Insights Problems solved.

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 businesses lose a large corporate client resulting in the loss of 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.