Profits
Monday, 14 January 2008
Last Updated: Tuesday, 15 January 2008
In this section:
By James Bennett
Growing revenue is one thing — growing profit is another altogether. A recent St George–ACCI Business Expectations Survey found that company profits are under pressure, despite rising sales, with higher wages particularly eating into margins.
SmartCompany has come up with 50 ways to boost your profit, and while every idea won’t work for every business, they will get you thinking about ways to improve your bottom line.
A good place to start, says Sue Prestney, a partner at MGI Boyd, is a business sensitivity study. These studies (usually done with the aid of specific software) allow you to see how much extra profit you will get if, for example, you put prices by 5% or cut advertising costs by 10%. “It can help tell you what’s going to give you the biggest impact and open your eyes to the possibilities,” Prestney says.
- Raise your prices. You’ll be surprised how few complaints you’ll get about a 5% price increase.
- Sack a customer. Think about abandoning demanding customers who eat up too much time for too little reward.
- Drop a product from your range. Most companies carry products or services that are just not working or cost too much to produce.
- Change your bank. There’s plenty of big and small financial institutions out there, so shop around for the best deal.
- Put your printed materials online. Posting documents such as manuals and brochures on your website saves on printing, storage and postage.
- Change suppliers. China, India, Vietnam and Thailand are full of companies that can supply products cheaper than in Australia. If you can’t beat the importers, join them.
- Put lots of information on your website. This will help reduce the amount of time you spend on the phone answering customer queries.
- Bill customers promptly. Get your invoices out as quickly as possible to get them back faster.
- Create incentives for creditors to pay faster. Offer a small discount to clients prepared to pay within a week and your cash flow will improve.
- Weed out slow payers. Before taking on a major customer, check their credit worthiness and references. Bad debts are bad news.
- Use email. Cut postage costs by migrating customers to email.
- Cut your inventory. Don’t tie money in the warehouse. Get that money out there working for you. Or better still, get it back in your wallet.
- Consider different property options. Moving out of the city can save you a bundle on rent.
- Barter. Look for companies with which you can exchange goods and services. It keeps cash in your pocket and helps you network at the same time.
- Add a new product or service to your range. Then bundle the new product or service with your new offering and watch revenue grow.
- Pay your bills online. It saves on cheque fees and postage costs.
- Consolidate your loans. Multiple loans mean multiple sets of fees. Consolidate and save.
- Change your phone company. Communications — particularly mobile phones and internet — can be expensive. Review your supplier and don’t sign a contract longer than 12 months unless you’re sure prices aren’t going to fall.
- Do things out of season. Conference facilities, hotels and airline flights are cheaper at certain times of the year. Plan around this and save.
- Negotiate. It makes some people uncomfortable, but haggling is a perfectly normal part of doing business.
- Shop around. You can find a cheaper price for everything if you look around. The bigger the expense, the more shopping you need to do.
- Advertise online. Online advertising is relatively cheap and its effectiveness is much easier to measure.
- Check your invoices. Don’t just pay up blindly — make sure none of your suppliers are over-charging you.
- Take advantage of discounts. You love prompt payers and so do your suppliers — take advantage when companies offer discounts to customers that pay quickly.
- Recycle. Reuse marketing materials such as promotional signage and displays.
- Find a purchasing partner. There are some things every business needs, like stationary and cleaning products. Team up with another business and use your combined buying power to get discounts.
- Standardise and simplify. Big manufacturers try to standardise every process in their business so it is done right every time. Less mistakes means less wastage.
- Clean up. Tidy your work environment so staff waste less time dodging obstacles and finding lost files and spend more time attending to customers.
- Survey your clients. Find out what they like about you and what they don’t like. Decide where you should invest your time and energy.
- Cut your labour costs. People are typically a business’s biggest expense. Weed out underperforming or unnecessary staff.
- Outsource. In some industries such as manufacturing, outsourcing production of some products or components can save big dollars.
- Form a joint venture. Many companies are too small to compete for large contracts. Find businesses with complimentary products or services and bid together.
- Make an acquisition. Buying another company is a quick way to grow revenue. The key is managing the integration.
- Go global. Australia is a relatively small market and taking your business offshore can open huge sales opportunities. There are even government grants available to help with the costs.
- Buy second-hand furniture and fittings. A slick office never made anybody any money. Keep it neat, tidy, functional and cheap.
- Do some R&D. Research and development can be expensive but new products don’t make themselves. Take a punt and trial something new.
- Copy. So what if you didn’t have that great idea first? If you see something that works, incorporate it into your business.
- Be extra nice to your customers. The cheapest and most reliable form of advertising is word-of-mouth.
- Say no. Some jobs are marginally profitable or high risk — don’t be afraid to avoid them.
- Go upmarket. Customers are prepared to pay for high-quality products. Make sure you are seen as the premium alternative and price products to reinforce this.
- Steal top staff from a competitor. Luring a proven employee with a big salary may end up being cheaper and less risky than hiring and training new staff.
- Improve your reporting systems. Knowing how each department and sales person is performing on a weekly basis helps highlight your strengths and weaknesses.
- Focus. Work out exactly what your business is good at and concentrate on it. If you stop trying to be all things to all people, you’ll improve your competitive advantage.
- Cut out the middle man. See if you can source products directly from the manufacturer at below wholesale prices.
- Extend your trading hours. Staying open a bit longer can be a good way for retailers to bring in extra revenue.
- Examine your logistics. Big companies regularly restructure their supply chains to improve profitability. Look at your transportation arrangements and eliminate double handling and delays.
- Benchmark your business. Compare your departments to each other. Compare your business to competitors. Compare your company to those in other industries. Then decide what sort of returns you should be getting and make a plan to get there.
- Develop and maintain your customer database. Selling to your existing clients is far cheaper than trying to find new ones. A good database is a big asset you must exploit.
- Change electricity suppliers. Energy companies are targeting small and medium businesses so take advantage and get a better deal.
- Monitor and manage staff workflow. If employees are getting through their work quickly, assign them new or extra tasks. You may even find you’ve got more staff than you need.
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By John Cook
Rising interest rates and a slowing economy are concerns for business owners, but it does not follow that they will have to lay off staff to prevent profits falling. Some planning can help. Many companies, big and small, have contingency plans to deal with economic slowdowns.
Financial services firm Bluestone, for example, has contingencies for a sharp fall in property prices or an economic downturn; building materials group Rinker has long had a detailed plan (updated by chief executive David Clarke) to deal with a downturn, which has helped the company during the US housing slump.
Here are 10 ways to increase your profits when business conditions change or the going gets tough:
1: Be disciplined with late payers. Every slice of revenue counts in a downturn, so pay close attention to chasing up money you are owed. Be disciplined with late payers and specify a deadline, rather than using a generic term such as “21 days”. If that does not work, try to be even more assertive. And keep written evidence in case a dispute arises.
2: Consider different property options. Do you need that smart CBD office, or magnificent water views? Not if your customers do not visit regularly, if you spend much of your time at their offices, or if you sometimes work from home. One option is to move just outside the CBD — being even a kilometre away can mean substantial rent savings. Another option is to lease serviced offices, which are springing up in and around business districts. Their operators can organise meetings, answer phone calls and ensure you still have that all-important city address. Premises are shared with other small businesses.
3: Look at your pricing. The importance of pricing seems to often be overlooked by businesses. Some tend to underestimate just how much their product or service is worth, afraid of being rejected by prospective customers or clients. But Melbourne technology services provider Extreme Networks has taken a different approach, says chief executive James Elling. He says companies should experiment with pricing to find the optimal point, pointing out that almost all his clients refuse to abandon him whenever he raises his prices. Client loyalty can survive price increases if a company constantly strives to improve its customer services.
4: Extra revenue does not necessarily mean more profit. It might sound simple but chasing extra income may mean stretching yourself too far. Taking on too much work can divert attention from important matters such as cutting costs and monitoring the bottom line. Servicing more clients could also mean additional costs you simply cannot afford. Instead, focus on the income you already have and ensure existing clients get close attention. On the other hand you may need to launch a sales campaign or boost your sales team. Remember: watch cash flow. Some successful entrepreneurs focus on clients who deliver regular cash even though they may not be as profitable in the long term.
5: Think carefully about your furniture and fittings. A slick office fitout won’t help if you go out of business. Telecommunications infrastructure provider PIPE Networks was a typical startup struggling for cash almost five years ago. Founders Bevan Slattery and Stephen Baxter furnished their offices with bargains from liquidation auctions and internet sites such as eBay. It paid off: PIPE Networks listed on the ASX after just three years.
6. Barter. Look for another business with which you can exchange goods or services without having to exchange cash. Examples include recruiting companies finding staff for their accountants in exchange for accounting services. Bartering can also take place between rival firms. The fast-growing recruitment firm, Market U, has an informal agreement with a fellow boutique company, that they will help each other find executive recruits for clients. Founder and director Anna Whitlam also exchanges ideas on strategy with other firms, which has led to them teaming up to pitch for tender work.
7: Look at advertising alternatives. Big advertising campaigns can be costly, as can direct marketing. Building a brand online is often a cheaper option for new companies. Another is viral marketing, or good old-fashioned word-of-mouth referrals. Maintaining a good customer relationship is vital for this because it relies on your existing clients referring others; considering asking them to do so. Make this one of the objectives of your business plan.
8: Do not neglect clients, get feedback from them. Some firms make more than 100 phone calls to clients every week. Queensland company DnM Computers has even employed people simply to call clients. A simple phone call can act like a strategic review; often clients can the best source of information about what you are doing right and wrong in your business. Building a close relationship with your client could also ensure they stay loyal during tough times.
9: Change your bank. There is an intense competition between banks for a share of the small-business market. It is a fast-growing market, so banks are keen to offer inducements and deals to attract new clients. A small saving on loan repayments or better access to lines of credit can make a big difference to a fledgling company, particularly with interest rates on the rise.
10: Stay focused. An important thing is to stay motivated if things are going wrong. Try to stay calm and focused. The founder of fitness centre company Beach House Group, Adam Price, says: “Sometimes you just have to back yourself. If you’ve got a solid business plan you should be confident in your company.”
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By James Dunn
Profit growth is trending down after years of strong returns. SMEs are the most worried.
Surprising resilience of profit growth is good news for companies big and small. It shows that a strong economy and the resultant business and consumer spending is sufficient – given sound cost controls – to power continued profit growth.
With the December interim profit reporting season entering its final phase, listed companies have surprised on the upside. Despite some notable disappointments – such as Foster’s, Insurance Australia Group and Tabcorp – about 48% of companies have managed to beat expectations, according to AMP Capital.
Investment advisory group Wren Research says a sample of 174 companies shows a median net profit jump of 21.4% in the December half, led by the resources sector, which posted median net profit growth of 27%. On a weighted average basis (adjusted for market capitalisation), average net profit rose by 42.4%, average sales revenue was up 17.9% and the average net profit margin was 17.5%.
It sounds like a recipe for the continuation of the halcyon period for company profits that has characterised much of this decade. Wren says profit growth for the S&P/ASX 300 stocks has averaged 19.1% compound over the past three financial years, compared to the average of earnings growth since 1975, at 9.3% a year.
The natural consequence of this profit bonanza has been share price rises: local shares (as measured by the benchmark S&P/ASX 200 index) have more than doubled in since 2003. If you add in the healthy flow of dividends generated by the outstanding profitability of Australian companies, the sharemarket has delivered a total return since February 2003 of 130%.
But earnings growth is trending down. Wren Research expects the market’s average profit growth figure to fall to 8.1% in 2006-07, which would represent a seven-year low. Investors who understand regression to the mean – the tendency, over the long term, of statistical series to return to normality – would not quibble with that.
Australia’s small-to-medium businesses (SMEs) are not missing out on these salad days for Australian companies.
The February 2007 National Australia Bank business survey found SME profitability improved in the December 2006 quarter, with the profitability index climbing by five points to 25 index points. The survey had 42% of SMEs reporting good/very good profit conditions and 17% reporting poor/very poor profit conditions.
But the St George-ACCI Index of Business Conditions for the December quarter found profit growth was flat despite reasonable growth in sales revenue. The bank’s small-business survey showed that small-business conditions eased over the December quarter and that profit growth was poor.
Like big listed Australia, SMEs are also tempering their profit expectations. The NAB survey shows the 12-month profit outlook of SMEs weakening, with a net 29% of SMEs anticipating an increase in profits over the next year, down from 32% previously.
The St George-ACCI index found smaller firms, although positive, were less confident than medium and larger businesses.
The profit outlook is stronger among SMEs that have lower turnover, of $2–3 million a year. The most optimistic group was smaller SMEs in health and financial services, while mid-range SMEs’ profit outlook was most favourable in financial and accommodation services.
Among the larger SMEs (those with annual sales of $5–10 million) the profit outlook is strongest in business and transport and storage sectors.
Although the outlook remains positive, National Australia Bank chief economist Alan Oster says SMEs remain concerned about the outlook for consumer demand, the availability and cost of labour and – to a lesser extent – interest rates. In short, Australian SMEs appear have the same list of potential banes as their listed counterparts.
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By James Dunn
Most investors know that the sharemarket is one of the most reliable generators of wealth over the long term. But the wealth-creating power of the market can be compressed into a matter of days – even hours – if you have the stomach for the volatility.
Speculating on the sharemarket has never been easier. In the past few years a couple of new financial products have emerged that offer simple leveraged punting on the likely direction of share prices and indices, commodity prices and exchange rates.
The first of these is a contract for difference (CFD), an equity derivative that represents a theoretical order to buy or sell a certain number of shares. The price of a CFD is derived from the spread – the highest buying price (offer) and lowest selling price (bid) that is quoted on the Australian Stock Exchange (ASX) – so the value of the CFD mirrors the share price.
An investor buying a “long” CFD benefits from a rise in the share price, while a “short” CFD gains its benefit from a fall in the share price. The investor’s profit or loss is determined by the difference between the opening and closing price, with the difference paid in cash at the close of the contract.
In this way, CFDs allow speculators to “short-sell” (sell without owning) much more easily than on the stock exchange. CFDs allow traders to leverage an investment with a deposit of as little as 3%.
CFDs are much more transparent and easy to understand than existing equity derivatives such as exchange-traded options (ETOs) and warrants, and individual stock futures (ISFs). The problem with options and warrants and futures is that they’re all priced in quite a complex way, which is quite difficult for many investors to understand.
Options and warrants incorporate the concept of time decay: you’ve got to understand delta, gamma, theta and vega, which are all measurements of various aspects of the relationship between the price of the underlying asset, the price of the derivative, and time. Frankly, the subject is beyond most people.
A CFD doesn’t have any need for these esoteric concepts, nor does it have a built-in loan, as with warrants. A CFD is much easier for investors to understand. You buy it as you would a share, and it moves identically with the underlying stock.
CFDs are also cheap. On trades up to $10,000, providers charge commission of $10. Above $10,000, the charge is 0.01%. That makes CFDs just about the cheapest leverage available in the sharemarket. CFDs are offered on more than 400 companies listed on the ASX, but they are not a listed product or an ASX product.
CFD providers include IG Markets, CMC Markets, E*Trade, Macquarie, Man Financial, Marketech, L Quay, Sonray and Tricom.
Binary CFDs, introduced in March 2005 by CFD issuer IG Markets, are even simpler than normal CFDs. A binary CFD simply represents the probability of a discrete event – such as the market finishing up or down on the day.
IG Markets quotes a price on that probability of between zero and 100. If the event occurs – in this case, the S&P/ASX 200 Index closes higher on the day – the trade settles at 100; if the event doesn’t occur – the index closes lower – the binary settles at zero.
The binary CFD is a probability index that changes in real time: you’re punting on a simple probability of directional movement. Binary CFDs are also quoted on other sharemarket indices, as well as currencies and commodities.
Spread betting is even simpler, because our speculator is not even buying a derivative product – he is simply betting that the price of a share (or index, or commodity, or exchange rate) will go up, or down. The punter doesn’t transact on the ASX: the bet is made with the bookmaker. The bookie’s spread will be based on the current selling quote and a future buying price that it determines.
The investor uses this price to bet on the direction of the share price or index value. If he thinks the price will rise, he makes an up bet from the quoted offer (the selling price); if he thinks the price will fall, he makes a down bet from the quoted bid (the buying price).
The amount wagered can be as little as $5 a point (one cent), which is the equivalent of owning 500 shares. If the share price rises, the investor wins $5 for every point (or cent) it gains: if it falls, the loss to the spread bettor making an “up bet” is $5 a point.
Traders can take their profits, or cut their loss, at any time. Spread betting is leveraged speculation, with punters having to lodge a deposit equal to 10% of the full value of the underlying contract.
Spread betting allows investors to back their judgement in financial markets, without having to buy or sell the shares. You can place a “bet” on which way the price will move. You never actually own the shares: you’re only interested in the price movement. Clients can bet on shares going up as well as down.
No commission is charged on spread betting: IG makes its profit from the spread it charges. Clients can place a pre-determined maximum possible loss on each bet without affecting the ability to make unlimited profits. And the beauty of spread betting is that any profits made are free of capital gains and income tax – but nor are any losses tax-deductible.
The Australian Taxation Office says that the issue of the tax status of spread betting is “still being looked at”. IG Index – the only licensed financial spread betting company in Australia – recommends that investors seek their own tax advice.
IG Index says spread betting customers are typically retail punters betting $5 to $10 a point, but the bookmaker also has clients that bet up to $1000 a point: that sort of client is most likely using spread betting to hedge a share portfolio against price movements.
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Bevan Slattery and Stephen Baxter started telco infrastructure company PIPE Networks on a limited budget, but have been solidly profitable from day one. AMANDA GOME details the PIPE profit plan.
In 2001 in the middle of the dot-com crash, when telecommunications companies had gone from being market darlings to market disasters, two young entrepreneurs decided to set up telecommunications infrastructure company, PIPE Networks.
By 2005, it was a market darling. When the company listed on the Australian Stock Exchange, shares skipped from 40 cents in May 2005 to about $4.54.
Now PIPE is causing the telecommunications industry to sit up and take notice with the announcement yesterday that it has enough keystone customers to build a $200 million Sydney to Guam undersea cable that is expected to be finished by the second quarter of 2009.
The approach of signing up customers before committing to a project is not new to entrepreneurs Bevan Slattery (pictured) and Stephen Baxter. The 36-year-olds have focused on their company making a profit from day one.
Amanda Gome talks to Bevan Slattery about his strategy, philosophy on profit and the next stage of growth. Bevan is happy to answer your questions. Send them to feedback@smartcompany.com.au and he will answer you on this page.
Amanda Gome: Your industry is littered with companies that borrowed big and then crashed spectacularly. What is your philosophy on profit?
Bevan Slattery: To charge at least what it takes to recover costs. It is not rocket science and you might think it sounds obvious, but our industry is littered with examples of people who did big deals with big numbers and then they hope the contracts are going to happen.
We sit down with interested parties and we know what the systems are going to cost and what we can recover comfortably after covering our costs. It is the founding philosophy of the company, to be profitable every year of operations. We made this part of our founding statements and it is in our annual reports and in our prospectus.
We can build the infrastructure, get the contracts to break even on sales, and then beyond that we get a fairly good margin. (Primus, Internode, iiNet, Telikom, PNG and VSNL are among those already signed up.)
Our net profit after tax was $4.5 million last year. This year it will be $7 to $7.4 million on revenue of $34 million.
You are serial entrepreneurs; both of you have run successful businesses before. You co-founded iseek and sold it to a US company N2H2 for $25 million in 2000. (Baxter helped start ISP company, SE net which was sold to Ozmail in 1999.) What did you make from that?
Look it was the dot-com boom and then the market dived. So I ended up with more than $1 million. I learnt a lot from that, but what has really driven the philosophy is not having much.
So where did the profit ethos come from?
Our wives. Both our wives told us we could only have $50,000 each for the new business (PIPE Networks). Neither of us could put our houses on the line so we were very focused on making a profit from day one.
Apparently when you started you bought a lot of office fittings at a liquidator’s auction. Do you watch every cent?
We do try and minimalise our costs. On the other hand we celebrate our successes and have a good time. We had a party recently where we took all 60 staff away for two days to Santuary Cove. In December we went to the Sheraton Mirage and had the band Diesel play. We have a strong ethic; work hard, play hard. It is more that we keep everyone focused on the fact that every deal we do has to make money.
But if you want to do something big on limited means you have to be very focused on costs and do very good deals that make money.
You both separately own 18% of a business valued at $200 million. Not bad for two blokes in their mid 30s. But you are young and probably working horrendous hours. Do you want to sell?
No. I had a year off after selling iseek. I got bored. I bought a house on the water and fished from my pontoon for five months. My mother in law was dying and I could spend a lot of time with my wife, and fishing and pottering around the house. But then I got bored and I picked up the phone to Steve and we decided to start PIPE Networks.
You listed after just three years to raise $3.5 million. Why not just get private equity?
We needed the money to lay the fibre optic cable networks in Melbourne and Sydney. It was easier to list than get private equity. It was less onerous on management. Private equity investors want to come in and control everything. We thought we had a good story for the market. Although we were only three years old we had been profitable since day one.
In retrospect would you do it again?
Yes. Being a listed company is not as onerous as people make out. Being a listed company you have to perform, but we are used to that.
You have just announced that the $200 million Project Runaway will go ahead. What is it?
It involves building a major undersea fibre optic cable link between Sydney and Guam. The cable will connect to an international data network junction. It will provide an internet link for some domestic internet service providers and international carriers who provide services to Australia. About 12 major cable systems run through Guam to the US and Asia, so we can tap into those.
And the benefits to consumers?
It means they get more internet for their dollar. They get a lot more downloads for the same cost as they are paying now, which is great as they are downloading more video and music from overseas.
How are you doing this at a cheaper cost to the incumbents?
The gang of four (Telstra, Optus, Verizon and Telecom NZ) haven’t changed their pricing structure but the costs associated with building fibre optics has dropped. The Australian dollar is also higher so we can offer a lot more bandwidth for the same amount of money. Also we own the infrastructure so we are not held to ransom by someone else’s ineffective models.
Do you need more money? It sounds expensive.
We have no immediate requirements but at some stage we might, from either shareholders or through strategic investments from third parties. But we have cash in the bank and a debt facility that is untouched.
So what is your biggest obstacle going forward?
People. We need good people. We have eight positions vacant including management positions, technical roles and sales roles.
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