidating seven councils was to realise operational efficiencies through fewer suppliers, economies of scale and reducing duplication. This potentially means bad news for smaller businesses, as while they previously supplied one of the seven councils, they may no longer have the resources to meet the needs of the much larger super city council. However, with close to 8000 staff, there will still be opportunities to provide goods or services to some departments directly. Building relationships and knowing ‘who’s who’ is vitally important. Businesses will also need to address changes in the way the new super city operates to ensure they are well positioned to continue to secure work. For some, doing business may become easier as standardised rules and regulations
will be set across the region, including new streamlined procurement processes and standard procedures for tendering and entering contracts. Hayes Knight clients are noticing a shift in the tendering process for work – the super city council is becoming more selective about who it engages, with fewer companies selected to participate in a tender by invite only. Price competitiveness is at an all-time high but reputation is already emerging as a vital competitive advantage. Many businesses will have invested a lot of time and effort into establishing relationships with the individual councils and positioning themselves as a preferred supplier. Again, rebuilding relationships will be a valuable investment and is pivotal to continuing to secure work. In the short term, we’ve noticed that a number of projects have been suspended or slowed down as a result of the transition, causing an unexpected dip in turnover for some businesses. This may give them a chance to consider other routes to market or ways of expanding their product or service offerings. Over the long term we may see consolidation within industry sectors, so now is a good time for businesses to consider revising their strategic plan and think about building possible alliances. As well as the immediate efficiency gains, the adoption of the super city structure also serves an added long-term objective – to drive economic development and expansion.
from my desk From the CEO Good Bye 2010, Hello 2011! Phew! 2010 will go down in the history books as a difficult year for most and probably one that a lot of people would rather forget. The big question is, will all of the problems disappear in 2011 or are we in for more of the same? I have the honour of advising many different businesses and sitting on a number of boards of SME companies, so I get to see first hand the effect of the recession and general lack of business confidence and the impact that this has on our local economy. There is one thing for certain – whilst the economy may not deteriorate further, it is unlikely that there will be a huge bouncing recovery. We can expect more of the same – a static property market, weak domestic demand, cash flow difficulties and businesses having difficulty accessing capital. The good news is that it does not appear as if things will get worse. It is likely that businesses that survived 2010 have put solid strategies in place to mitigate the effects of the recession, and should be well placed for the coming year.
Real benefits will come as Auckland becomes recognised on the global stage and gains attention from investors, tourists, shoppers and as a destination for international events. One of the new council’s main tasks is to prepare a ‘spatial plan’. With Auckland expecting substantial population growth over the next 20 years, planning will be vital to managing transport, housing and infrastructure investments and resources. These developments are recognised as being favourable to economic development and can be expected to drive local industry.
On that basis, here are the top five skills leaders will require to successfully lead their teams through 2011: Sight – Ability to see emerging patterns and shift perspective when necessary Insight – Ability to learn faster than the rate of change in your industry Create – Ability to think strategically and critically to gain insights that create new opportunities
But one message is loud and clear, and for business owners it’s the key to success: the ability to remain agile and seize opportunities will set a business apart from its competitors. This may come in the form of product or service differentiation, the ability to secure relationships with customers or building strong alliances. Capitalizing on these strengths through times of change can only build a stronger and more successful business. The only certainty is that things will be different to the way they were before. You cannot control the outcome, but you can control your response. Review your plans, re-build your relationships, look for opportunities and consider investment in plant and equipment to ensure you are best placed to win those elusive contracts.
M a t t h ew B e l l i n g h a m , H a ye s K n i g h t C EO an d Bu s in e ss I mprove me n t D ire cto r
Communicate – Ability to collaborate inside and outside your organization and to build and sustain social networks Inspire – Ability to mobilise support and engage others Of course the business model will have to be robust, the operation efficient, the capital and equity position strong and the business needs to be innovative. If your business is missing any one of these attributes you will find it a long hard road.
Plan ahead Now is a great time to get your balance sheet under control, review your strategy, profit plan and get your future governance structures under control. Corporate governance does not need to be expensive or complex. It is simply a mechanism for accountability. In other words, stating what the company will do in a specified time frame and reporting the results. This involves setting a plan, creating templates for monthly reports, delegating responsibility and providing a forum for feedback. The most successful boards also employ an independent adviser who is not embroiled in day to day management activities. Remember – businesses need a leader now more than ever. Make the tough calls, put in place plans and strategies, lean out the organisation and prepare to take advantage of the opportunities as they present themselves. They will present themselves; after all, this is just a cycle.
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Steve says Hayes Knight takes an active interest in the business and continues to proactively monitor it, providing guidance and advice on all matters from gaining new contracts to looking at potential acquisitions. P i c t u re d: Pharmacy One C EO , S teve M ur ray w w w.pha r macyon e .co.n z
P h oto b y Ro b i n H o d gk i n so n
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advice beyond the numbers
Prescription for success Ups and downs are a part of business, especially given recent economic events. Over the past year, one of New Zealand’s largest specialist pharmacy groups, the Pharmacy One Group, has encountered its fair share of challenges and triumphs. The group comprises three businesses: Medication Packaging Services (MPS NZ Ltd) is a robotic pharmaceutical packaging and technology company; Pharmacy One Ltd supplies packaged medicines to Residential Care facilities and special needs patients in Auckland; and Pharmacy Direct is New Zealand’s number one online pharmacy providing both retail products and prescription medication. Although they were started at different times, all have been trading for well over a decade. In July 2009, Steve Murray became the group’s new CEO, having bought into the company with Paul Taylor to join the existing majority shareholder, pharmacist Greg MacPherson. What began as a casual conversation earlier that year between Greg and Steve turned into a full-blown due diligence process on the Pharmacy One Group of companies, says Steve. “What I found was a group that was nowhere near exploiting its full potential for various reasons, so I decided to take up the challenge by taking a stake in the business and becoming CEO for group.” Greg MacPherson was impressed by Steve’s business and technology background, aspects that Pharmacy One Group was lacking. Together they could combine sound business and technology strategies with a sound healthcare vision for pharmacy and medication management services. It was clear that financial management was a major issue within the group and Steve decided to make sweeping changes and “raise the bar a bit”. “I wanted more of a business advisor/partner service rather than just someone who could crunch numbers and do my accounts,” he says. “We needed someone who would be interested in the business in a more holistic way and that I could call on for advice and guidance.” Steve had already investigated possible options as part of the due diligence process and says that Hayes Knight always seemed to come out on top. He’d also heard good things about the company. “I met with Tristan Dean before the deal was complete and effectively appointed Hayes Knight well before day one. To this day, I commend myself for making an excellent decision!”
But the hard work had just begun. A formal governance structure was needed and a proper board structure was also put in place, with Tristan Dean appointed to the board from the very beginning. “The first thing we did was to look at the cash flow situation and it was not a good story,” says Tristan. “In fact, it was serious. They had just a few weeks before they’d be out of cash. Our advice was to downsize the roles in the company and reduce management salaries. It wasn’t great news to deliver, but it has saved their business.” Steve admits it was a challenging and stressful time for everyone at Pharmacy One Group. “A lot of people lost their positions as a result,” he says. “It’s never something to enter into lightly but something you must not shy away from, and Hayes Knight helped every step of the way – through the challenging times of dealing to the cash shortfall and restructures necessary to make the business work. They kept me honest by establishing some clarity and accuracy around the situation and advising on what needed to be done.” The relationship has grown from there. Hayes Knight has become an integrated part of Pharmacy One Group’s business, providing support to its in-house accountant with the preparation and review of monthly figures, and reporting requirements for the bank. Steve says Hayes Knight takes an active interest in the business and continues to proactively monitor it, providing guidance and advice on all matters from gaining new contracts to looking at potential acquisitions. A business valuation was also carried out for the group so the shareholders could track the value of their investment on a quarterly basis. Hayes Knight provided a template that Pharmacy One Group could complete themselves. “In effect, they are more like another business partner than our accountants and that’s the value I was looking for,” he says. “They don’t sugar coat things – they do the research, do the analysis and give you a very clear and well-articulated statement of position. “The quality of work, the level of interest shown and the overall commitment to my business has been outstanding. Overall, I’m extremely happy with how things are working out.” One year on and Pharmacy One Group has strong foundations from which to build. It hasn’t been an easy year, but the future is looking considerably brighter.
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P i c tu re d: Al an Le Noel of H auraki Panel and Paint .
P h oto b y Ro b i n H o d gk i n so n
“It all became customerfocused and solution-based rather than just repairing dings and dents.�
strategic growth
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Back in good shape Vehicle repair specialists, Hauraki Panel and Paint, have found success by employing strategic thinking and a common mission for their team. To most, they’re panelbeaters, but in the world of Hauraki Panel and Paint, they’re vehicle accident and emergency clinics where first aid means delivering the right repair solution for each situation. The dusty, noisy environment of old is gone, replaced by high-technology machinery, bright colours and clean, sparkling floors. The business even sends clients text message updates on the progress of their vehicle repair. Alan Le Noel is surgeon general of this new-style operation, which had its own form of reconstructive surgery. In a period of acute economic downturn, Le Noel hasn’t only radically expanded the operation, rebranded the experience and applied a number of system innovations; he and his staff have also developed a mission statement that will be prominently displayed. Le Noel firmly believes that brains can be successfully integrated into what is generally seen as a brawn industry. “Ours is a grudge purchase, as people are traumatised after an accident. We figured that if we took a personal approach and brought this into our brand, it would work to our advantage.” Starting out as an apprentice body-working 23 years ago, Le Noel moved up the ranks to become manager of a large city shop. In 2004 he purchased Howarth Panel and Paint, a long-established business in the Auckland suburb of Birkenhead. Two years later, he bought another shop in Mt Wellington. That might have been it had he not changed accountants and, in the process, his whole approach. “Our industry is often price-based – sometimes at the expense of quality – so I knew we needed to look for smarter ways to differentiate the service. When I talked to Hayes Knight about this they agreed and that set me on a totally new path of thinking and doing.” This included, mid-recession, expanding the business through more acquisition. Le Noel admits that buying a business in a recession seemed a massive risk but it was a calculated one, and he had implicit faith in the advice he was given. So much so that he bought two further operations: one in Manurewa, the other in central Auckland. “A geographical spread wasn’t initially part of the plan but it’s transpired that way. Flexibility is now part of our model and in this business we can feed into any of the four locations depending on volume and demand.”
At the suggestion of Hayes Knight, and in order to achieve seamless coordination between the various entities, Le Noel established various quality-assurance and operationalefficiency programmes. Computer systems link all the branches and Le Noel studies national and international trends within the collision-repair industry to keep up with the latest repair methodology and equipment and ensure he and his team understand new car technology and materials. The most radical overhaul, however, has been in Le Noel’s attitude to people. “I’m essentially a doer and originally I expected everyone to be like me. Managing staff and growing a business forced me to change how I behaved and looked at the world. I now put an emphasis on respect – within our team and especially for our suppliers and customers.” Hayes Knight encouraged Le Noel to develop a common mission, goals and other elements to define the business and ensure everyone was working to a common purpose. With the recent acquisitions, this was critical. “Initially I thought the process was a bit airy-fairy. But one day, after numerous sessions talking to the team, customers and others and taking notes, the epiphany took place. We arrived at the point of iterating: We help take the stress out of motor vehicle accidents by delivering the right repair solution to your unique situation. It all became customer-focused and solution-based rather than just repairing dings and dents.” Hayes Knight Business Improvement Director Aaron Wallace says Le Noel’s approach to growing his operation in depressed times has put the venture in good health. “Growth in tough times should be built around quality service and having a plausible unique selling point. Think about developing strong relationships with referrers, customers and suppliers,” Wallace says. “Create efficiencies by investing in training and new technologies, and be smart about how to deliver your product and service.”
Life beyond the numbers There’s more to fiscal wellbeing than just the bottom line. Get a business checkup and make sure it includes: Strategic planning, including financial modelling. Flesh out new ideas, tactics and how to compete in a changing market by achieving organic growth
Governance Assistance with M&A activity
Acquiring funding to help with R&D for future efficiencies
Assistance around the power/impact of discounting and knowing true break-even.
business advice
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Top tips for franchisees Principles on which successful franchisees build their business. As it has for many sectors, the recession has proven to be a tough time for franchisees. Those that have adopted sound business practices have fared better than the franchisees that have not. Here’s what flourishing franchisees do to ensure their ongoing success.
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Maintain good equity levels in the business
Resist the temptation to weaken the business by withdrawing all of its profit or be prepared to put some back into the business. Businesses with good levels of equity are able to cope better when faced with reduced cash flows and tighter lending criteria from banks.
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Understand the business
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Planning
This means getting to know the business from top to bottom, including what the key drivers of profit are, as well as deciphering what is and isn’t important and putting resources into what works. Successful operators analyse their time spent working in the business and prioritise the activities that add the most value while delegating the rest.
Develop and maintain a business plan. This process is driven by the proprietor with assistance from professional advisers, not the other way around. Successful operators know the plan, its objectives and goals because they set them. Commit to the goals and communicate the plan to the team, ensuring they are engaged.
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Control – measure and manage
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Follow the system
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Use the benefits and support offered by the franchise group
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Invest in yourself and your team
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Strive for improvement but stick to your knitting
Franchisees serious about their business prepare monthly financial statements and measure them against forecast financial statements. Revenue is monitored daily or even hourly. Both financial and non-financial key performance indicators are identified and measured against budgeted performance and historical performance and benchmarked against the franchise group performance. Timely and accurate reporting enables agile decision-making and means opportunities and problems can be identified early.
Successful franchises have business models that work because they stick to their systems and follow the operation’s manual. Don’t try to reinvent the model and do things completely differently. Not only do you risk breaching the franchise agreement and damaging the brand, but the value of the franchise business is undermined if the business is taken down an alternate route.
Embrace the franchise model by working closely with the franchisor. Comply with reporting covenants, attend training and conferences, benchmark your business against the group and get to know other franchisees. Franchisees that distance themselves from the franchisor not only damage the relationship, but fail to maximise the benefits available to leverage under the franchise model.
Well-trained team members and franchise operators are always a key component of a successful franchise. Training should be ongoing and regular, not just at the induction stage. Identify team members who wish to progress and devise a development programme for them.
The key to a successful franchise is to carry out the business activity according to the proven formula (the system) and keep repeating it. However, keep an open mindset and continue to evaluate the way the business operates, looking for opportunities to improve efficiency or drive revenue. If you believe you can make improvements in ways that involve a fundamental change to the system, discuss this with the franchisor before implementing anything.
business advice
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Having trouble with cash flow? You’re not alone... Managing cash flow is a key component of business strategy. Regardless of your challenges in business, it is one area you cannot afford to neglect. In late 2010, Reserve Bank Governor Allan Bollard left the OCR rate at 3%, commenting, “The pace of economic growth appears to have moderated. Corporate investment intentions are now below average. Household spending also remains weak, with household credit still flat and housing market activity slowing further.” This is a view that Hayes Knight shares and we believe that the Reserve Bank has got it right this time. We’d like to think that OCR will remain stable for at least another six months to give our economy a chance to get back on its feet. From what we’re seeing in the market it appears that the promised recovery is a bit further away than anticipated. The upshot is that we need to work harder and smarter to run our businesses more efficiently and not only win new customers, but keep our existing customers. Of course, the most important thing of all at the moment (or any time, really) is managing cash. That’s easy to say, but how do we do it? Control of finances is critical to a company’s survival, growth and profitability in any environment. Key factors are setting out trading and cash flow budgets for the business over the 12-month cycle and regular monitoring of performance and updating of budgets. However, many businesses are too busy with day-to-day activities and administration to do this thoroughly, if at all. To make good management decisions, company directors need to have accurate, up-to-date and realistic forecasts of their sales, purchases, overheads, gross margins, net margins and cash flow. Critical decisions about the future of the company, such as levels of employment, investment, salaries, sales, stock levels, debtors and creditors and overdraft requirements should be made with up-to-date financial information – not simply based mainly on gut feel. Without sufficient cash in the system, poorly performing companies can go under while businesses performing profitably can see their growth restricted. It is also vital to look at more than just the numbers for your business to be sustainable in the medium to long term. This includes an analysis of the risks around legal issues, customer and supplier relationships, contracts, funding lines, assets, competitor analysis, debt levels and much more.
To accurately predict the cash flow requirements of a business, your model must be dynamic. This means you need to be constantly updating it with your year-to-date figures and current balance sheet position, and then forecast the remainder of the year to estimate your finishing position. These forecasts should include detailed assumptions and consider the following:
+ Analysis of sales levels, product mix and growth + Customer analysis, including risk and exposure to one or more customers
+ Gross margin analysis + Review of individual overhead costs + Asset and depreciation analysis, and capital + + + + + + + +
expenditure programme Net margin analysis Debtors ageing and analysis Stock level analysis and ageing Overdraft levels and cash head-room Additional funding requirements Forecasts Corporate governance Supplier relationships and contracts
Banks have traditionally been the prime source of funding for businesses, but obtaining finance from them is now a lot more difficult. They have moved from a ‘growth’ mindset, to a ‘protection’ mindset. They are more cautious and conservative, regardless of a business’s cash flow, its creditworthiness and track record, and the security offered. As always, it helps if you have developed a rapport with your banking relationship manager and continue to give them regular, accurate updates. In addition, if an experienced accountant and adviser are facilitating the process, you will dramatically improve the chances of success. But, what if you simply can’t get additional finance from your bank? Some specialist alternative lenders may lend on debtors, stock or equipment, but their interest rates and fees may be significantly higher. Off-setting that is the risk that you run out of cash – and that cost is, of course, higher still. Make sure you get quality advice from your Hayes Knight adviser before heading down this track. We have great relationships with many reputable suppliers of alternative finance and have helped clients secure funding in recent months.
You can always squeeze a little extra cash out of your balance sheet. Try the following:
+ Collect your debtors faster
+ Sell surplus assets and equipment
+ Negotiate extended terms with some suppliers
+ Reduce stock + Consider purchasing new stock on consignment
+ Review your costs + Refinance existing assets + Lease new equipment rather than using cash flow
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news & updates
Big shakeup for auditing Major changes are on the way for auditing in New Zealand. What are they and how will they impact your business? Auditors play an important role in providing independent assurance over financial information. Unfortunately, many see audit as a compliance cost and a ‘grudge purchase’… that is until they lose money in the entity concerned. Recently, local and international events have increased the focus on auditors and audit standards. Several significant changes have affected auditors and more are soon to come.
What’s been happening? The introduction of new more complex International Financial Reporting Standards (IFRS) has put more pressure on New Zealand auditors to be the ‘accounting-standards policemen’. In many cases they’ve also had to educate their clients about the required changes.
+ The new accounting standards haven’t applied to all entities that are audited, and auditors often have to help clients determine what’s applicable to them. + The 2009 introduction of a complete suite of new auditing standards, International Standards on Auditing (NZ), fully came into effect in 2010. This has increased the body of mandatory standards auditors are required to follow. There are now 700 pages of standards versus the previous 250 pages. + There have also been legislative and regulatory changes, such as to the Charities Act 2005 clarifying the requirements of many charities in New Zealand; amendments to the Securities Regulations impacting many issuers and to the Financial Reporting Act concerning who must be audited and file their financial statements. The above changes have created significant work for auditors and all during a recessionary environment where
they have been under pressure to keep their audit fees to the bare minimum.
Another big change on the horizon New Zealand auditors are now being further shaken up with the introduction of the proposed Auditor Regulation and External Reporting Bill. This proposed legislation seeks to create a form of government-appointed independent oversight over auditors of issuers. An issuer is an entity that issues shares or securities to the general public, or has the power to rate tax or levy the general public.
Important facts:
• Audited financial statements are a snapshot at a particular point in time – they look backwards rather than forwards.
• Financial statements, audited or not, may not contain sufficient information to assess the ongoing viability of an entity.
• An audit of financial statements isn’t undertaken with the primary objective of detecting fraud, or identifying systemic risks, within an organisation.
• An audit of financial statements provides no assurance of the competence or integrity of directors or senior management, the quality of their decision making, or the sustainability of the business model they have adopted. What’s described as ‘the audit expectation gap’ is the difference between the true purpose of an audit (to provide assurance to a defined group of people concerning the work of others) and its perceived purpose in the minds of some market participants (that it is akin to a clean bill of health for the company concerned). An audit does not offer the latter. The procedures an auditor performs do not provide a certification of accuracy in every respect and are limited by a range of practical considerations, including the fee the client is willing to pay.
news & updates
LAQCs RIP The Government has made sweeping changes to the Loss Attributing Qualifying Company (LAQC) regime. Now is the time for affected clients to make a decision of ‘what’s next’ for them.
Key Proposals
+ Standards setting – A government-appointed body will take over the role of audit and assurance standardsetting. To date, this has been done by the New Zealand Institute of Chartered Accountants (with the standardsetting board chaired by Hayes Knight Chairman Craig Fisher from 2001 to 2009);
+ Audit standards may get the force of law – In addition to the existing civil offence, it would become a criminal offence if auditors are found to be negligent. (If passed, this means that auditors may not just lose their own house, but they’d also have to live in someone else’s house – with bars on the windows!)
+ Registration and licensing – Auditors of issuers will need to be registered and licensed, involving further compliance costs. It will also split the auditor market into those who have met the standards to be licensed and those who have not.
+ A level playing field with overseas auditors – Current anomalies allow overseas auditors to audit in New Zealand without being subject to the same level of controls as local auditors. For example, the collapsed Bridgecorp Finance was audited by an Australian firm. Australian firms can audit here, but New Zealand firms cannot audit in Australia. The proposals aim to tidy up this situation.
+ Levies – The Bill proposes that the costs of this regulation and oversight be borne by issuers and their auditors. This will lead to increased costs. The Hayes Knight Audit team has been actively involved in discussions regarding the proposed changes within the profession and we are making submissions to try to ensure a practical, sensible and cost-effective result for all.
What is an audit? An audit gives shareholders a reasonable level of assurance that the financial statements prepared by an entity comply with relevant standards and provide, in all material respects, a true and fair view of its financial performance and financial position. It is the governance body’s (usually the directors) obligation to prepare financial statements that comply with relevant standards and give the reader a true and fair view. The auditor is engaged to express their opinion on whether that obligation has been properly discharged.
The new legislation has said RIP to LAQCs, which allowed company losses to be attributed to shareholders. From April 2011, if no action is taken, LAQCs will simply revert to being a Qualifying Company (QC), which does not allow losses to be attributed to shareholders. However, with the death of the LAQC comes a new vehicle called a ‘look through company’ (LTC), which is transparent for tax purposes, meaning the income and expenditure of the LTC is passed through to the owners and tax is paid at the owner’s level. LTC’s do have a loss limitation rule which means a shareholder can only use losses of the LTC to the extent they have sufficient ‘owner’s basis’. An LTC retains its identity as a regular company and will keep its corporate obligations and benefits under company law, such as its limited liability.
So what next? A decision has to be made about what to do with all LAQCs. The options are to:
+ Remain as a QC + Elect out of the QC regime and become an ordinary company
+ Transition to a LTC, a partnership or sole trader + Restructure to a trust There is a transitional period that allows for restructuring and transitioning to another entity without a tax cost – but only for a limited time. Therefore every person that has a QC needs to review their position and seek advice to determine what structure is appropriate for them going forward. Not doing so may bring consequences that you do not want!
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hayes knight news
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Supporting excellence Hayes Knight clients in the spotlight 1 Villa Maria’s manager, Fabian Yukich, has been awarded the Sustainability Champion Award at the NZ Sustainable Business Network awards. Villa Maria wines have been awarded 11 gold medals and three pure gold medals at the Air New Zealand Wine Awards 2010. 2 Paralympics New Zealand hosted the IPC Athletics World Championships in New Zealand in January 2011. Pictured is Tim Prendergast, visually impaired (5%) middle distant runner. 3 Smartpay is growing its payment solutions business in New Zealand since it acquired the Cadmus operations and is now looking to expand the Australian business. They are seeking a listing on the Australian Stock Exchange by mid2011 as part of its growth strategy. 4 Lindesay Construction built the house that won the 2010 Registered Master Builders House of the Year Supreme Award, adding to their trophy collection after winning in 2008 as well. In the words of Panel Judge, Graham Anderson, “Coming down the driveway you know you’re arriving at a very special place”. 1
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Emerging Talent Awards Hayes Knight is once again proud to be a major sponsor of the Emerging Talent Awards, part of the prestigious annual North Harbour Club AIMES Awards. AIMES awards are presented to young people (aged 13-25) living in the North Harbour Region who have achieved excellence in the categories of the Arts, IT, Innovation & Science, Music, Education, Sport and Service to the Community. Hayes Knight CEO Matthew Bellingham says: “Sponsoring the Emerging Talent Awards is a wonderful way we can reward young people who really stand out from the crowd. We see our association with the North Harbour Club and these awards as a commitment to celebrating excellence.” Matt presented the Emerging Talent AIMES Awards to six outstanding recipients on October 21 2010. Each received $4,000. The main awards were presented on 30 October, at the Bruce Mason Centre. Category winners received $10,000 and the overall winner received a further $15,000 (full results are listed on the North Harbour Club website www.northharbourclub.co.nz, under AIMES Awards) The North Harbour Club is a charitable organisation of which Matt was recently appointed vice-president. “The club rewards excellence in the youth of the North Harbour region, and the black tie event is the premier event of the year. It is always an awesome night. I am constantly blown away by the calibre of people that receive an award,” he says. Hayes Knight sees this sponsorship as a way to put back into the community while being inspired by the future leaders of our country.
3 Matt Bellingham, C EO , s p eaki ng at the A I M E S E m e rg i n g Ta le n t prizegiving
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Matt Bellingham, CEO, w i t h b a n d N a ke d a n d Fa m o u s a t t h e A I M E S Em erg i ng Ta lent Aw ard s
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1 The Hayes Knight Mini driven by our petrol head Barry Hare, once again punched well above its weight in the 2010 Dunlop Targa Rally, finishing in 11th place overall and 1st in his class. The best news was that the Mini came home without a scratch. 2 The Hayes Knight team members challenged themselves and their personal fitness running and walking the Corporate Challenge in Auckland on 24 November 2010 – the fifteenth time we have participated in the event. With 30+ team members competing (well... some were!), we were proud of our results taking away a number of trophies. The best part? The sausages and beer under the Hayes Knight tent after the race.Our Chairman Craig Fisher, who first competed in 1995, takes home the trophy for 1st Men’s Accounting team at the Corporate Challenge. 3 Brendon Cutler after finishing the Corporate Challenge. 4 Sausages and a few beers under that tent is the best prize! 5 & 6 Hayes Knight did a fantastic job in raising funds for men’s health by growing mos for Movember, with $1389 raised overall. 7 & 8 2010 finished on a high with the team letting their hair down at the Hayes Knight ‘Starry Knight’ Christmas party.
profile: Mike Elliot Business Advisory Manager has enjoyed putting people first at Hayes Knight for the past 21 years.
Where do you see the future of accountancy and business advisory services going? I think it’s really more about getting alongside sustainable businesses and helping them to implement and report on the benefits they gain. There is an awareness of the importance of sustainability – both financially and for the environment, but businesses have just been riding the recession and surviving. On the upside, many companies have learnt a lot from the recession and have had to work harder and smarter. As the economy improves, they can take those lessons forward and become stronger for it.
What has been a career highlight for you? I was involved in a fairly complex joint venture structure that enabled me to work with some smart business minds. It required a lot of business acumen as we weren’t just ‘doing the numbers’, but were explaining what the numbers meant. With deals like that you need to know that what you offer is robust – and I was proud of what we achieved. What advice do you find yourself always giving to clients? Don’t look at tax consequences as the primary reason for doing
something. Think longer term about the overall commercial benefits. Tax is just one of many considerations. What do you love about Hayes Knight and your job? At Hayes Knight they really do put clients and team members first. We enjoy going the extra mile for clients and living by the mantra of ‘beyond the numbers’. Working here, it’s all about the people, and over the last 21 years I have met a lot of new people – it’s almost like a new job as people join the firm, which keeps it fresh. I love problem-solving and to be given a challenge and having
to think ‘beyond the numbers’ to get to a solution that makes sense. What do you enjoy outside of work? I have two little girls, aged two and three, who I love spending time with. I’m a sports fanatic and I rally the troops each year for the Hayes Knight indoor netball team. I’d say that I am quite competitive – I play to win. I grew up in Whitianga and I enjoy spending time there with the family.
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innovation showcase
Hayes Knight is proud to be assisting and advising companies at the leading edge of their industries. Here, we present three more businesses that fit that description, and look briefly at the exciting and innovative work they’re doing. MW Cleaning Founded: 1972 by Bob Quaid’s parents. Bob and Anne Quaid took over the business in 2005. Innovative strategy: A desire to clean up the cleaning industry has driven Bob and Anne Quaid to lead the way in the use of sustainable cleaning products and to base everything they do on the question: “Is there a better way?” This has seen them become the first cleaning company in New Zealand to achieve an Environmental Choice NZ License, endorsed and initiated by the government. Their innovative work is benefiting both the planet and humans, with fewer nasties pumped into the air, which helps asthma suffers and reduces sick days in general. MW Cleaning recently won the Environmental Choice NZ Innovator of the Year 2010 award. Since taking over MW Cleaning in 2005 the business has doubled, with an estitimated 20 per cent growth in the current financial year, which Bob puts down to “achieving our ECNZ licence and putting in place the right systems to ensure we remained sustainable throughout the recession”. “We are passionate about leading the industry when it comes to sustainability. Being the first cleaning company certified by ECNZ is proof that we are doing what we say. We love spreading the word about the health benefits too, as people don’t realise that something as simple as cleaning practices can make such a difference.” Bob Quaid, Director.
nz crane group Founded: 1999 through the acquisition of Central Cranes Innovative strategy: When NZ Crane Group decided to move in to the renewable energy market, with a focus on wind energy, a strategic alliance was formed with KR Wind, a global company owned by Mammoet, the world’s largest crane operator. This gave NZ Crane Group access to a fleet of cranes up to 750 tonne capacity to service wind farms in New Zealand. The strategy to form this alliance immediately paid off with the NZ Crane Group / KR Wind Alliance awarded the contract for the erection of 28 turbines at Te Uku, near Raglan. The use of innovative machinery was critical, with the largest crane New Zealand has ever seen (600 tonnes!) bought in for the project. The project is currently nearing completion. “By focussing on the wind farm market, forming the alliance with the world leader and providing specialist equipment that could reach difficult sites with minimal environmental impact, we realised that we could offer something that no one else had.” Deane Manley, Managing Director.
Jericho Founded: 2001 by Jeff Mann Innovative strategy: Jericho is a team of emarketing specialists who have been at the forefront of digital marketing for the past ten years, having developed their own email marketing solution (SmartMail PRO) that is turning heads. With clients such as Ezibuy, Mercury Energy, Metservice, Te Papa, Telecom, The Warehouse and Westpac Bank signing up, it’s clear that Jericho is delivering outstanding results. Jericho has gained recognition by winning the under-$5 million category prize in the Vero Excellence in Business Support Awards in 2009 and had previously been acknowledged for its technology innovation when it won the supreme award at the 2007 IBM Annual Business Partner Awards. “Our strength in growing a successful specialised digital marketing agency comes from two core areas. Providing high calibre personnel to realise and maximise a clients digital plans combined with development and management of complex technology that is constantly changing.” Jeff Mann, MD, Jericho Ltd.
the last word
Take control – understand your cash flow Cash flow can often seem haphazard – one month the bank account is healthy, the next you’re out of cash. The good news is that it doesn’t need to be that way – you can take control. Every business should perform cash flow modelling so that you know what to expect and the timing of your working capital requirements. At Hayes Knight we have the expertise to help you forecast your business’ cash flow. To get it working the way you want it to, talk to your advisor or Mel Jenkin today. E: melanie.jenkin@hayesknight.co.nz T: 09 379 7013
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Someone’s changed my backyard One of the joys of children is having the excuse to play with some of their toys and be a big kid yourself every now and then (I find it helps keep my sanity). Recently I had the fortune of watching the movie Cars – a story about a racing car that gets trapped in a country town called Radiator Springs. This sleepy town was full of past successes, but time has marched on and the rest of the world has embraced the changing environment, while they were still waiting for a miracle to lift them all out of the doldrums. Then I received a text from one of my fellow directors asking if I’d emailed a mutual client about updating their online GST pricing, given the rate change. I guess only a propeller-head accountant can draw a parallel between these two scenarios: It’s a changing business landscape we’re living in and we either adapt to it or we wait, wait a little more, then die. It’s not so much strategies I’m referring to here, but more the way we do things and the boundaries within which we must operate. Recent legislative examples include the death of the LAQC; the abolishment of Gift Duty; updated audit requirements; tighter securities legislation and the changing tax rates (GST, company and personal). Among the finance examples are the tougher lending requirements/banking covenants, or perhaps a general drying up of investment funds. As for examples of the changed impact on marketing strategies/media and the way people interact, there are technology advancements in correspondence (it’s now instant), e-commerce (websites as well as new business models) and purchasing attitudes. Human resources have been impacted by tighter employment laws and the retirement of the Baby Boomers has seen a ‘changing of the guard’ in business relationships. So much has happened over the last five years to the way we conduct business. So much more will change over the next five years in terms of how business will be done. In my opinion, the ability to embrace the ever-changing business landscape early on will not only create a better chance for success, it will be critical to survival. We can’t keep turning a blind eye and be the last cowboy up the pass. Imagine how many opportunities have been lost if your website hasn’t been properly updated for three years and how high is your business up the Google search list? I live by the belief that it’s okay to let someone else past and try something out first – after all, it’s the second mouse that gets the cheese – however, don’t let everyone go first or you will be the first to go. We must change the mindset, change the way we engage and operate and change our game if we are to change the bottom line. —Radar
You know your numbers...
but do you know their meaning?
Keeping your business future fit is about being better equipped to make bold and powerful financial decisions. At Hayes Knight, rather than just work the numbers, we interpret them. The result is a more empowered, knowledgeable client able to be proactive with the next steps of their business. To find out more, visit hayesknight.co.nz