Understanding your break even point.

Understanding your break even point.

Dec 20, 2017 | Governance, Management, Small business

 

Understanding the break even point in a business is a crucial but often overlooked piece of the financial puzzle.

It is particularly important in a manufacturing business where there are both overheads  to just keep the doors open, and the marginal costs of production.

In order to make informed and sensible cost and pricing decisions, and effectively manage the business, you need to understand both.

Marginal cost

This is the cost of making and selling another widget. The materials consumed, packaging, and direct labour necessary. The difference between your sales price of a widget and the marginal cost of that widget is usually referred to as the ‘Gross margin’

For example, if a widget costs .80 cents to manufacture, (materials + packaging + direct labour) and you sell it for $2.00, the gross margin is $1.20/unit.

Fixed costs.

These are the costs necessary to keep the business going, and not tied to the cost of production. Rent, insurance, staff labour costs, marketing and sales expenses, travel, and many others. These costs keep on coming irrespective of sales.

Let’s assume your business has fixed costs of $600,000/year, it is a small business, so you as the owner pay yourself a modest wage, there is one sales person,  an office manager, rent and insurance, as well as the general costs of running a business. In the factory there are three people, a factory manager, and 2 people who work on the production line. The factory manager would normally be included in overheads, but if he works on the line part time, then a portion of his salary would reasonably be included in the costs of production.

There are always questions about where a cost should be allocated, marginal cost or fixed cost, For example, sales commissions would usually be considered a marginal cost, but sales salaries would be considered a fixed cost. Similarly with freight costs, the cost of keeping trucks on the road would be considered a fixed cost, but the cost of an outsourced courier service would be a marginal cost, as without a sale, it will not be incurred. The key is to be consistent in the treatment of costs.

Break even is the point at which all costs are covered, but there is no profit.

How to calculate the break even.

The formula is fixed costs divided by the unit gross margin.

In our case above,  the break even point would be $600,000/1.20 = 500,000 units.

In a situation where there are several different widgets, with different selling processes and differing costs of production, the calculation can be done either by taking averages, of both the sales revenue and costs of production based on average sales mix, or it can be done separately, for each of the products and added together.

In any event, understanding  the structure of your break even will assist enormously in making sensible pricing and cost management decisions. It will also make the choices that  impact future cash flows, such where to concentrate your limited sales and marketing resources, much clearer.

This will be the last StrategyAudit post of 2017. I am very grateful to those who have commented, shared and generally engaged with the sometimes random stuff that pops out of my brain, and I am enormously gratified that you see the value in the ideas. Have a safe and merry Christmas, and I will be back early in 2018, refreshed and eager to  go another mile.

 

 

 

7 Mental models for business planning

7 Mental models for business planning

Dec 18, 2017 | Governance, Leadership, Management, Strategy

Business planning, when you think about it is a  bit of an oxymoron.

The only thing you know for sure about your plan is that it will be wrong.

George Patton said ‘Without a plan, you are just a tourist’ and even that great social philosopher Mike Tyson weighed in with ‘everybody has a plan until they get hit in the face’.

However we persist in writing what is usually a document full of crap that is not looked at again, until next year.

Here I am going to offer you an alternative to the formatted, templated, disciplined plan, so beloved of accountants, banks, and education institutions. I am going to suggest you use ‘Mental Models’ to ask the right questions, gather information, generate insights, create strategies that are meaningful, implementable and measurable.

Albert Einstein used mental models to develop his theories of relativity and quantum physics.

If employing mental models is good enough for Albert to articulate a picture of uncertainty, ambiguity, and then hypothesise about its hidden drivers, it should  be good enough for us.

Mental Models are frameworks that can be used to simplify problems, to ensure that the right questions have been asked, and the explanations that evolve from those questions hold when subjected to detailed scrutiny and testing.

Mental models frame things.

As a kid I loved cricket. I would walk to school early, and play for a couple of hours before ‘the bell’. As I came up to the oval attached to the school, when someone was batting, I could see the stroke, then a second or two later, hear the bat hit the ball. Clearly there was something at work here I did not understand. Dad explained it by telling me that sound travelled at 740 mph, while light, which enabled me to see the stroke travelled at 186,000 miles per second. This meant the sight was instantaneous, the sound was not.

Hearing the bat hit the ball a second or so after seeing it hit the ball created a mental model that made the understanding of the effect of the differing speeds of light and sound absolutely clear. Had I been a mathematical kid, I could have measured the speed of sound by measuring how far I was from the batting crease, divided by the time it took for the sound to reach me. This is exactly what Albert did to come up with E=MC2, although a little more complicated.

Einstein used simple mental models to come up with his theories of relativity, then worked his way through the maths to test and ultimately validate the theories mathematically. It is only now that some of the stuff he hypothesised about is becoming confirmed, as the measurement of the effects he hypothesised are becoming available.

The origins of the business plan was to attract funds. If someone was going to lend you money it is reasonable that you told them where you would be spending it, what the risks were, and the means by which you were going to repay the debt.

Banks, which are usually the first port of call when seeking funding are not particularly interested in your success, they are interested in the asset backing you have, so that when you go broke, they can sell up and get their money back. They would prefer you did not go broke, just because that complicates their lives, but they ensure they are covered if you do.

Banks are not your friends, they sell a commodity: money, and like any sales organisation, will sell as much of it as they can within their risk parameters and any regulatory restrictions, by solving your cash shortage for you.

Therefore the standard P&L, and balance sheet projections, with a few discounted cash flow scenarios were enough. All accounting and management education was oriented towards this model, so it became widely used and abused, but if you are going into a serious business planning exercise for your business, in this homogenising and increasingly volatile world, it should not be enough for you.

Do  not think about business planning as a linear incremental process, with a known set of tasks to be done, which is what all  the templates assume. Rather, it should be the application of a series of mental models to the circumstances of the business, each looking at the business from a different perspective.

It is like looking at a display in a museum. Looking from the front only, you get one view, but go behind, under, above, and you can get a 3D view of the display. Often very different, and ensures that you capture the whole picture of the business.

To continue the museum exhibit metaphor, is the exhibit in a room of its own, is it in a quiet corner with other pieces of no distinct value, or is it in a room full of similar and complementary exhibits. Each will influence the way in which you see the exhibit.

Out of interest, I googled ‘Business plan template’ and got 9.4  million responses in .45 seconds.

Must be important????

Problem is when you look at  them, they are all pretty much the same. The words change, the graphics change, but they are essentially a fill in the form and bingo, a business plan.

Might be OK for a bank, but as a document that determines the allocation of your scarce resources to achieve an outcome, it is next to useless.

A template is the easy way.

The hard way is really hard, but is worth the effort,

However, you must have the right ingredients, or the cake will not work.

It is all about the questions you ask, and what you do with the resulting information, intelligence, and instinct.

So, take Alberts advice, which is also the advice of Charlie Munger,  Warren Buffets offsider who knows a thing or two about being successful, and who uses Mental Models extensively.

Following are some of the more common ‘Mental Models’ to apply.

Each has its strengths, but none is the silver bullet that those who write books about them claim them to be.

The trick is to be familiar with them so you can run through the models and pick the ones that apply to any given situation.

 

Most are familiar with SWOT.

We spend time dreaming up items, then filling in boxes, rarely with any useful numbers, rarely anything new, and everything is equally weighted.

Most times, there is as much debate about whether something is a strength or an opportunity, a weakness or a threat, as there is about the strategic impact of the item itself. Many do not recognise the distinction of strengths and weaknesses as being internal to the business and opportunities and threats as being external, and that they are all relative. For example, a strength is really only a strength when it has two distinguishing features: It is something that you do that your competitors cannot do, or chooses not to do, and that it is of value to customers.

SWOT has limitations in fast moving and technically evolving industries, and typically, there is insufficient time given to the consideration of the options that may emerge that offer some degree of differentiation.

In its generic form, a SWOT also fails to weight the factors it identifies, so I do that as well in a different table.

Because SWOT is well known, it often gets a run in the projects I do, almost always in parallel with another that better explains the problems, and offers another perspective. It is a good start to the process because it acts as a catalyst for the more difficult questions, and identification of the cause and effect chains, and eventually to the use of other models that drive a deeper analysis.

.

Many will be familiar with the 5 forces that shape industry competition first articulated by Michael Porter 30 years ago, and still is a great way to examine the nature of the industry in which you compete.

Bargaining power of suppliers

Bargaining power of buyers

Threat of new entrants

Threat of substitution

The sum of these forces adds up to the state of current competition in any market.

A thorough examination of the forces really surfaces most if not all of  the issues that have to be faced.

When you think hard about it, everything can be broken into one or a mix of the forces.

As with SWOT, it suffers a bit in a fast evolving environment, as the searching questions about the future are often missed, but it is extremely useful.

For example, if you are a supplier to supermarkets, this is a great tool to use, as it captures the drivers of the competitive environment, but if you have an idea for a new piece of software, the outcomes of the analysis will be a little less certain because of the more ambiguous competitive environment.

 

Roger Martin is an academic and widely experienced commercial consultant, who wrote a book a short time ago called ‘Playing to win’ with AG Lafley, who was the CEO of Procter and Gamble.

This sequential process he outlines is a very good framework indeed, forcing difficult choices to be made at each stage before moving on, while encouraging necessary adjustments via the feedback loops.

One of the factors I really like about this model is that it creates a flow, from the macro to the micro, and forces you to make choices all the way. One of the key factors I look for when doing a StrategyAudit for a client is the manner and degree of ‘flow’ that exists in the business.

It is the flow of information, flow of product through a production process, and flow of the planning execution and revision of activities that take place.

 

The Balanced Scorecard goes back to the mid 90’s, and offers an integrated set of ‘perspectives’ through which to observe, measure and plan the business.

You agree the vision and strategy, then determine the measures of that strategy against the 4 perspectives, and map the interrelationships.

Balanced scorecard analysis can become very complex, particularly as you set out to  cascade it through an organisation.

However, It makes absolute sense to look at, and measure the strategies agreed upon from the perspectives of those perspectives impacted by choices made.

The financial performance of the business.

The customers perspective of how the business meets their needs, now and into the future.

The necessary business processes required to deliver value over the long term as well as immediately.

How the business will learn and grow.

It is still widely used, mostly by large organisations with centralised strategic planning functions.

 

A business plan on one page.

Halleluiah.

This methodology evolved quite recently out of the ‘Lean Start-up’ movement, first articulated in a book called, surprisingly, ‘Business Model Canvas’. The thinking underpinning this tool is still evolving, and it is still oriented towards tech start-ups, but I really like it for any business as a way to quickly ensure the right questions are being asked, and is to my mind a must use model.

It is designed to be iterative, and its strength is that it is both iterative, and stackable, in that where there are two major customer groups, or product groups in a business you can do two, or even more canvases, and they will all be stackable.

It forces choices to be made, and is iterative in that as you progress, and learn more, you often need to go back and review and balance the choices made earlier.

Generally I do this in a rough order.

  • Problem to be solved
  • Customer segments
  • Value proposition
  • Revenue streams
  • Key activities
  • Cost structures
  • Channels
  • key resources

 

There are many others:

  • Ansoff matrix,
  • BCG matrix, dogs, stars, that most of us are aware of.
  • Options games
  • Blue ocean strategy
  • Scenario planning
  • Jobs to be done
  • A3

The real point is that there are many ways to plan, but there is no easy way, no silver bullet, and you must get amongst it or fail.

The old cliché: failing to plan is planning to fail is unfortunately correct.

There is no school for fortune telling, unless you join the circus. All these purport to be able to at least remove some of the uncertainty of dealing with the future, but they are all tools, and the value of a tool rests with the skill of whoever is wielding them.

To my mind, using a bunch of them, each with slightly different perspectives offers the best opportunity to remove more of the uncertainty.

However, if I go back to Albert, E=MC2 does predict that time travel is possible.

Much of what he projected is coming true, a bit like Arthur C Clarke, Jules Verne, and others. Perhaps this is Alberts time to become a strategy guru?

 

I think it is only right to finish where I started, with Albert.

His theories of relativity, that famous formula we all know, but have no idea what it means, explains the workings of the universe. Perhaps it can also give us an insight into the value we can add to an enterprise, which is after all, what we are setting out to do by planning.

In my view, the internet has changed everything about the business models that will be successful in the future. Therefore we have to find a way to recognise the power of digital access and the compounding that is possible by leveraging networks in our planning processes and mental models.

I like e=mc2 because it explicitly compounds the value of networks.

E is the enterprise value, not the stock market valuation, which is only a financial calculation, but the value that is created by the enterprise, which has many forms. Value can be time, services, transparency, design, everyone sees value as being different, and is subject to the context in  which it is seen. Apple is the most valuable company on the planet, which has absolutely nothing to do with the fact that they outsource the manufacture and assembly of what has become generic electronic gizmos. The value of Apple is elsewhere than the functionality of the devices.

M is the mass of the enterprise.  This is the sum of the physical assets and processes of the business, the stuff that enables the work to be done.

C is the Capital of the enterprise.  It includes financial capital, but the greater part is in the capital contributed  by  the people who populate the place, and this comes in many forms, Intellectual capital, what is between peoples ears, and the relational capital they bring, and the cultural capital, the way in which there is collaboration and alignment of activity towards the creation of value by the enterprise. This is squared, simply because of the geometric nature of relationships, and the network effect, the more you have, the greater the sum of the value that can be created

 

Red flags to business failure.

Red flags to business failure.

Dec 11, 2017 | Change, Governance, Management

The November 2017 issue of the magazine of the Australian Institute of Company Directors (AICD) contains a very insightful and useful article by Phil Ruthven dealing with the industry cycles that IBIS research has been cataloguing for 40 years.

Ruthven makes the observation that while industry cycles are crucial to success, the risk they pose is only 1/3 of the risks faced by businesses, the other 2/3 are internal risks, in short the quality of their management.

No real surprise there, but seeing it in black and white, with supporting numbers from a source as credible as Ruthven is disturbing.

ASIC has developed a list of the impending signs of insolvency, no surprise, as they deal with that situation every day. High on the list is poor cash flow, absence of a business plan, disorganised internal finances, inadequate cash flow forecasting and budgeting, board dysfunctionality, customer and supplier complaints, and growing liabilities.

Again, no  surprises in this list, I have seen them all regularly over the last 25 years of working to improve SME performance.

I have my own checklist, broken into 4 categories: Financial, Operational, Strategic and Revenue Generation, against which I assess performance. It is a quick and dirty tool that over the years has captured the main culprits of underperformance, the red flags to insolvency.

It is reproduced in summary form below.

Strategic.

  • Unclear undifferentiated position in primary markets
  • Lack of investment in ‘Environmental research’
  • Absence of an innovation mindset
  • Absence of any differentiating Intellectual Capital
  • Lack of clear alignment of operations and strategic priorities
  • Wrong CEO and/or governing body
  • Poor cultural drivers
  • Poor strategic, operational and tactical planning and ‘After Action’ Review processes

Operational

  • Ambiguous lines of responsibility and accountability
  • Absence of a continuous improvement mindset
  • Absence of performance management and review systems
  • Unreported customer and supplier complaints
  • Absence of DIFOT management and measures
  • Digital naivety

Financial

  • Erratic and unforecast cash flow
  • Poor management of debtors and creditors ledgers
  • Inadequate budgeting and financial performance management
  • Disorganised and/or inaccurate numbers
  • Tightly held financial and operational performance reports
  • Growing debt
  • Lack of financial understanding amongst management

Revenue generation

  • No defined ‘ideal customer’
  • Uncontrolled distribution channels
  • Lack of end consumer contact and feedback
  • Disorganised lead generation and conversion  processes
  • Absence of customer profitability and Share of wallet measures

For some time now I have been referring to the marketing and Sales functions collectively as ‘Revenue Generation‘. To my mind the functional separation that is usual is redundant in this fast moving world where the demarcation between the two is both blurred and irrelevant to customers, so should be eliminated.

This list is not a template, it is a compendium of headings that typically require investigation. To the extent that there are numbers available, they are very useful, and the absence of numbers also offers an insight into what is going on. I also make observations based on the conversations I have, and set about weighting of the various factors. Two however always are at the top of the list.

The absence of routine and pro-active cash management is a very strong signal of trouble to come, as is a disorganised, and in B2B businesses, often absent revenue generation processes that go beyond being reactive to whatever walks in the door.

Any one of these 26 factors will result in under-performance, that can lead to insolvency, but a combination of them is toxic.

 

Too many slices and the loaf disappears: Is this the end of Australian FMCG?

Too many slices and the loaf disappears: Is this the end of Australian FMCG?

Nov 16, 2017 | Change, Governance, Leadership, rant, Strategy

What the hell have we been thinking?

Some time ago I mused that the slow death of the Australian FMCG manufacturing base was akin to nicking a slice off a cut loaf, one at a time. At any specific time you do not really notice the difference, but looked at over a period, the loss is obvious.

Well, it seems that someone nicked the Food industry loaf, and all we have left are the crumbs.

A report released last week by Food Navigator reveals Australia’s top 10 FMCG suppliers.

Not one of them is  owned by Australians.

Let me say that again: Not one is owned by Australians!

Over time I have worked for two businesses on the list, and at the time, both were aggressively and proudly Australian, wearing the national flag on their shoulders, and in their advertising, and both were in their way successful despite themselves.  However, dismay at some of the nonsense that went on is a primary reason I have been self-employed for the last 22 years.

I struggle to think of many substantial companies still domestically owned, Bega, Patties Pies and San Remo come to mind, but we are then down to the minnows.

All these multinationals will rightly say that they pay lots of taxes, employ lots of Australians, both directly, and indirectly, and that they have Australian best interests at heart.

Bullshit.

It is true they employ many people, and it is true that they pay unavoidable taxes, like GST, local government rates, and collect from their employees PAYE, but do they carry the full weight of their ‘moral obligations’ to the communities they live in via income taxes?  The reality is that have their own best interests at heart, or at least, most of them do. Transfer pricing, creative funding, corporate domicile on low tax environments, and all the rest of the shenanigans revealed again, by the Paradise Papers in the past weeks or so are widespread. It should not come as a surprise to anybody when these large companies make decisions in their interests, not in those of Australians and Australia.

This is like renting a house. You are allowed to live in it, under certain conditions,  but you have no control over the property, someone else makes all the key decisions. The renters best interests are not a factor in the determination of the owners best interests.

We tell ourselves we are a food bowl, and we are, but without any access to the markets at all. We no longer even have any brands for direct contact with consumers (Vegemite is a rare example, purchased back from Kraft last year by Bega, hooray). We are therefore nothing other than commodity suppliers in a price driven world. Not being a low cost producer, without the umbrella of brands and control of the operational infrastructure that can deliver genuine value to consumers, we are inevitably going to be screwed, with the benefits of ownership exported.

Coles and Woollies have ‘conspired’ to destroy the domestic suppliers and their brands by limiting ranges, replacing proprietary brands with house brands, sourced from wherever is convenient and cheap, realising short term margin gains at the expense of long term prosperity, both theirs and that of the communities they serve.  They have also lost in the process the cover of brands at a time where there is a huge retail  disruption looming: Amazon, online ordering, AI, ‘Ubered’ home delivery, and all the rest.

It seems to me the two retail gorillas will now reap the poison crop they sowed as an outcome of their short term,  one dimensional and absolutely unimaginative strategies.  Taking on Amazon with that mind-set is suicide, as if we know anything about Amazon, it is that they do not play by the existing rules. They make up a new set, and  the incumbents are left to wonder in their wake.

Food manufacturing used to be our biggest manufacturing industry, and we have given it away, or at least the benefits of ownership of it, for next to nothing. It is not even as if for the most part the interlopers paid a premium for control, they just waited until the numbers were so crap that they could take it for a song. The most recent example, Murray Goulbourn is a classic case in point, as are two of my previous corporate employers, Dairy Farmers and Goodman Fielder. Both reasonably large, reasonably successful businesses stuffed by poor management decisions until they became unsuccessful smaller ones, that could be scooped up out of Multinational petty cash.

Our kids will pay a heavy price for the short sighted and incompetent management of their fathers and grandfathers. (Cannot help wondering if their grandmothers and mothers would  have done a better job)

Our so called leaders mumble abut populist causes, ignoring the difficult and challenging long term choices that need to be made, which are usually by definition, not populist. It took a crisis to get them to consider ‘power policy’ in their quiet, moments when not looking after their own jobs in the face of failing to check if they are technically Australians, but it is 25 years too late. ‘Manufacturing policy’ discussions are pretty thin on the ground, now the motor industry has folded their tents, and more specific ‘Food Industry Policy’ discussions are as rare as sightings of the  Tasmanian tiger. Rumoured but carrying very little real credibility.

There has been very little of much value about any policy setting that might help us control and leverage our own agricultural and manufacturing capabilities that would enable us to feel confident we can feed ourselves, and others in the region into the medium term. The horse has bolted, and we are left with a pile of shit in the stables.

Sadly, few in power seem to be too concerned with the demise of our ability to control our own food supply, value adding and distribution.

If nothing else, we may have discovered an innovative solution to the national obesity problem.

 

8 Reasons not to change.

8 Reasons not to change.

Nov 13, 2017 | Change, Governance, Strategy

We all understand the power of ‘Not broken, don’t fix’ sort of thinking. When things are going OK, even if that is not as well as you would expect, the temptation to leave the status quo in place is compelling.

No risk in that is there.

I see reasons not to change all the time, and find that change is easiest when all concerned see that there is simply no option, and even then, it is sometimes hard, as any improvement is put down to the status quo delivering as it always has, not to the changes made.

Here are the reasons I hear most often, each with their own variation.

  • We are doing OK, do not rock the boat, there are sharks out there.

Counterargument. The success to date is no indicator of  success into the future, in fact we do know that the future will not look like the past, so we better get on with shaping our own future or we will end up being shark-shit.

  • We are really busy getting stuff done, in order to make these changes, there is a whole bunch of work we do not have the resources or time to do.

Counterargument.  If we are so busy getting stuff done, that is a sure sign that what we are doing is suboptimal. In a world where knowledge is king, unless we are sufficiently curious to think about and try new stuff we will just get busier, and busier, and end up  not seeing the wall before we hit it.

  • We tried that, and it did not work.

Counterargument. It may  not have worked, but do we understand why it did not, and how with the benefit of hindsight we would go about it a second time? Perhaps things have changed sufficiently for it or a variation of it to work today.

  • If we improve what we are doing just a little bit, we will have a huge improvement, so let’s concentrate on that.

Counterargument. Having in place a process of continuous improvement is great but not enough to be sustainably successful. Continuous improvement is a core management responsibility, not an option, or reason for celebration, as at best it optimises existing processes, which may be poor process in the first place. The challenge is to seek new ways of achieving the result that create new sources of value, or indeed, create a new result.

  • Our customers do not seem to think that we need to do it that way

Counterargument. Customers usually see things in their existing context, and so long as the product or service you provide continues to be competitive, often see no reason to change or push you for improvement. However, when an alternative supplier turns up with a better solution, they will move. Steve Jobs famously quipped that he never asked customers what they wanted, simply because they did not know, and Henry Ford observed that if he asked customers what they wanted, the answer would be a faster horse. Don’t get caught having the best horse stables in town when the residents are all driving cars.

  • Change is risky, what if it all goes to hell?.

Counterargument. Change is risky, and it can easily go pear-shaped, so the smart managers avoid betting the farm while changing as quickly as practical and possible.

  • What if we are wrong?

Counterargument. Being wrong can and does happen, indeed, being wrong some of the time is a part of learning how to improve. The key is to plan the changes, understand the outcomes required, monitor the outcomes as they emerge, and be prepared to make adjustments quickly as necessary.  You could also ask yourself ‘what if we are right, but did nothing. What would be the cost of that inaction?

  • We do not have the skills or experience to make these sorts of changes

Counterargument. Few do when they start, that is what change is all about, and what makes it so challenging. What is required is a dose of leadership, someone who inspires the idea that change is necessary, communicates the need widely, then is seen to be ‘walking the walk’ and leading it. Besides, there are plenty of advisors out there with a lot of experience  and knowledge,  pick someone who can help by guiding, mentoring and advising.

Initiating and managing change is the biggest challenge a leader faces. It impacts on every corner and crevice of their business. Most shy away, and very few are able to see all the forces at work themselves. Change is necessarily collaborative and highly ‘leadership sensitive’. An appropriate dispassionate and experienced outside resource, often teams of them, always add value to the process.

Header cartoon credit: Hugh McLeod at gaping Void.

5 realities we Australians should  be thinking about.

5 realities we Australians should  be thinking about.

Nov 10, 2017 | Change, Governance, Leadership, rant

This is a personal rant motivated by the continuing  sight of politicians pontificating about stuff that does not matter and either ignoring much of the stuff that does, or presenting as facts, suppositions and bullshit that is supposed to make their case and cover their culpability for inaction  and stupidity.

Not a bad start.

However, much as it is good to blame someone else for the things frustrating the hell out of us, it is not entirely their fault.

We live, for those who have not noticed, well into the 21st century.  Our institutions were designed and evolved in the 19th and 20th centuries. Most would accept the notion that change has never been faster or more all-encompassing as in the last 20 years, so why are we surprised that  the institutions have failed to keep up?

So, let me just have a look at an area I am at least partially familiar with after 40 years of operating in it, the current state of small business, and the relationship they have to the economic well being of the communities they serve. Nothing about the stupid non binding vote on same sex marriage, nothing about the nonsense of setting out to build submarines of a hybrid and bodgied  design over which we have no control, and cannot crew anyway in the name of saving a few government seats, nothing about the hysteria and confusion about what is means to be an Australian citizen, …. Need I go on?

There is a general recognition that small business is the backbone of the economy, employing 5 million (the data is 2 years old, which tells you something about our institutions) people and contributing billions in tax, in other words, they carry the weight of the economy, but the statistics do not tell us all we need to understand, as they, like everything else, were designed to give information on the 20th century economy, not the 21st.

A few examples.

  • Micro entrepreneurs are everywhere. There are hundreds of thousands of Australians making a bit on the side via eBay, Etsy, and Amazon, buying and selling stuff that never gets counted. This is a new breed of entrepreneur, and they are operating almost under the radar. The tools that enable this sort of activity did not exist 20 years ago.

 

  • The net is ubiquitous. The enabler of the previous point, the net, has also enabled thousands to start new businesses, often on the side, simply because the cost of failure is now so low, as the cost of entry has shrunk to a fraction of what it was 20 years ago. Many of these businesses fail, perhaps even most,  but that no longer means penury for  the entrepreneur, he/she simply picks up and has another go. Few of my children’s friends and colleagues expect to work for a corporation all their lives, then retire, as my generation did, although many of us are radically rethinking that at  the moment. They expect to get some experience, at somebody else’s expense, then  leverage that into their own business.

 

  • The tax base is hiding. The goldmine of PAYE tax is rapidly disappearing, as individuals go into business for themselves, rather than working for corporations, and often, as well as working for corporations. This gives access to all sorts of reasonable deductions of expenses not available to a PAYE employee. While we have a spending problem in this country, pollies spending to get themselves re-elected, or massively overspending to correct the failures of the past (look at the Sydney road and rail systems for any evidence you need of this) we also have a revenue problem. The GST was a sensible step, compromised as it was, and is, by politics, but the whole tax and welfare system needs a radical rethink, which simply will not happen until we are faced with a true crisis. On top of all that is the simple reality that paying tax has become optional for the large multinationals around the globe who have the reach and resources to structure their affairs towards minimisation. it may not be illegal, but it sure as hell is immoral, and the price we ‘ordinary taxpayers’ are all paying, and will continue to pay unless we, and other international tax institutions figure out that we need to collaborate to stop it. Perhaps we should summon the ghost of Kerry Packer to deliver another broadside.

 

  • Baby Boomers are not ‘retiring’. The so called baby boomers, of which I am one, are not retiring, they may be cutting back, but often they are starting businesses, setting out to use their experience and lifetime wisdom in some useful way. The retirement age is a function of a world where we worked physically much harder than we do now, and the body gave out just before we kicked the bucket. Now the body is not giving out, and when it does we go in for renovations to keep on going. The  only bucket we are interested in  is the list of stuff we still want to do.

 

  • Manufacturing is not dead, it has just changed shape. The 20th century manufacturing model is dead, but is being replaced by a highly technical, globally connected combination of technologies from electronics to additive and 3D manufacturing, which employs just a few highly qualified and motivated people. Yet, our industrial institutions still believe we have big factories full of people doing repetitive tasks. Worse still, our education systems are still geared to mass production of kids who can recite rather than think, and this is despite the disastrous rebalancing of education towards university at the expense of trade skills. While we need less people digging holes, we need more who can design, fabricate, and operate a complex piece of machinery or electronics, and we are not training them in sufficient numbers, or giving them the self belief that valuable and rewarding work does not necessarily equate to sitting in an air conditioned office driving a mouse.

 

All of this simply means that opportunity multiplies, as the institutions that supposedly govern us sit idly by at best, but get in the way most of the time, more often than not by accident. The status quo for which they were designed has been chucked out, trashed, and is significantly irrelevant now, rapidly becoming utterly irrelevant  and a wet blanket on progress without real and immediate change.