29 May 2023

Ensuring profit margins and safeguarding SME owners/directors


6 min


Dear client…it’s time for your annual health check-up.

Several traits are common among successful business operators, regardless of industry, structure, and size. One of the most important is expecting the business owner conducts regular reviews of the business using clear and accurate information. And that brings us to the question: “How many clients actually conduct regular business health checks?”

While a rhetorical question, the reality is, despite your best intentions to support your clients, there will probably be a few clients who don’t see the value in it or are simply so time-poor that it doesn’t fit within their list of competing priorities.

Based on our experience, this is the perfect environment for financial problems to fester and eventually spread unabated which, in turn, could put the business’s survival at risk, not to mention potentially exposing the business owner’s personal assets.

Here are some key areas which, given the current environment, we believe should be front of mind as part of your client’s regular business health check-up:

  • Monitor margins.

  • The bank balance is negative, and debtors are going through the roof.

  • How does your client’s business compare with the opposition.

  • Tax compliance.

  • What’s going to happen in the future?

  • There’s more than financial statements to look at.

Monitor margins

With inflation running at a generational high, many SME’s margins are under pressure compounded by COVID restricting price increases. Several businesses we reviewed over the past few months are trading at a loss simply because its price points are not aligned to higher input costs. When margins aren’t maintained, those businesses become non-viable and require major price rises just to stay afloat.

Solution: Checking and adjusting margins regularly allows for smaller price increases and prevents customers being shocked by major price hikes.

The bank balance is negative, and debtors are going through the roof

With a tighter economy, debtors are taking longer to pay their debts, putting pressure on your clients’ cash flow. We are seeing sales maintained but significant growth in outstanding debtor days. There are plenty of promises to pay or if you supply me: I will have the cash to pay your last bill. These turn out to be hollow promises in almost all cases.

Solution: Your clients must have a proper and highly commercial debt collection policy. Follow up debtors the day they become overdue. Stop supply if a debtor hasn’t paid, set credit limits. Have your clients get cash upfront whenever possible.

Has does your client’s business compare to the opposition

Most businesses don’t know how they perform against competitors. They go on gossip or gut feel, neither tends to be that accurate. We recently reviewed a business that thought they were at a premium price point only to find out they were only charging about 60 percent of what they should.

Solution: Check your client’s businesses against industry benchmarks. Some industries produce their own benchmark which tend to be a broad range of specific benchmarks for that industry. The Australian Taxation Office (ATO) also produces benchmarks for all industries based on ANZSIC code[1] on tax returns. The ATO benchmarks, while its information is limited, cover all business classifications.

Tax compliance

We see clients not lodging their BAS and income tax returns due to lack of cash to pay the amounts due. This leaves them potentially exposed to a lockdown Director Penalty Notice and a personal liability for those debts as a director. The second problem with not lodging their BAS is it prevents eligibility for small business restructuring (which requires up to date tax lodgments as a precondition).

Large tax debts are unfortunately common for the businesses we see and are a clear sign of other issues within the business not being addressed.

Solution: Ensure your clients lodge BAS and income tax returns on time. Encourage them to open a separate tax bank account to deposit tax funds as they come in. Determine a combined GST and tax rate estimate to allocate from sales. When they pay their staff, set aside the PAYG withholding. If for whatever reason they can’t pay the BAS and income tax liability on time they should still lodge to avoid the risk of a lockdown director penalty notice.

What’s going to happen in the future?

Most of the businesses we see don’t do budgets. The first time they realise they have a problem is after it has happened and often making it too late for you to help them avoid any issues. Similarly, business owners fail to monitor their business’s trends. Simply graphing monthly sales, gross profit, overhead, wages, and net profit over recent years will give a very clear idea of the business’s direction.

Solution: Prepare annual budgets and review on a regular basis. If the budget shows issues for the year ahead, address those in the budget so they don’t occur. Look at the business trends to determine future direction and the required actions.

There’s more than financial statements to look at

Too many SME businesses don’t look at information that will help them understand their business. They don’t monitor their business’s key drivers and miss out on the opportunity to act if needed. It’s often hard to get them to review financial statements let alone anything else. Key drivers are not always financial information.

Solution: Produce a monthly scorecard that shows the business’s key drivers and what is happening. Act on the areas not meeting expectations as soon as they show up.

Giving your clients business an annual health check-up will lead to a financially stronger client with lower risk.

If you would like assistance with giving your client an annual health check-up, please call your usual Worrells contact to discuss how we can assist you and your client. 

For information on the director penalty notice regime, go to our knowledge base: click here

[1] Australian and New Zealand Standard Industrial Classification ( ANZSIC ) is a standard classification developed by the Australian Bureau of Statistics for use in Australia and New Zealand for the analysis of industry statistics.

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