Mitigating Income Risk

There is no denying that many retail businesses have experienced significant challenges over the past decade with the rise of low-margin, low-cost online businesses. The need to adjust costs and offer innovation in client service to meet the challenge of online competition has become an ongoing area of focus to stay profitable.

There is another area of potential vulnerability for all businesses, especially those in the corporate sales space; managing the risk of being reliant on a small number of large clients.

On a number of occasions, I have seen agents lose a large corporate client resulting in those agents losing a significant amount of income and being forced into administration and liquidation. Certainly not a good outcome. You don’t always have control over when your clients seek your service but you do control when and where you spend money.

Any business with income reliant on a limited number of clients, and clients that have the ability to move to another supplier relatively easily, must ensure that they can operate without that income. The simple solution is to keep your overheads as flexible as possible to allow your business to scale up and down as quickly as necessary.

There are usually 3 main overheads that should be monitored by most businesses; staffing costs, rent and occupancy costs and office IT systems.

Staffing costs pose their challenges with a need to balance between full- and part-time direct employees and contractors. Direct employees offer greater control for the employer but adding employees in times of growth may necessitate their redundancy when there is a significant loss of income. Staff redundancy has implications not only for the employee being made redundant but also for the remaining employees and their feeling of job security and office culture generally. Using contractors may seem like providing a convenient way to scale back staffing costs when necessary but also restrict the control over the work they do.

Rent and occupancy costs are a challenge between a long office lease offering security and a shorter lease offering greater flexibility to move to larger or smaller premises as the business grows or shrinks. Every business needs sufficient office space in terms of location and size to best serve clients while at the same time ensuring that their leasing and fit-out commitments are flexible. One often overlooked solution to keeping rent and occupancy costs low is to encourage staff and contractors to work from home and use shared office facilities that may be less costly than having permanent facilities that are often under-utilised.

Cloud based office IT systems offer huge potential for savings compared to on-premises systems that may have been state of the art less than 5 years ago. The biggest benefit to any cloud based system is the ease with which a business can scale up and down its use of the systems in response to changes in demand. Quite often it makes financial sense to scrap existing on-premises systems, even those that may still be operational, for cloud based systems with lower ongoing maintenance costs. Cloud based systems will often not have any upfront costs apart from migration of existing data and some training. Cloud based IT systems also offer greater ease for staff and contractors to work at home or form clients premises as appropriate.

There is no magic solution to avoid risk and every decision has challenges and consequences. You, as a business owner, need to consider and review your business practices to ensure that you can handle what happens in your business and that your business remains as flexible and adaptable as possible to meet the challenges it will face.

Calling all future leaders

When running a business, it is very important to grow and develop as the world changes around you. If you don’t grow and develop, your business will eventually become extinct.

It is equally important not to rush into any decision without careful consideration of all the options and the foreseeable consequences. A wrong decision can be very costly to your business and the last thing that any business operator wants is to cause their own business demise.

A successful business operator will be someone that has vision for the future with enough caution to not head in the wrong direction but enough conviction to keep moving forward. A successful business operator will surround themselves with people and organisations that can help to foster that growth and development and share their vision.

But visions and ideas also grow and develop and need those people and organisations to continue to grow and develop too.

Quite often, business operators will believe loyalty from these other people and organisations, often shown through long term employees and favourable trading terms, is a sign of a strong business.

But loyalty alone is often the cause of a businesses demise. If those same loyal employees and organisations are not keeping up with the changes, and even helping you to see the future and make those changes, they will hold you and your business back from continuing to succeed in the future.

Future business leaders must show their ability to grow and develop, not just out of necessity but from their deep desire to drive for success. Future leaders that think their success will come from mastering the old ways will be outpaced by their peers who look for new ways to do things better.

Good luck. See you at the finish line.

Storm Clouds Ahead

Many businesses look to minimise their accounting and bookkeeping costs as they will often see it as an expense with little benefit. Their push to save money will often end up costing them more in the medium to long term. You either do the job right or not at all.

Many start-up businesses come with the idea that they can save costs by maintaining a list of income and expenses in a spreadsheet and providing that to their bookkeeper or accountant for processing. This is certainly doable and can be cost effective initially, especially when the lists of income and expenses are relatively small.

But, as your business grows, you will get to the stage of having too much information to manage in a spreadsheet and inevitably mistakes will be made. A proper bookkeeping system is designed with checks in place to ensure that when (not if) a mistake is made, the mistake is easily identified and able to be corrected.

Hunting for errors without a proper bookkeeping system will add considerable time and cost to your costs no matter how good you think your spreadsheet is and no matter how diligent you think you are.

Xero and similar accounting systems go one step further by providing direct feeds of banking data into the accounting system, reducing the amount of manual processing and thus reducing the chance of errors.

If you are thinking short term only and not preparing for growth, the growth will be challenging.

Choosing your Accountant

I was recently asked by a prospective new client what I thought to be the most important consideration when looking for a new client. From a client’s perspective, all accountants seem very similar, offering similar services. Most even charge similar fees. But there is 1 key element before all else that will determine if your engagement with your accountant will be a success or not.

Simply, you must choose your accountant by whether you can communicate with them. This is not just a matter of your accountant speaking the same language, nor just your accountant speaking in terms simple enough for you to understand. You must choose your accountant based on you feeling comfortable to contact your accountant and asking for help.

You will need to discuss personal matters with your accountant. You will need to expose your finances to your accountant and allow them to comment and critique your financial (and sometime non-financial) behaviour. Without you as the client being able to talk to your accountant, your accountant will never be able to offer you the full support you need and deserve.

Communication works both ways. You should want your accountant to be your partner in your success, someone that will give you honest feedback and be your supporter when appropriate. You also need to make your accountant feel comfortable that they can pass on news that you may not like (I have yet to meet anyone to get excited about paying their taxes). You need to learn to trust your accountant over time, but having some initial doubts is healthy.

After finding an accountant that you feel comfortable communicating with, it is also important that they are not just competent at completing your compliance work but also work with you to solve problems and challenges you may face. It is also important that your accountant has the right experience to be able to assist you. It is important that your accountant is willing to push themselves for you too. It is important that your accountant can understand your situation and circumstances, and suggest solutions to any challenges you face.

Finding an accountant is easy. Finding a good accountant is not so easy. Finding the right accountant for you can take several false starts but the price for settling for an accountant you can’t communicate with will be detrimental to you and your business.


man makes plans and god laughs

Following my earlier post about business plans, one of the more powerful tools to better understanding yourself and your business is a SWOT analysis; Strength, Weaknesses, Opportunities and Threats.

Strengths Understand what you do better than others and where you fit in. Strengths can be drawn from experience, character traits, educational and career achievements. Advantageous circumstance may include social connections and resource access.

Weaknesses Acknowledge where you need help. Exhaust the options for ‘filling the gaps’ which may involve additional training, drawing on the knowledge and skills of other people, or using external resources.

Opportunities What are your competitors missing? Identifying opportunities is the first step to realising them. Think creatively and exhaust all possibilities to provide the broadest options.

Threats What do your competitors do better than you? Consider how achievable your goal is, the difficulties faced, the consequences of not addressing any weaknesses. Work out actions to reduce the chance of occurrence and a back-up plan if the threat becomes real.

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.

  • Sun Tzu

Running a business is like going into battle where you have opposing forces that you will need to address, each with their own agenda, to ensure that the final outcome is a success. Performing a SWOT analysis helps you understand where your business fits in and how to maximise your situation.

It is not enough to just know yourself without consideration to your competitors or their products/services. You must understand your customers/clients to know what they need and want. Similarly, it is not enough to just know what you are good at but also need to know where you are weak and be prepared to seek and ask for help. No one is good at everything and no one should consider going into business alone.

Also like a general business plan, a SWOT analysis will need to be updated and revised as the business and market evolves. Competitors will introduce new products and services that will challenge your existing business. Customer needs and wants will change over time requiring you to adapt with them. Your strengths and weaknesses will change as you learn and grow too.


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