All articles in Volume 11 Issue 25

Five New Year's resolutions for SMEs

BRR_Issue 24Welcome to 2014! You may have made some personal New Year’s resolutions, but have you made any for your business as you look ahead to what could be a year of big achievements?

MYOB CEO Tim Reed says: “January is the ideal time to reflect and to give new strategies and goals the green light, instead of taking a ‘business as usual’ approach. Operators who commit to clarifying their priorities early in the piece will likely reap the rewards. It can mean the difference between flourishing and floundering.

“When setting New Year’s resolutions, big or small, the first step is to plan. Set some specific and inspiring goals around key areas of your business that you wish to develop. Begin by asking yourself what you will stop as well as start doing in 2014.

“Whatever your business goals – be they driving efficiencies, harnessing the power of cloud technology or finessing your finances – establishing your New Year’s resolutions can help you approach the year with renewed vigour.”

Reed suggests the following five New Year’s resolutions for small and medium-sized enterprises (SMEs):

1. Learn from last year’s hits and misses

Place the previous 12 months’ trading under the microscope. Analyse the strategies that worked, those that didn’t and work out the “whys”. Why did some products or services succeed when others flopped? What changes could you make in 2014 to ensure mistakes aren’t repeated and opportunities aren’t missed? Get the ball rolling with a SWOT analysis – a useful technique for understanding your business strengths and weaknesses and for identifying the opportunities open to you and the threats your business may face.

2. Stay on the business track

A solid business plan will help you make better business decisions about the strategies you need to continue to operate and grow. If you’re looking for annual growth of 100 per cent, you will need a different strategy to one that shoots for 10 per cent growth. Then, to ensure you tick off your to-do list in 2014, make strategic planning a weekly or fortnightly task. Ongoing strategic thinking is great for defining goals and objectives within a timeframe. This type of thinking also helps to ensure you and your team have a consensus about where the business is going and how to stay on track.

3. Don’t try to be all things to all people

Are you the director, IT person, admin manager and salesperson in your business? Wearing multiple hats can be exhausting. Avoid micro-managing if you are lucky enough to have employees. Delegate intelligently. It can be challenging letting go, but if you don’t delegate, growing your business could become a pipe dream. Why not outsource tasks you loathe so you can spend more time on growing the business?

4. Grow to love your numbers

Many business owners consider themselves too busy to check or understand their financial statements. Learn about profit and loss statements, balance sheets and cash flow statements and don’t shy away from the numbers. Making time to understand your financial documents will give you greater control and a clearer picture of your business and its performance. It can help you make smarter decisions and improve your ability to communicate productively with your accountant and other advisers. With cash flow ranking as the second highest pressure point for SMEs in the latest MYOB Business Monitor report, it’s time to add cash flow expertise to your toolbox. Ask your trusted accountant or bookkeeper to guide you.

5. Don’t be afraid to embrace technology

Cloud-based accounting software, convenient mobile apps and online business management tools are a must for businesses to consider. Today’s technologies can save you time and drive significant efficiencies.

Tax changes for charities dumped

The Abbott government’s decision to abandon plans to "Better Target Not-for-Profit Tax Concessions" has been widely welcomed.

The measure, which brought into question charities’ income producing activities, was introduced by the previous Labor government. It argued that the government was foregoing significant revenue because some of the income-producing activities of charities were not being directed to charitable purposes.

The legislation would have resulted in not-for-profits (NFPs) only receiving tax concessions if their income producing activities directly furthered the purpose for which they were established.

Assistant Treasurer Arthur Sinodinos has indicated that while he will not proceed with this legislation, he will consider other measures for charities which are inappropriately exploiting their charitable status to gain tax concessions.

David Crosbie, CEO of the Community Council for Australia (CCA), describes the measure’s abandonment as a good outcome for the one in eight Australians employed in the NFP sector and the communities that will benefit from their NFPs being both more secure and more able to diversify their income streams.

“For the past two years, charities have been concerned that their income-producing activities may jeopardise their charitable status and the concessions they receive,” says Crosbie.

“In this area, the government has clearly listened to the NFP sector and provided a measure of certainty for future planning of income-producing activities.”

Independent Disability Services (IDS) also welcomed the government’s decision not to proceed with the tax. For the last two years, we have been concerned that our funding activities may jeopardise our charitable status and the concessions we receive, taking funding away from the work we do on behalf of our clients. The decision means we will have greater security and be more able to diversify our income streams,” IDS said in a statement.

Bethwyn Serow, executive director of the Australian Major Performing Arts Group (AMPAG), describes the move as “a vote for common sense”.

"The previous government’s approach could destabilise and limit charities’ options for generating revenue to support their charitable purpose,” she says.

“This decision, combined with the start of the Charities Act on 1 January, gives greater certainty to performing arts organisations.

“The Charities Act enshrines the ability of charities to engage in activities that are not intrinsically charitable, as long as the activities aid their charitable purpose.

“The innovative activities that performing arts organisations legally undertake to raise much needed funds for pursuing their purpose will also not attract additional or crippling tax.”

Serow urges the government to fully consult with the sector while it explores its “simpler alternatives” to address illegal activity by some charities.

Other groups that have welcomed the announcement include the RSPCA, Musica Viva, Smith Family, World Vision, Mission Australia, The Big Issue, Drug Arm Australia, Good Beginnings, Lifeline, the Benevolent Society, Hammond Care and Wesley Mission.

Website crash provides some lessons in IT governance

 A website malfunction can result in a trail of angry customers, red-faced executives and damaging comments on social media platforms. But how can the average director stave off such an experience?

Melbourne-based adviser on IT governance, Mark Toomey, stresses the importance of proper testing, but adds: “We can’t expect directors to be out there testing systems and we can’t expect them to have the in-depth technical knowledge to directly assess the testing arrangements.”

In fact, he says directors don’t need to have any of that detailed knowledge. “There are many probing questions that directors who have no specific technology skills can ask to discover whether management is on the ball and to gain comfort in the systems on which the business relies.”

For example, Toomey says that directors can ask: “What is the proven sustained peak workload at which our system can operate before customers experience an unacceptable reduction in service?

“The only way that management can truthfully answer this question is to have conducted stress tests that give a clear answer. It’s the one question beyond any other that gives confidence, but only if it is answered in a way that confirms a robust method of determination,” he says.

Toomey warns that because there are many potential points which could cripple web-enabled online shopping systems, its vital to ensure that management has a clear, workable and preferably well-rehearsed plan for dealing with any fallout. The issues that warrant consideration in such a plan are how to:

  • Promptly and efficiently field complaints and other messages from customers, which may arrive by email or be detected on several social media systems.
  • Keep customers, the media and others updated on the situation and the action that is being taken, with pragmatic estimates for resumption of service when possible. The plans for informing customers should include a wide array of channels, such as an opt-in email, a text message or messages dispatched via social media.
  • Provide customer service via alternative channels.
  • Protect your market share in the face of an attack – for example, if competitors seize the opportunity to acquire business/customers while your systems are not working.

Toomey adds: “No matter how much testing is carried out, the ultimate measure of performance in a 21st century online shopping system is what each customer experiences. It’s not enough to simply wait for customer complaints to reach a crescendo. Processes should be in place to understand exactly what customers are experiencing and to detect problems before a crisis develops.

“Directors should ask management to explain how the customer experience is monitored and managed, and management should provide ongoing reporting of the customer experience as part of a comprehensive approach to the oversight of online channels. And from time to time, it wouldn’t hurt for directors to take on the role of customer and actually use the online channel themselves, rather than making an in-store visit.”

New standard

Meanwhile, Standards Australia has published a new standard designed to help boards and executives effectively discharge their governance responsibilities when it comes to the oversight of major IT projects.

“The standard has been prepared to set out how significant IT projects can benefit through the use of appropriate governance frameworks and principles,” says Dr Bronwyn Evans, CEO of Standards Australia.

She says guiding successful projects, driving change within organisations and achieving desired business outcomes requires clear engagement between governing bodies and their senior executives.

“Organisations undertaking significant IT projects will find this is the ‘go-to’ document when it comes to linking governance and management.”

Max Shanahan, project editor and member of Standards Australia technical committee, IT-030, says the standard is also designed to assist members of governing bodies, who are required to evaluate business cases for major IT-related investment decisions, without having the benefit of a technology background.

Toomey endorses the new standard in December, saying: “Shanahan and his helpers have now compiled a very useful resource that will help organisations to be more successful when they invest in IT-enabled change.  The timing could not be better.  Digital Transformation is the new name for IT-enabled change and it’s a topic that is front of mind for many commentators on business today.”

Listed entities: Still room to lift their reporting game

Australian companies have significantly enhanced the quality of disclosures in their operating and financial reviews (OFRs), but some need to try harder when describing their businesses and underlying drivers of reported results.

That’s the sentiment from the Australian Securities and Investment Commission (ASIC) following its review of 280 financial reports at 30 June 2013.

ASIC Commissioner John Price adds: “While the quality of financial reporting in Australia is comparable with other major jurisdictions, we continue to identify matters such as inadequate impairment of assets and inappropriate recognition of revenue in some cases.”

The June 2013 annual reports are the first since ASIC released guidance (ref:13-064MR) in March 2013 to help directors of listed entities provide useful and meaningful analysis and information in the OFR.

Past ASIC reviews found that around half of listed companies tried to rely on an exemption for information that could cause unreasonable prejudice and did not disclose any information on business strategies and prospects for future financial years, even when the information was already publicly available.

However, there was a substantial reduction in the use of the exemption in the OFRs reviewed at 30 June 2013.

Nonetheless, ASIC says it has written to, or will be writing to, a number of companies regarding omitted or inadequate disclosures of:

  • The entity's business model(s).
  • Business strategies which are relevant to the entity's future financial position and performance.
  • Material business risks that could adversely affect the achievement of the future financial performance or financial outcomes of the entity.
  • Underlying drivers of financial performance.
  • Explanation of significant changes in balances.

ASIC adds that some entities make relevant disclosures in investor presentations and analyst briefings rather than in the OFR. However, these disclosures are often in the form of slide presentations, lack supporting explanation and are not in a readily understandable narrative form.

“Our objective is not to increase the length of the OFR, but rather the quality of the information provided in it,” says ASIC.

ASIC also continues to identify concerns regarding assessments of the recoverability of the carrying values of assets, including goodwill, other intangibles, investment properties and property, plant and equipment.

As a result of its inquiries, ASIC says a number of entities have made significant impairment write-downs and will improve their disclosures on matters such as key assumptions

ASIC says it has made inquiries of 70 entities on 100 matters. Of these:

• Eight have made material restatements of reported net assets and profits.
• Three have agreed to provide additional material disclosures.
• Twelve have been concluded without changes to their financial reporting.

Of the inquiries made by ASIC, 34 related to impairment and other asset values, 14 to revenue recognition and nine to consolidation of other entities.

Other inquiries related to the OFR (3), joint arrangements (1), going concern (1), control of assets (3), financial instruments (4), non-IFRS financial information (5), related party disclosures (2), amortisation of intangibles (6), segment reporting (6), current classification of assets (3), business combination accounting (2) and other matters (7).

Key issues to be on top of in 2014

The most successful businesses in 2014 will be those that recognise growth opportunities in a tighter market, ensure their due diligence and financing is appropriate and engage their workforce to drive productivity.

So says Kim Hutchinson, national chairman of RSM Bird Cameron, who believes directors that stay on top of the following changes and challenges will achieve the best outcomes in 2014:

A rapidly-changing sales environment: “Gone are the days of business owners simply waiting to take orders from customers as decreased consumer demand leaves a gaping void,” says Hutchinson. Directors need to start preparing for a completely different sales environment to ensure their businesses are sustainable and successful. Evolving consumer buying behaviours and preferences are changing the face of how a business approaches its selling function.

Increased investment in innovation: Productivity is a key area for improvement. Most businesses need to look carefully at how they can innovate to increase efficiency and improve their competitiveness. Businesses shouldn’t try to compete on price. Instead, they need to consider their real competitive advantages, which can be gained through smart innovation.

Superannuation Guarantee (SG) payments: There has been a significant amount of activity by the Australian Taxation Office (ATO) in relation to reviewing the timing of SG payments and Hutchinson says this is unlikely to change. Employers are currently required to pay 9.25 per cent into the employees’ superannuation fund by the 28th day after each quarter-end. If a company is late in paying, the company (and potentially the directors) are liable to a Superannuation Guarantee Charge (SGC) as well as penalties and interest.

Transfer pricing will be talk of the town (again): The recent OECD Public Consultation considered country-by-country reporting, transfer pricing documentation improvements, new guidance on the transfer pricing aspects of intangibles and the transfer pricing aspects of the BEPS (Base Erosion and Profit Shifting) Action Plan.

Corporate governance and probity issues: As companies look to auditors and risk professionals, including internal auditors, to take on more risk than they did 12 months ago, the issues of corporate governance and probity remain high. It is essential to a company’s reputation and credibility that effective corporate governance practices are in place at all levels, are working effectively and that there is a process of continual improvement. Businesses should also focus on eliminating inappropriateness and ensuring correct procedures are followed.

Due diligence in business transactions: Businesses can’t afford to make mistakes when it comes to financial transactions. The risk associated with covenant breaches and shareholder scrutiny is more pronounced than ever. The due diligence process is key as it focuses on the issues likely to affect a decision to proceed with a business transaction and the factors which may affect the value or price. Due diligence provides businesses with the ability to evaluate a business transaction appropriately. A strategic approach to due diligence is critical to the success of a merger or acquisition. Further, the assessment of all risks in business deals is imperative and a core part of due diligence. An effective risk management strategy will uncover any “skeletons in the closet”. These issues may change the terms or value of the business transaction. Particularly in cross-border transactions, due diligence is vital as the acquirer often does not have an in-depth understanding of the target company and local market. The key areas to look at in the due diligence process are historical trading results, quality of earnings, company balance sheet and financial information forecasts.

Cross-border demand will increase: The term multinational isn't just reserved for large corporations. In today’s digital environment, it’s easier than ever to go global no matter what your size, says Hutchinson. Many companies are going global and the tax implications are serious. The ability of organisations to profit from a worldwide market can be limited by the ever-increasing complexity of tax rules in Australia and around the world. These shifts in client service demands will create important growth opportunities for accounting, tax and consulting firms with cross-border capabilities.

Changes to the Personal Property Securities Act (PPSA): These alter the way in which security interests in personal property are dealt with across Australia. The 24-month transitional protection period will expire on 30 January 2014. Any holder of a security interest in personal property must register it on an online Personal Properties Security Register (PPSR). Many business owners don’t fully understand the potential effect of not doing this. If not perfected, the security interest will be defeated by other perfected interests, it will be void against a liquidator or administrator and it will be extinguished in case of a sale. Goods that are in the hands of a liquidator or administrator in which security interests are not registered will be sold without payment to the owner. Failure to perfect a security interest may also prevent a creditor from relying on personal guarantees.

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