Guarantees

Which brings up an important question for anyone who has provided or is thinking of providing a Personal or Director guarantee: Are you aware of what happens if the business defaults and

a) the guarantor is alive and working?
b) the guarantor is alive but unable to work due to a disability?
c) the guarantor is no longer alive?

The answer is the same for all three. If a business defaults on a loan, the guarantor will be called on regardless of their current situation.

So, if you have personally provided guarantees or are part of a business which has a guarantor, you need to ensure that you have sufficient insurance coverage and strategies in place in case something goes wrong. Summit Accountants and Business Advisors work with specialists who can assist you with understanding the consequences and outcomes. Call us on (03) 9622 0600 to discuss how to put the necessary protection in place. 

An idea to save you thousands

The Reserve Bank of Australia has all but guaranteed what will happen with interest rates. With the recent statement that "stronger-than-expected economic data and the general improvement in sentiment both in Australia and abroad have reduced the likelihood that a further reduction will be required", we can only expect the interest rates will increase.

So, now is a good time to have a banking review. This simple review may save you thousands of dollars.

As we take on debt, we do so at different times, so it's not uncommon to have multiple debt commitments. If you take a look at these commitments, you'll notice that they are remarkably different to each other. The differences include interest rate, the life of the loan, whether you are paying interest only or repaying principal, whether you can pay the loan off faster. These differences may not always be to your advantage.

Contact us today on (03) 9622 0600, or click here to arrange for a free consultation. We’ll help put you in touch with specialists who can work with you to reduce the cost of your cash while we ensure that any change takes into account your business and taxation needs.

Business Scruples

 Welcome to Business Scruples, your Agony aunt for business professionals. Today's letter comes from Fiscally Anxious, who writes:

Dear Business Scruples,

The costs of running my business have gone up (despite what they keep telling me on the news) but I have held off increasing my prices.  It just doesn’t seem right when the economy is in a slump to pump up prices.  I don’t want any existing sales to dry up.
What’s the best approach to keep customers on my side during the economic downtimes?  Should I be doing more and adding a bit of a discount to keep people happy?

Yours,

Fiscally Anxious

Dear Fiscally Anxious,

If I told you that to run your business you need to absorb additional costs, reduce your profit margin, slow your cash flow and limit your ability to reinvest in your business, then this would be the first and last advice letter I'd be permitted to write.

You're in business to make a profit - because profit is what allows us to grow our business, employ more people and build an asset that it more than just being a form of employment (albeit, one with longer hours and often less direct benefits.)

If you want to be charitable, then donate money to a real charity (and claim the tax deduction. If your customers don't realise the sacrifice you're making on their behalf (reducing prices, doing more) then you aren't really creating customer loyalty anyway. History shows that martyrdom is not a survival strategy.

Leaving your prices at 2008/2009 levels or even reducing them is a decision that comes at a price. So, for a moment, let's not concentrate on the social morality of the decision, and look at the business case for making the decision. There are a few things we need to consider to arrive at what the number needs to be.

Understanding your market

Everyone thinks their market is price sensitive. Is it really, or are we all just being a little paranoid?

Australia just recorded its lowest inflation rate in decades, so you wouldn't be alone in keeping prices in check. But as American writer Irene Peter said, "Anyone who thinks there's safety in numbers hasn't looked at the stock market pages."

If you are dominated by competitors with a large market share and you have no differentiators, then yes, you will have a fair amount of price pressure. However, if you offer something different to your competition, you can take the focus away from price. There is a sizable difference between Value conscious and price conscious.

So, if you have a more personalised product or better interaction with your clients, then you need to answer the question of whether a marginal increase in price is going to make a difference to your customers. No one likes to pay more, but if your costs have increased, then a price increase is merely a reflection on what's happening in your broader market.

The cost of discounting

You can't be successful if you only focus on volume of sales and ignore the cost of discounting.

By discounting, you are essentially giving away some or all of your profit. If you are planning on doing this, you need to understand how far you can go. For example, a businesses with a 30% gross profit margin that offers a 25% discount (not unusual in today's market), would need a 500% increase in sales volume to maintain the same position. a 500% increase is not so likely, so these companies end up trading below the break-even point and generate a loss. You can only run at a loss for a limited time.

Understanding your cost structure

You need to know your break-even point. This is the point where you are not making a profit or a loss. You calculate your break-even point by dividing your fixed expenses by your gross profit margin. This figure represents the level of sales income you need to break-even. Knowing this figure means that at any time you will know if you're profitable or not (as long as your fixed expenses and profit margin have remained constant.)

It's this break-even point which will determine whether to offer a discount. If your break-even point is well below your current operating level, then you have a good buffer in your profits to manage growth, invest in further capital opportunities, and to protect yourself against any sudden downturns in operating performance.

This might be telling you things you already know, but when was the last time you put all this into practice?

Putting prices up during an economic downturn is not social betrayal. If your costs have increased, so too should your prices, unless you are comfortable making less for the same product and effort, or unless you are in an industry so price sensitive that you have no choice but to follow your competitors.

If you want to know where your business is up to and the best strategies for your individual business, talk to us today.

Quote of the month

A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.
Suze Orman