Focus on Cash Flow (Part 3): Optimising Stock Management

Stock control is always going to be a balancing act – too little and you might be sacrificing sales, too much and you’re tying up cash unnecessarily.

The usefulness of stock in leveraging working capital is often overlooked in favour of ‘easier’ options – usually increased focus on debtor and creditor management (the subject of my previous blogs: Optimising Supplier Management and Optimising Debt Collection). 

So here are some simple tips to maximise the effectiveness of your stock control systems, and improve your business’ cash flow at the same time:

• Conduct regular stock takes – monthly or quarterly stock takes are fairly standard depending on the size and nature of your business.  Use the stock take to identify fast and slow moving stock lines.
• Understand your sales market – Learning what drives product demand and staying abreast of consumer sentiment and fads will help you quickly identify changes in demand and either increase or decrease your purchasing accordingly.
• Regularly review gross margin – Understand what drives the cost of your products and pass on cost increases wherever possible.  Where cost price increases are unlikely to be able to be passed on consider dropping the stock line.
• Monitor slow moving stock – Identify slow moving stock through the stock take process and implement a strategy to move it as soon as possible.  Cash earned through sale of slow moving stock can be used to purchase faster moving items.
• Implement an automated stock control system – Among the benefits of an automated system is the ability to set re-ordering parameters to ensure stock is only purchased when needed. If you have an automated system revisit the trigger points as they might need to be reset.
• Use volume based supplier discounts prudently – Investing in large volumes of stock to lower costs only to increase your holding costs is counterproductive.
• Consider negotiating smaller and more frequent deliveries from suppliers to smooth out cash flow (and order pre month end to be delivered early in the subsequent month thereby giving you 55 days interest free)
• Ensure when you place an order you set the delivery date for week one of the month and do not allow for early delivery of stock.
• Implement rigid sales discount policies – Implementing appropriate policies and ensuring sales staff are aware of their authority limits will eliminate the risk of under-pricing.

A strong understanding of how and why stock moves through your business, combined with implementing some basic review procedures, will put you in a much better position to maximise all of your business’ working capital ingredients.

Other blogs in this ‘Focus on Cash Flow’ series:
Optimising Debt Collection
Optimising Supplier Management

Tips for surviving tough times in the construction industry

The skills required to survive in business vary widely when there is noticeable change in the business cycle, up or down.

The Queensland construction industry has certainly had its up and down moments over the past decade.

After a number of years of positive growth in the leadup to the GFC, many business owners within the state’s construction industry felt they had cause to be optimistic, committing forward expenditure on equipment, assets or land stock and funding these commitments through various forms of debt.

However, the GFC negatively impacted on many businesses, who found themselves overcommitted with debt or cash outlays due to a sharp reduction in income.

The industry experienced considerable turmoil and restructuring post-GFC and further difficulties after the natural disasters of January 2011.

Many companies had to react with major debt reduction exercises, sale of assets or staff lay-offs to improve cash flow and survive.

The consequence for those who were unable to adjust is that the Queensland construction industry has seen many businesses collapse, some quickly and some many months later. Queensland Building Services Authority’s 2010/11 annual report indicates that individual licensees excluded from holding a license (voluntary or involuntary) due to financial failure has trebled since 2007/08, while permanent exclusions have doubled due to individuals being involved in a financial failure a second time.

There is a strong need for improved management skills and decisions, and financial monitoring.

Survival tips
No matter what the business cycle is, basic prudent business management principles still apply.

Given the lessons learnt from business collapses in the Queensland construction industry, it would pay for owners to consider these guidelines when they write that next quote or commit to the next project:

• Stick to your core capability – but if you shift your focus or change strategy, consider setting up an advisory board to get objective advice on the wisdom and viability of your plans.
• Ensure your financial management and job reporting capabilities are accurate and timely and take action when warnings appear. History indicates the longer it takes to react or seek assistance, the less likelihood of recovery.
• Clearly understand the scope of work and define exclusions and limitations in quotes.
• Be clear as to who is paying the account and what the payment terms are.
• Calculate all your costs and ensure you know the overheads and margins you need to achieve. If the overhead structure is changing get professional advice so you know the correct numbers to apply in your pricing.
• There is no need to discount prices to win all jobs; within reason, the community is expecting to pay a premium.
• If you need extra equipment, can you get away with subcontracting or hiring? Will second hand equipment get the job done or can you set up an arrangement with an industry peer?
• Monitor cashflow; an increase in work should increase cashflow in the short term, but don’t forget it is also there to pay wages, expenses, GST and taxes which follow.
• Ensure you monitor compliance with the Queensland Building Services Authority (QBSA) Allowable Annual Turn Over (AATO) requirements, and work within your licence agreement. After the GFC, the QBSA significantly stepped up its surveillance activities.
• If you are successful in seeking a loan for working capital or equipment, make sure the terms and repayments reflect your forecast revenue and repayment capability after the boom – if there is one.  In hindsight, this is where many people were caught in the GFC.

Forecasts indicate mixed messages about the future of the Queensland construction industry, including the expectation of interest rate cuts – clearly there are both opportunities and cautions ahead. Those who manage the business basics correctly will prosper and survive; those who ignore them will do so at their peril.

This blog is based on an article by Keith Bailey that first appeared in the Summer 2012 edition of Family Business Magazine.

Keith Bailey is a client director at national transformation and turnaround firm Vantage Performance. He specialises in assisting under-performing businesses and providing support and resources for recovery, rapid business growth or complex business challenges. He was named Queensland’s Turnaround Professional of the Year for 2010. www.vantageperformance.com.au

New executive remuneration laws give more power to shareholders

Executive pay remains a contentious issue for shareholders of organisations and the broader community.

Links can be drawn between the ‘Occupy Movement’ (which has sprung up in locations around the world, protesting social and economic inequality, corporate greed and corruption) and the substantial difference between the national average wage and what Key Management Personnel (KMP) are paid.

There is no shortage of examples where the public and shareholders have been at odds with Boards’ interpretation of fair pay.

Look at the recent pay rise of Alan Joyce, CEO of Qantas, which was questioned widely in the media and public circles. It practically coincided with the industrial dispute that cost the business millions.

Remuneration and an individual’s value to an organisation is determined by a complex interaction of factors.

However, the new remuneration laws that came into effect in Australia on July 1 this year give shareholders (of listed companies and some other specified organisations) considerably more power when it comes to executive pay.
 
What the new legislation means
The Corporations Act Amendment – ‘Improving Accountability on Director & Executive Remuneration’ (2011) will be particularly useful to shareholders, and follows the lead of  countries such as Sweden, Norway and the United Kingdom that have responded to concerns about executive pay levels.

Contravention of the Act will be a strict liability offense – meaning no explanations, defence or mitigating factors will be accepted, and executives and consultants will face stiff penalties for breaching the Act.

The major bite in the new law is the “two strikes” rule where if 25% or more of shareholders oppose the adoption of the remuneration report in two successive votes, the Board can be forcibly disbanded and elections held.

Companies are already taking advantage of the legislation. In an article on ‘The Conversation’, author Julie Walker reports that ‘Homewares company GUD Holdings has already been hit with a protest vote from 42% of shareholders over the company’s remuneration report, under the new legislation introduced in July’.

Major changes to the executive remuneration legislation are:

• The engagement of remuneration consultants must be made directly by the Board or Remuneration Committee to avoid potential conflict of interest.
• The remuneration report and decisions related to KMP is the domain of Non-Executive Directors or the Remuneration Committee; NOT company management.
• The Board must include a statement in the Annual Report to the effect that they are satisfied recommendations have been made free from undue influence. The remuneration consultant must also issue a declaration to the same effect.

Breach implications
Breaches of these provisions will result in fines being imposed on the company (60 penalty units at $550 per unit) or the individual remuneration consultant (60 penalty units at $110 per unit).

These new laws and penalties give shareholders substantially more teeth when it comes to executive remuneration.

Transparent advice will be critical if Boards are to maintain harmonious relationships with their shareholders.

Listed companies should immediately review their remuneration practices and implement new procedures to ensure compliance with the new legal requirements.

Jennifer Scarman is a Client Director and Kate Klease is a Senior Executive at Vantage Performance, one of Australia’s leading business transformation and turnaround management firms – solving complex problems for businesses experiencing major change. www.vantageperformance.com.au

Why Businesses Need Turnaround Executives

Hiring a turnaround executive may be one of the most important and critical business survival decisions a business will make.

Any business, even one with a long history of strong performance, will at some stage need to introduce fresh ideas or change direction to remain competitive.

For underperforming or distressed businesses, stabilisation and careful steering out of crisis is required before setting out in a new direction.

In both cases, it is extremely difficult for people within the business to find the time or energy to objectively and critically evaluate what direction the business should take.

Those who take the time to think about the future of their business will consider hiring turnaround executives to help with the challenges.

How turnaround executives help businesses

It’s becoming more common practice in Australian business to appoint specialist turnaround executives to assist businesses in distress or facing challenges.

It’s less common, but smart firms are also looking to turnaround executives to help when they have lost direction or require measures to improve performance.

Turnaround executives provide a business:

1. Accurate financial projections to meet the company’s financial obligations. This is particularly important if there is a cash crisis and tight cash controls are required.
2. An objective and independent business review. For businesses wanting to sharpen their competitive edge an objective business review, leading to long term, robust operational performance improvement, is vital to their growth and preparing for the challenges ahead.
3. Exit strategy options. At some point in its life cycle a business will exit from a market, product or acquisition, or a retiring owner will be keen to sell the business. Turnaround executives can provide an optimum profit maximising exit strategy.
4. Refinancing. Lenders have workout departments that spot companies in trouble and quickly act to claim what is owed to them. They may request that the company hires a turnaround executive to obtain an independent opinion on the company and its health before new finance or extension of existing finance is granted.
5. Negotiation with lenders and other creditors (e.g. ATO). A struggling company, especially one that has missed some payments, will be on the watch list of lenders. An active turnaround executive, with skilful ability to negotiate, can give the company more credibility.
6. Capital raising. If a fresh capital injection is required, turnaround executives should have plenty of contacts to obtain equity. They should also have good relationships with lenders to obtain appropriate financing. Most importantly, they will be able to prepare the business for the injection of fresh capital.
7. Changing the perception of the market and outside world. Having a turnaround executive can be a great way to return the business to profitability. It will also provide a good indication to external stakeholders that management are serious about avoiding or overcoming trouble, and are proactively looking for a solution.

Appointing a turnaround executive

As I’ve mentioned, the decision to hire a turnaround executive can be a critical one in the life of any business.

Unfortunately, often management’s pride comes first and such an appointment is seen as a loss of control or an admission of failure.

In these instances, appointing a turnaround executive either happens too late or not at all.

Recognising the need to appoint a turnaround executive can be an important step to maximise the business’s chance of survival and success.

If insolvency becomes inevitable, turnaround executives can be helpful in negotiations with lenders and creditors; easing the pain of the process for management.

Turnaround executives who have experience working with distressed businesses can deliver profitability and productivity improvements to a business, and often companies on the brink can be brought back to life.

Krystyna Adamek is a Senior Executive in the Sydney office of Vantage Performance, one of Australia’s leading business transformation and turnaround management firms – solving complex problems for businesses experiencing major change.

Related posts you might enjoy:

• How To Raise Private Equity and Venture Capital
• Business Exit Strategies for Baby Boomers

Should You Sell a Non-Core Business?

Non-core businesses are created usually from acquisitions, mergers or as a result of synergies with the core group activities.

They can be the “forgotten child” of business. Once purchased or set-up, the original recognition of the unique features that would add value to the group is forgotten and the core business takes over focus, to the detriment of the non-core business.

It is common to see ASX 200 companies divest non-core businesses to focus on their core activities.

However, boards and Group Leadership Teams (GLT) really do need to understand and care about  non-core businesses for them to succeed.

There can be value in retaining a non-core business.

These businesses are often the home of innovation, profitability and entrepreneurship.

They can set benchmarks for the group because they have something to prove and can’t rest on their laurels like the core business.

They challenge the status quo.

Understanding how a non-core business operates, where it fits in the group and what its key success factors and key challenges are is essential for creating an effective union and secure future within the group.

Challenges for non-core businesses:

• Smaller turnover means non-core businesses are considered less significant by the Board and GLT  
• They are seen as different and not a nice fit with the group (i.e. square peg in a round hole)
• There can be a push by the Board/GLT for them to blend with the core business. One rule fits all, or does it?
• Lack of Board and GLT focus and support
• Board and GLT often don’t  spend the time to understand the non-core business
• Resources and capital are not as readily available
• Their risk profile is different – often higher, which can be seen as negative rather than looking at the higher return that often comes with it
•  There can be a constant battle to retain the identity and key differences that are essential to the value of the non-core business
• Internal politics can see core staff competing with non-core staff
  80/20 rule – Board and GLT concentrate on the core business and brush over the non-core business.

Keep or sell a non-core business?
This is the million dollar question. The pros and cons have to be carefully weighed up.

For the parent company, the benefits of retaining can include profits, innovation, utilising synergies and keeping group activities diversified. On the other hand, non-core businesses can drain focus and attention and increase risk profile.

From the perspective of the non-core business, the benefits of being retained include synergies that can deliver value to the whole group. But a sell-off may see the business get better understanding and support from a like-minded new owner, with less time spent trying to educate the group on the nature of the business.

Understanding non-core businesses
The reason why non-core businesses are there in the first place is to add value to the group.

Understanding how a non-core business operates, its fit with the greater group and its key success factors is essential for a happy and effective union and future.

Here are some key questions for Boards and GLTs to consider:

1. Do you really understand your non-core businesses?
2. Are you optimising their value and synergies?
3. Do you know what is required to do this?
4. Have you evaluated your group activities to clearly understand what is core and what is non-core?
5. Do you have the right organisational structure to ensure you optimise core and non-core businesses?
6. If your non-core business is not performing as well as expected, are you looking at the top as well as the bottom for answers?
7. Are you prepared to change the perception of non-core – that the Board and GLT don’t understand their business well enough and therefore are not helping them reach their potential?

If you focus more on your group’s non-core businesses you may well discover a future core business.

I’m interested to hear your experiences, either as a Board member, GLT member or as a leader of a non-core business.

Barbara Ould is a Client Director in the Melbourne office of Vantage Performance, Australia’s leading business transformation and turnaround management firm – solving complex problems for businesses experiencing major change.

How your business can survive the looming economic downturn

The worst thing Australian businesses can do during the “new GFC” conditions they will face over the next year is batten down the hatches and just try to survive.

Signs of economic slowdown in China, combined with a predicted poor retail result over Christmas and concerns over carbon tax impact, mean 2012 will be an incredibly challenging one for many businesses – I believe tougher than the original GFC aftermath.

Whether or not we fall into recession is irrelevant, business is facing extremely tough conditions. We can see among clients that bank finance is becoming tight again and credit rationing will be a factor.

The worst thing a business can do is approach this period with a “bunker down” attitude.

You need to treat tough times as an opportunity, and be doing something different to stand out from the competition so you can continue to grow and source capital to fund the business.

The herd will panic and start cost cutting and laying off staff like they always do.

Those more likely to come through the tough conditions in better shape will be the ones tightly managing their working capital, continuing with research/development and innovation, showcasing their “demonstrable” unique selling proposition and standing out from the crowd.

These are the businesses that will win the competition for hard-to-find credit.

How to survive the economic downturn

1. Don’t just compete on price when things get tough
   The trouble with relying on discounting is you don’t know your competitors’ cash reserves. Don’t blindly go down this path not knowing if you can outlast your competitor.
2. Be unique, have a real point of difference (think Peter Alexander)
   Who would you rather be coming out of the next economic downturn – the business still discounting its old products or the one introducing new products at a higher margin to the market?
   Keep the focus on innovation through the economic downturn.
   I’d rather this than be slashing my throat with the herd.
3. Aggressively manage accounts receivable, inventory and payables and seriously consider selling non-core assets/divisions or surplus assets.
4. Seriously consider sale and leaseback options for property and other assets to bolster cash flow.
5. You may also need to consider a merger in order to not only survive but come through the next period in better shape than your competitors.
6. Focus right now on stress testing your business.

It’s a sobering thought that, of the more than 16,000 Australian companies likely to become insolvent in 2011 (based on FY2011 ASIC stats of 14,566), a significant number could have been saved if they had sought the right help early enough.

The current economic downturn has dramatically increased the speed at which business conditions can change.

This forces astute leaders to rely more than ever on risk management strategies to protect their businesses.

Regardless of the position your business is in, it’s essential to be undertaking detailed financial modelling and “what if” scenario testing to gauge how sudden changes in market conditions will affect your business – and more importantly, what initiatives management can deploy to combat these challenges.

So what is your business doing to stand out from the crowd in 2012? We’d love to hear.

Michael Fingland, a Managing Director of national business transformation and turnaround firm Vantage Performance, was awarded Australasian Turnaround Professional of the Year 2011 by the Turnaround Management Association, for his work with fast growth and troubled companies. www.vantageperformance.com.au