Buying an existing business can be a great way to get started as a business owner or to expand operations.
Established businesses have already done the hard work of setting up; so you can get up and running on day one without a lengthy formation process.
Things You’ll Need
- Why is the business for sale – it’s important to understand the motivation for the sale, whether strategic or whether an emergency sale. There may also be hidden reasons for the sale which your research can uncover.
- Research – do more than you think you need to! Market research, investigation, learning and questioning about the potential business, the locale, the industry, the customers, the suppliers, the competitors, the market and the nature of the goods or services being sold will ensure you don’t rush into a decision just because it looks like a good deal.
- Due diligence – you’ll need to see detailed financial records, contracts, licenses, supplier agreements, lists of equipment, assets and inventory, lists of liabilities, loans and debts, and all employee records before making your decision.
- A good business plan – that covers one year, two to three years and possibly five years as well. This will help you to look at the longer term and big picture, assess the potential of the business and give a realistic picture of what you are committing to.
- Independent advice – from your tax agent and other business advisors such as an industry expert, business broker or lawyer. You might think a business looks like a great potential, but objective observers may pick up issues or queries that you have not.
- Finance – whether it’s your own funds, a business loan or short term finance options, you will need to work with your advisors and refer to the business plan to assess how much you will really need for the initial purchase, transition period, and future investment.
- Commitment to the work – Being prepared for responsibility required to run a business. Running a business does require certain skills, as well as time, energy and money. You need to be clear about your reasons for going into business and to be sure you are up for the challenge!
When considering a business, we can help you to analyse the financial reports, activity statements, tax returns and sales and purchases records to give you an independent overview of the financial performance and potential of the business.
We can assist in understanding the financial performance and benchmarks of a business you are considering buying, so that you make the best decision possible!
If you sell stock or inventory, it’s essential you understand stock turn and how to increase it.
Obsolete or ‘dead’ stock will harm your cashflow and your ability to increase profit, particularly in a slower-moving economy. The longer stock takes to sell, the longer you have your cash tied up in the stock before it can be sold for a profit. The older the stock, the less likely it is that you’ll be able to sell it for its original retail price.
Use the below formulas to calculate your stock turn:
Stock turn = cost of sales / average stock held
To calculate cost of sales: opening stock + annual purchases – closing stock (where purchases includes all variable costs that show in your trading account).
To calculate your average stock:(opening stock + closing stock) / 2.
For example, where your cost of sales is $150,000 and average stock is $45,000, your stock turn will be 1.33 ($150,000 / $45,000). This means that on average, you sell each item of stock 3.3 times per year.
So, how do you increase your stockturn to sell items faster, free up cashflow and increase your profit, particularly in the current economy?
- Reduce your stock levels. In the above example, if stock was reduced by $10,000, stock turn would increase to 4.3, you would free up $10,000 of cash, and increase your margin.
- Buy stock on consignment. This means you only pay for it when it sells.
- Order ‘just in time’. For example, if it takes two days to receive an item after the order is placed, and you sell an average of five items per day, only hold a maximum of 10 of that item in stock.
- Use display stock. If a customer wants to buy the item, have it delivered straight from your supplier to the customer instead of holding multiple items in store.
- Use a catalogue. Reduce the stock held in store and provide customers with a catalogue to order from.
- Reduce ordering levels. Ideally, calculate the stock turn per item (use the above formula for each item). You’ll then be able to identify the slow-moving stock so you can reduce how often you re-order it.
- Stop stocking slow-moving stock altogether. It’s just tying up your cash for longer. Reassess whether you should be selling these items at all.
- Encourage your sales team. Tell them which items sell more quickly and encourage them to sell more of these items.
- Get rid of obsolete or dead stock. You’re better off to have cash from a discounted sale reinvested in faster moving stock.
- Ask us for 10 more ideas! There are numerous ways to increase your turnover, get in touch and we’ll help you identify the best ways for your business.
A business budget is one of the essential tools in managing your business finances and actively building your business.
A budget shows what you plan to do with your cash over the next year.
For a complete picture of your business health, you need to review the profit and loss statement, the balance sheet, the cash flow forecast and the budget. Taken together, these reports allow you to make informed business decisions and monitor performance.
Why have a Budget?
- Forecast sales and expenses according to monthly or quarterly variations.
- Evaluate performance over time, including changes or patterns.
- Get really familiar with where your money goes and where it comes from.
- Clarify targets and goals and use the budget to help you focus and achieve those goals.
- Comparing actual figures to budgeted figures allows you to see potential problems early and plan for unexpected costs.
- A budget will help you to see the big picture and stay motivated over the long term.
Where to start
A basic budget takes known income and expenses, then makes certain assumptions about the timing of income and planned expenditure. The basic budget is based on cash in and out of the business.
Over time, as you start to see the benefits of using a budget, your budget should evolve into a more sophisticated version that includes non-cash elements such as provisions and depreciation.
Most businesses will start with one budget but soon move to having three budgets.
- Business as usual – the next year’s budget is based on current year income and expenses, with perhaps a small adjustment for consumer price index increases.
- Worst case – budget is based on a pessimistic view of next year’s performance.
- Best case – budget is based on an optimistic view of performance over the next year.
A budget is usually for a financial year, but you can also set up budgets for two to five years.
Once you have one budget (or more) set up, you can then run your current financial reports against the budget to see how you are tracking. This allows you to make rational business decisions in real time to adjust accordingly.
You can run your financial reports monthly and adjust your budget as needed.
Now is a great time to put a budget into place for the coming financial year. Book a time with us to help you create a meaningful budget in your accounting software so that you can use it as a proactive part of your business management, strategy and your success.
For your business to make money, you need to generate revenue.
You produce revenue through your usual business activity, by making sales, getting your invoices paid or taking cash from paying customers. So, the better you are at selling your products/services and bringing money into the business, the higher your revenue levels will be.
But what actually drives these revenue levels? And how do you get in control of these drivers?
Knowing where your cash is coming from is more crucial than ever
As a trading company, you face the multiple challenges of a global recession, an increase in online consumer buying and a ‘new normal’ when it comes to trading, markets and buying expectations. The better you can understand the nature of your revenue and its drivers, the more you can flex, manage and control your ability to generate this income.
This helps your medium to long-term strategic thinking and your decision-making, allowing you to be confident that you’re focusing on the business areas that deliver maximum revenue.
Import areas to consider will include:
- Revenue channels – where does your revenue actually come from? Do you create income from online sales and ecommerce, through retail sales in bricks and mortar stores or through wholesales to other businesses? You may focus on just one of these channels, or it could be that you use a mixture of two, three or more.
- Revenue streams – your total revenue will be made up of a number of different ‘streams’ So, you might be a coffee shop, whose revenue streams include coffee sales, cake and pastry sales and lunch sales. Knowing which revenue streams you rely on, which are most productive and what return they are delivering allows you to make decisions. If 80% of your income comes from 20% of your products, perhaps you need to tighten up your product range and ditch some of the poor sellers. If you’re selling more services to one particular industry, perhaps you should focus more marketing in this specific niche, or downscale your sales activity in less profitable niches.
- Product/service split – Do you know which products/services are the most profitable in the business? Which products/services have been resilient to market changes (giving you some revenue stability) and which have adapted well to change? The more you can dive into your metrics and find the most productive and adaptable products and services, the greater your ability is to provide constant and evolving revenue for the business.
- Value vs volume – Is your revenue based on selling a high volume of products/services at low margin, or low volume at a high margin? Based on this, can you move your margin down to create a more attractive price point (and more value for customers)? Or are their ways to push volume up, shifting more units and boosting total revenue? By diversifying into new channels, new streams or new products/services you can aim to balance value and volume to create brand new sales – and higher revenue levels.
Talk to us about exploring your revenue drivers
If you want to boost revenue and increase your overall profitability, come and talk to us. We’ll review the numbers in your business, help you to understand your revenue drivers and will give you proactive advice on enhancing your total revenue as a company.
Get in touch to kickstart your revenue generation.
Whilst it is not exactly business as usual right now, you still need to prepare for your business tax return. Organising your documents now will mean you can get your tax return completed earlier and access any refunds due or start planning for tax payments.
Getting your business records up to date and accurate will allow us to work with you proactively to plan for the coming year, which will continue to be unusual (and possibly difficult) for many.
It will also be one less thing to do when your normal business activity resumes later in the year.
What Records do you Need to Have Ready for the Tax Agent?
- Have you bought or sold assets? If so, you need full details of acquisitions and disposals.
- Have you taken out a new loan or other finance? You must have details of the finance arrangements and statements of monies owing at 30 June.
- Check that any bonds or deposits paid or received have been allocated correctly.
- Have you prepaid for insurance or other large business expenses that need to be apportioned to the following financial year? Make note of the portion applicable to the current financial year.
- Do you carry stock? If so, you need to perform a full stocktake at 30 June (unless you qualify for the simplified trading stock rules).
- List any doubtful or bad debts to be written off.
- Review your debtors and creditors (accounts payable and receivable). Is the list current and correct?
- Do you have loans with related entities? Reconcile the loans to and from each entity to ensure the same value is reported in the accounts of both entities.
- Ensure that all payments to company directors have been correctly captured. Talk to us now if you want to make director payments before 30 June.
- If contact details of business owners and key personnel have changed let us know.
We will let you know if there are other matters to discuss with us before completing your tax return, such as capital gains, vehicle usage, private usage apportionment or superannuation. This year, there may also be new elements to discuss if you have received refunds, credits or deferrals of business expenses and liabilities.Remember you need to keep all your business records for seven years, so store everything securely and where possible electronically for safety and ease.
Once you have all your records for the 2020 financial year, make an appointment with us to schedule in your tax return for prompt lodgement.
It’s not easy to request payment right now, but it is important to keep cash flowing into your business so you can cover expenses and meet your obligations to others. As with all business dealings right now, a little empathy and a lot of open communication can go a long way.
The following tips might be useful to keep in mind when you are asking for payment.
Communication – Connecting with your customers is important. Try to make it personal to their situation rather than a one-size-fits-all email. Connecting on a more personal level shows you value them and are conscious of the impacts that the current situation may be having on them. The empathy you show now will also be remembered when business returns to normal. Be proactive – early communication will help you stay on top of cash flow and will also alert you, if you need to account for late payments.
Add value – Use your expertise to give something back. Surprise and delight your customers by offering something over and above your usual services. It could be as simple letting customers know you want to help and being open to requests, offering a one-off discount or an offer just to chat one to one.
Offer flexible payment options – for customers who can’t pay in full, consider breaking invoices into multiple payments with payment terms moved to a longer timeframe. Set up a credit card facility to give customers other options for payment. After all, the easier you can make it for them to pay you, the quicker you will get paid. If you don’t have payment services set up in your Xero account, we can help you do this. Offering a discount for early payment might provide the incentive for customers who can settle, to pay your invoice before others.
Keeping cash flow going is vital for your business so the earlier you can communicate with customers the better.
‘Business continuity’ is the process of planning out how your company can continue trading – when disaster hits. In essence, it’s your Plan B for how to set up a means of trading, when you don’t have access to your usual offices, workspaces or equipment. Right now businesses are having to put ‘Plan B’ into action.
10 key elements to include for your ongoing business continuity plan
Digital communication and cloud technology have given us the ability to access company information, applications and communication channels. For many businesses this will allow you to keep at least some of your usual day-to-day operations ticking over.
However, there are a host of important business areas that you need to consider when developing your company strategy to deal with an emergency situation.
Here are 10 important elements to factor into your business continuity plan:
- Location and workspace – Does everyone in the business have a good internet connection for remote working? Make sure you agree on the guidelines for maintaining workflow. Schedule regular online catch ups to check in and agree on the priorities.
- Key products or services – which products and/or services will you be able to offer? For the business to continue trading, you need to identify a core set of products/services. Review which product/services will bring in the required revenue and cashflow, and which activities in the business should therefore be classed as essential.
- Key staff and resources – who are the core people you need for the company to operate? Based on your decisions regarding essential activities, identify who your key management and staff members are. Think about how much resource is needed to trade, how you’ll get approvals and sign-off and what critical knowledge needs to be shared within the team.
- Key contacts and connections – who are your main stakeholders outside the business? And which of these are vital to the running of your business? Make a list of your key suppliers, service providers, property contacts and customers and ensure you can have open communication with all these connections. Also, look at alternative suppliers so you can minimise any disruption to your operations.
- IT equipment, data and infrastructure – what equipment, tools and software do you need to continue working? Essential hardware and software will include laptops, tablets or smartphones for your staff, paired with cloud services, video conferencing, communication apps and effective, secure access to your customer and business data.
- Plant and manufacturing equipment for essential businesses – if you’re a bricks and mortar business, or a product-based manufacturing business, what equipment do you need to carry on your operations? This will include any machinery, hardware equipment and vehicles needed to manage the essential operations you’ve identified for the business.
- Financial management – how will you access your key financial numbers during any outage? It’s sensible to move to a cloud-based accounting system NOW, so you have continuous, uninterrupted access to your financials. A platform like Xero online accounting allows you and your advisers to see those all-important figures.
- Cashflow management – how are you going to ensure you maintain a positive cashflow position? We can help put a process in place to run regular cashflow statements. Use forecasting to project your cashflow position forward in time – so you can take proactive action to avoid any cash gaps in the near future.
- Insurance – does your current business insurance policy cover you for all emergency situations? Review all your existing insurance policies so you understand what your policy covers. Securing the business in all scenarios should be your focus here.
- Leadership – who could take over if you (the owner/MD/CEO), is left unable to run the business? Having a nominated deputy, with a clearly defined chain of command, means you can be confident that the company will be in safe hands, even if you’re indisposed.
We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?
Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It’s worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).
So, why is working capital such a critical metric?
Having the liquid capital needed to trade
It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.
If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.
To achieve this healthy level of working capital you’ll need to:
- Proactively manage your cashflow – cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.
- Monitor and forecast your financial position – running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.
- Use additional finance when required – if working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.
Talk to us about optimising your working capital
Working closely with your bookkeeper is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.
Get in touch to start maximising your working capital.