directors; do you understand your rights and obligations?

May 8, 2020 | Governance, Management

directors; do you understand your rights and obligations?

There are a lot of SME’s around that are now in unexpected and unplanned financial trouble. For some it will be terminal with a potentially huge impact on personal assets, as well as those of the businesses they run.

Many owners of SME’s do not fully understand their rights and obligations, often despite having an accountant that does their compliance and advises on financial structuring.

In particular, many owners of SME’s do not understand the obligations they have under the Corporations Act as directors of their company.

This was brought home to me in a conversation yesterday with a casual acquaintance who I thought would be pretty well informed.

Following is a simple checklist, if in any doubt, ask your accountant the question. now is not the time to be dodging asking those questions because of the cost.

Insolvent trading.

It is illegal to trade while insolvent, and doing so risks personal and criminal liability. It is a black and white test: ‘Are you able to pay debts as and when they become due’? For manufacturing businesses the answer is often tangled up in the valuation of inventory, and the state of your debtors ledger and revenue forecasts.

Can you collect what is owed to you, what can you reasonablly expect to sell, and how much cash do you have on hand.

Solvency is based on the expected cash flow, the result of these calculations. If you are not solvent, you are, by definition insolvent.

Directors duties.

As a director, which most will be, there are duties imposed by the Corporations act, and ignorance is not a defence.

You are required to act in good faith, with due diligence, and not improperly use information gained as a result of your privileged position. When solvency is in question, you are further required to look after the best interests of creditors.

In order to carry out these duties, you need to be fully aware if the financial position of the business, and have a management plan that addresses the problems. If in any doubt at all, ensure your accountant is completely informed and able to offer their expert advice.

What to do?

If your conclusion is that you are, or may be insolvent, a voluntary administrator can be appointed. The effect of this is to voluntarily relinquish control of the financial management of the business to an outsider, whose responsibility is to ensure creditors, in a defined order are paid. It does however, limit the liability of the director after the day of the appointment. This option leaves you with more options than a wind up order instigated by a creditor, or group of creditors.

Premature appointment of a voluntary administrator is sometimes a temptation, so there has been recent changes to the Corporations act to allow a ‘Safe harbour’ which offers directors protection against personal liability of an insolvent trading claim. There are conditions attached to such protection:

Tax records are up to date.
All employee entitlements are up to date.
There is a concrete, stress tested plan to trade out of the difficulties, that does not include optimistic forecasts and hopes that ‘something’ will turn up.

From March 25th as part of the governments response to the Corona induced problems, the ‘Safe harbour’ provision have been extended. You are now allowed to incur debts in the course of ordinary trading for the next 6 months, and the thresholds for issuing statutory demands have been increased. This is not a ‘get out of gaol’ card, simply a recognition of the reality of the current situation, and other director duties are not impacted. For details talk to your accountant.

The plan.

As noted, hope and rosy projections do not constitute a plan. There has to be specific actions taken to stabilise the financial situation, that will necessitate some challenging decisions about asset disposal, restructuring of operations and perhaps personnel, and managing the manner in which further costs are incurred. Together these should offer a concrete pathway to rebuilding the financial capacity of the business to trade its way out of insolvency.

The obvious elements of the plan will be:

Assessment and reordering of the cost base. Removing, reducing and deferring as much cost as possible, both fixed costs like rent, and discretionary costs like planned capital investments, and revenue generation activities that do not have a short term payoff.
Ensuring you have accessed government and provider assistance
Communication with all stakeholders. Employees, funders, suppliers, regulators, landlords and key customers.
Aggressively managing your cash conversion time by extending by agreement, payment terms to creditors and chasing debtors, early, politely, and often. This is just managing your working capital. The cash flow forecast is the essential tool for doing this. every change you make should be reflected in the cash flow forecasts.

The key ‘takeaway’ is to manage your cash.

How to get important things done: Today.

Apr 6, 2020 | Change, Management

How to get important things done: Today.

No business succeeds in the absence of a concentrated application of resources to the most important problems and opportunities they face.

The Pareto principle, or the 80/20 rule. 80% of your profits come from 20% of your customers, so it is logical to focus on them.

The time frame differs, from the daily work, to the long term strategic thinking required for commercial sustainability, but the process does not.

You need to examine the questions and issues in an open ended manner, based on objectivity, creativity, and collaboration in order to have an agreed priority list. The absence of an agreed set of priorities results in less than ideal expenditure of resources.

There are always facts available about what has happened.

There will usually be a range of short term forecasts with a high degree of probability.

As we go longer the probabilities of certainty diminish, and in its place comes the opportunity to anticipate the situations that may emerge, or that you can create, to your strategic and competitive benefit.

The structure of the conversations, and that is what they should be, rather than being labelled ‘meetings’, which implies formality and influence based on hierarchical position, is similar.

What are we facing today? What needs to be done to succeed, today?
What do the metrics tell us? When you are looking at the few key numbers, every day, you will get to see the patterns and trends emerge, as they are doing so, which gives the time to address them.
What are the constraints, what are the questions and issues that are going to get in the way of performing, today?’

Such conversations have a daily, weekly, monthly cadence. The metrics and participants may alter in the differing conversations, but the agenda will not, and once embedded become a vital part of achieving results. However, they will deliver little if any benefit in the absence of specificity. Generality is the death knell, you must be specific, how much, which customer, what communication, by when, who is accountable, outcome expectations, and so on.

Need some assistance with this exercise, particularly in a time of crisis such as we are now? Give me a call, or go to the StrategyAudit blog for many hundreds of tips, templates, and idea starters. Assistance at your fingertips.

Cartoon header courtesy GapingVoid.com

Five essentials for SME’s to survive the Corona chaos.

Mar 25, 2020 | Governance, Management

Five essentials for SME’s to survive the Corona chaos.

It is too easy for those not at the front lines of a crisis to brush aside the practical difficulties of day to day survival, in favour of the fluffier, albeit no less important longer term questions and issues.

Currently there is a flurry of activity from political leaders, roused from their partisan politics by this virus, resulting in a raft of measures that is challenging for owners of SME’s to understand, and access. However, it is essential that your spend the time, in a rational way, to understand the measures that will impact your business, what the qualification guidelines are, and how the assistance is to be accessed.

Many businesses are fighting for survival in the face of that Black Corona Swan that flew in and crapped all over them.

The five things business owners should be doing today.

Cash flow forecast.

Cash is the oxygen of business, survival without it is impossible. Having a clear view of the cash coming in, and going out over the immediate future is vital to making informed decisions. I always favour a weekly rolling 13 week forecast in most circumstances, and certainly in this one. There are plenty of tools out there, but a simple spreadsheet, filled with the input of your debtors and creditors ledgers, along with the bank reconciliation and a sales forecast will give the answers you need.

Do it now!

Cash ‘runway’.

You need to know how long your cash reserves will last in the event that you are suddenly trading at a loss, which is broadly illegal. This calculation goes hand in hand with the cash flow forecast, but requires you to break costs up into fixed and variable components. Those who regularly review their Break Even will have this information to hand. The provisions in the Corporations Act that refer to the personal liability of Directors who allow trading at a loss to continue, will be altered to accommodate the Corona virus, according to the PM’s March 22 statement. As yet I have seen no detail about this change, so be wary.

Communicate, communicate, communicate. Talk to major customers and those prospects that were about to be converted, to understand how their businesses are being impacted, and what you might be able to do to assist them. Talk to your staff, include them in the decisions around how best to preserve the business so that there is a job there when things recover. Taking holiday leave, unpaid leave, long service, job sharing, all may play a role. When you as the boss are getting really tired of having the same conversation, over and over, you might just be getting to the point where you are being heard.

Government assistance.

Both state and federal governments are setting out, with it seems common dual objectives, for the measures put in place, which are still evolving.

Provide assistance to those whose employment dissolves. This includes a specific Corona income supplement, the ability to draw down on superannuation accounts, reduction of social security deeming rates, and direct payments to households.
Provide assistance to businesses to keep employees working. This is the crucial one, as it is businesses that will provide the impetus for recovery. From April 28, the government is providing up to a maximum of $100,000 to be used to cover overheads, and keep staff. There is also included in the second package, a payment equal to the withholding tax on wages and salaries, of up to $50,000. The government has also put in place a specific Corona virus assistance scheme to assist access to working capital, by guaranteeing 50% of new loans by banks to eligible SME’s. To fund this measure, the Reserve bank has announced a lending facility to the financial institutions that will reduce the costs to those institutions of lending to SME’s. The states and territories have all weighed in with measures that relate to businesses operating in their states. Ignoring the stupidity of the federated system that results in an inconsistent patchwork of regulations, resulting in complication and confusion, you should investigate the specifics, and understand how you will be effected. In NSW for example, the government has announced they will waive payroll tax, and will being forward planned reductions in that awful tax on employment.

Be of service.

These are tough times, that induce a sense of desperation, which too often ends up being seen by others as the ‘hard sell’. This is the wrong time to be seen that way. Instead, set out to be of service, to use your resources to help mitigate the impact on others. They will respond positively, and remember. This does not mean you do not sell, obviously, but it does mean you do so only with the best interests of the buyer at heart, not your own. And, for heavens sake, stop those silly brand managers sending out those patronising ‘Covid-19 measures for your safety’ emails to anyone and everyone whose email address they collected in some way over the last decade. We do not want to hear from you, but will remember you clogged up our inboxes at a vital time when things get better.

It is a lot, on top of the day to day battle for survival, but spending your time wisely, on the things that will make a difference, is the best investment you could make at this time.

Header photo credit: David Brim, davidbrim.com

Cash flow assistance for SME’s

Mar 22, 2020 | Governance, Management

Cash flow assistance for SME’s

Halleluiah

The Government has announced cash flow assistance for small businesses, turnover limit an arbitrary $50 million, impacted by the Corona virus.

Perhaps the precarious position many small businesses are finding themselves in has finally pricked the Canberra political bubble.

The assistance is intended to keep people at work, and therefore money flowing in the economy. Some of the details are in a fact sheet easily downloaded from the Treasury website. If unsure, speak to your accountant.

Industry organisations, particularly banks will play a role in ensuring the information gets out, and those eligible, are helped to make the appropriate applications.

Inevitably however, the devil will be in the detail. Governments being what they are, will without necessarily intending to do so, make it challenging to access the relief.

There will be layers of bureaucracy and miles of red tape to be navigated.

I have one piece of advice to give that might serve to reduce the disruption and stress any interaction with a government agency giving out money and assistance will create:

Start collecting the data you will need now!

Add a category to your ledgers, that captures each and every expense associated with the Corona virus. Direct costs are easily assembled, but put them in one place, and include a calculation that reflects the time people spend sorting through the debris of their employers caused by this blight. Use the total cost of employment X hours spent as the calculating base.

Assembling and reporting the numbers is something that will inevitably have to be done, so do it now, and do it in a disciplined manner, so that when the rush is on nothing gets missed, and having it organised will make the process of accessing the assistance less disruptive.

Header cartoon courtesy Tom Gauld.

The only commercial vaccine for COVID-19. Cash.

Mar 20, 2020 | Governance, Management

The only commercial vaccine for COVID-19. Cash.

When things suddenly get really tough, as we are now seeing, the priority is survival.

That simple word means many different things to different people, but the common denominator is that you need cash to do it.

If your processes do not include short term rolling cash flow forecasting, the best time to start was before the do do hit the fan. The second best time is right now. There are many templates out there, but the information required is simple:

A forecast of the cash coming in.

A forecast of the cash going out.

This is not a managed number like a profit and loss statement, it involves only what goes in and out of the bank account.

My preference for most circumstances is a 13 week rolling weekly forecast. It is long enough to give a good picture, short enough to be sensitive to the immediate challenges that arise.

As a sibling to cash flow forecasting and a little more complex, is an exercise to ‘stress test’ your business. It is in effect a model to enable you to test to see how long your cash will last given a variety of assumptions about the trading environment.

To do a stress test, you need 8 pieces of added information, some will be forecasts, others will be sourced from your trading history, captured in the P&L and ledger accounts. The importance of each will vary depending on the type of business you are in. For example, physical inventories in a service business do not exist, but there will be a work in progress number that can take its place.

Projected revenues

Margins

Fixed costs

Variable cost of goods sold

Accounts receivable

Accounts payable

Inventories.

Cash reserves and available lines of credit

You can make this a sophisticated and challenging exercise, and in a large business, it should be. However, in an SME, it should be simple enough that a competent bookkeeper will be able to create a simple spreadsheet that will reflect the impact on your cash reserves of changing assumptions about any of the variables. Even just the conversation about the weighting of variables going into the stress test model, and their underpinning assumptions, will be extremely valuable.

When you could do with an experienced outsiders input, give me a call.

Header cartoon courtesy Scott Adams and ‘Dilbert’

The critical key to reliable forecasting: Be less wrong.

Mar 18, 2020 | Change, Management, Uncategorized

The critical key to reliable forecasting: Be less wrong.

Thomas Bayes. 1701 – 1761

The key to good forecasting, that magic elixir most of us take, is not to be right, but to be increasingly less wrong.

We know the future will be different, being less wrong about that difference is better than consuming resources trying to be right, because you never will be.

For a decade, several decades ago, as marketing manager of a very significant business, I did a weekly sales record for about 50 SKU’s, by hand. It was in the late eighties, early nineties, the days before this was made easy.

Every Monday morning, I took about 15 minutes to record the sales on a sheet, with a 5 week rolling average, and a 5 week rolling forecast. Every month I did the same, but it took a little longer, as there were comparisons to the relevant quarter the year before, and budget, which took about 45 minutes.

In 10 years, I only ever got one forecast right, but was usually very close. Nobody took any notice at all of the forecasts of the sales force, despite them being part of the sales KPI’s. When manufacturing had choices to make about factory utilisation and what not to make, they came to me, and ignored the rest.

This was simply the building of a qualitative knowledge over time.

We routinely defer to ‘Bayesian’ statistics, a theorem proposed by English statistician Thomas Bayes in 1763, that dealt with the probability of a future event, and how that probability becomes more certain with the addition of information relevant to the outcome. We see Bayesian thinking all around us all the time. Every time we see an outcome to an action, and adjust before we repeat the action, we are using Bayesian thinking. Artillery is the obvious example. Use one cannon to get as close as you can, observe the degree to which you are long or short of the target, and adjust accordingly. When you land one on the target is when all the other cannons in the group adopt the same settings and blast away.

In business, we can spent inordinate amounts of time and energy trying to get the last 5% accuracy, when it would be far better to take a decision, and move ahead knowing that the chances are you will be wrong, but able to adjust and accommodate the degree of ‘wrongness’ with far less effort. This is the basis of continuous improvement, Plan, Do, Check, Act.

Bayesian theory at work, every day.