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March 1 2018

Be aware of the “boiled frog syndrome” in business!

This is the second of our two part podcast with Joanna Oakey, Lawyer at Aspect Legal and Antony de Vries, Partner at dVT Group.  In this podcast we have provided insights and practical steps for both businesses and accountants and other professional advisers that work with businesses on recognizing the warning signs to recognise trouble brewing before it’s too late and the importance of getting help from professionals early in the piece.

 

The podcast will cover the following:

  1. Importance of financial information;
  2. Good growth vs Bad Growth;
  3. The concept of having enough;
  4. The danger of over exposure (or too much concentration on one customer);
  5. The boiled frog syndrome;
  6. Talking to your accountant & professionals. 

Financial Information – Cash Flow:

Poor cash flow is always one of the biggest issues.  It is difficult to know what your cash position is if your financial records are disorganized or incomplete or you don’t understand how to read them.  Antony de Vries says “directors will often come to me and say – we’re doing so well, we’re making so much, our business is thriving, we have record sales this year compared to last year, but I’m having trouble actually paying all the bills. I don’t understand why.”  When we drill down to find out what is the situation, we find that sometimes they are getting the wrong information from the financial records or not understanding it.
It happens a lot in retail. A white goods retailer would conduct advertising campaigns that would generate extra sales.  But it turns out he was selling the goods at less than cost price, creating a false economy.  This was due to the actual true cost being clouded by complex ways of dealing with rebates and stretch targets from suppliers.  In fact the more he sold the more he lost.

 

When the time came that there was not enough money in the bank account to actually pay all the bills, you start wondering if something is wrong.  Obtaining more funds can help but it also masks the problem and may eventually result in the bank putting a limit on your overdraft.

 

To avoid getting to this point, it is critical to have and understand the proper financial information to identify issues and allow you to take corrective action early.

 

Good growth vs Bad growth:

Directors or shareholders often start to tip money into a business as they have this underlying belief that the business is growing and that anything that is growing is good without taking the right financial advice to really understand if it is good growth or bad growth!

 

When a business is growing, they often experience similar signs of cash flow pressure as a business that is actually struggling or shrinking. You need to differentiate between the symptoms and the causes.  An example is featured in the podcast.

 

 

 


 

The concept of having enough:

In business, we all understand the simple concept of making sure you can sell your product or your service for enough to cover the costs plus the actual costs of the infrastructure that you need to be able to put you in the environment whereby you can provide that service or product.
Whilst it is a simple concept, it is not always clear in reality.  You need to continually look for the signs that may indicate that this is not happening.  Some of these are going over overdraft limits, the bouncing of cheques, defaulting on loan or interest payments etc.
Asking for help and obtaining assessments of where your business is can help identify where leakages are so they can be rectified early before it’s too late.  And with prudence, hard work and a little luck you can actually avoid disasters.

The concept of overexposure (or too much concentration on one customer):

Another sign is when clients have over exposure themselves to a large amount of money that they are owed from one particular client or one particular group of clients.  In this case it is important for business owners to understand the risks associated if that particular client was to be wound up and they end up with only 5 or 10 cents in the dollar for the money that’s outstanding to them.  It is imperative to look out for possible insolvency signs or signals from these clients.

 

This is very common in the construction industry where a subcontractor does work for a builder and he will have a too high concentration of just working for that builder. Now if that builder is doing work for a developer and that developer can’t pay the builder, that builder can’t pay the subcontractor, resulting in the subcontractors actually losing 80 percent or even more of what he’s owed. So the subcontractor needs to keep an eye on making sure that that builder is making his payments regularly and that he doesn’t get too far behind.

 

Other warning signs are when you see payments being made to clients that end in round figures, indicating that invoices are not being paid in full.   If this is your one and only customer, you must take the necessary precautions and action otherwise it may affect you like a virus and you are going to suffer.

 

First, talk to your accountant:

When businesses have identified that they probably need to get external help or get someone else to help identify strategies that they need to put in place, they should start with their accountant.
Accountants are in a great position to have these conversations.  They are sometimes difficult conversations to have as no one likes to talk about failure or be challenged with severe consequences.  The role of the accountant is an important one as they aim to assist directors to reduce the noise and to avoid it becoming a massive distraction to running their business.  They should help identify the main issues and then direct them to someone like dVT Group to help them recover and get back in control.  But first to the accountant and then us if necessary.

 

We have close relationships with accountants and work with them to help the business owners.  We do not poach clients but in fact they are made more robust which helps not only the client but also the accountant.

 

This works as accountants are caught up with the day to day matters and have many clients to service, so they do not necessarily have the time needed to devote the attention required to efficiently deal with these matters and the urgency of identifying the best course of action for their clients.

 

Our success has come from our commitment to getting the right outcomes.  When somebody comes to us our approach is to start with the real issue, identify the alternatives, and work out a practical solution.  We don’t point the finger or criticise!

 

 

The boiled frog syndrome:

The time to get help is a line that is not always clear as there are a lot of elements of ‘you don’t know what you don’t know until you realize you don’t know it’. In the ideal world the client talks with accountants who are there to listen to help determine where that line is and when they should be using an expert in the field.

 

It’s like the boiled frog syndrome?  If you took a frog and put it into a pot of boiling water, that frog would jumped straight out, like any reasonable person would do. But if you actually put the frog in a pot of cold water and then slowly turn the heat up, it happens so gradually that the frog does not realise and ends up being boiled.

 

Hence, the accountant’s role of actually identifying when it’s time to hop out of the water and suggest it’s time for the client to speak to someone (like dVT Group) is crucial.  Coming together to go over the situation and using our expertise in this area, we can assist by quickly summarising the situation and what options and alternatives are available.  Remember… “when something’s broken, it doesn’t get better by itself”.

 

 

So just to recap, business owners need to have good financial information, understand what they mean and how much it costs to actually keep the doors open.  They should also know the key drivers of the business and how to be aware and manage overexposure.

 

For accountants, if you feel your client is showing signs of distress, have the conversations, drill a little deeper and seek expert opinions and advice sooner rather than later.
Sooner rather than later gives you alternatives and alternatives gives you a greater chance of success.  It is possible to come out through the other side stronger than what it was before you went in.

 

At dVT Group we don’t do traditional accounting work and do not poach clients from accountants.  We like to collaborate to add value to pass on to clients.  Antony says… “Collaboration is a big word for us – we like to find people that have similar value sets to what we do and we find that when we collaborate together, everybody succeeds and when everybody succeeds everyone is happy. It’s not a complicated formula but one that has worked really well for us for the last couple decades”.

 

If you would like more information, please call Antony de Vries (or any one of our 5 partners) at dVT Group on 02 9633 3333 or if you would like legal advice please call Joanna Oakey at Aspect Legal on 02 8006 0830 or visit our websites dvtgroup.com.au or talkinglaw.com.au.

In the meantime, we hope you take the time to enjoy this podcast (27 mins) and that you get some useful tips of what to do to recognise trouble brewing in business before it’s too late.  Please click on the link below.

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