Identifying risks building within your business
Is Your Business Becoming Complacent? A couple of bits of news really piqued our interest this week and got us thinking. The first, a survey by CPA Australia into the effects of Covid on Australian businesses. The findings were from a survey of over 4000 Australian businesses. Its conclusions included, that only 41% of businesses do not expect growth this year. One of the reasons cited for this lack of growth, was the reluctance for Aussie businesses to invest in digital technologies. It found that during the Covid months, only 36.1% of those businesses made any changes within their business during those times.
Some of the key findings. Aussie businesses (in comparison to other Asia Pacific markets) are least likely to:
“Begin or increase online sales during COVID-19”
“Use social media for business”
“Invest in technology in 2020”
“Profit from their investment in technology”
“Least likely to review cyber-security…”
Considering the various State lockdowns, Increased prevalence of Cyber attacks on small businesses, (see for instance Australian Cyber Security Centre), and social media prevalence, we find these findings deeply worrying for the future. Has Australia had it too good for too long and businesses sleepwalking toward problems?
Not Just A Lack Of Investment
Worrying as this is, it’s not just a possible lack of digital investment that is creating storm clouds on the horizon. Another article we recently read, by Charles Goodhart, Manoj Pradhan (2020) cited a number of factors arising from the pandemic, that will “inevitably” lead to significant inflationary pressures in many economies. Factors cited included the massive economic and fiscal stimuli that many governments have undertaken. Supply chain difficulties as the pandemic eases were also cited, along with a strengthening of and reliance on domestic labour pools.
Additional Survey Results
In another survey report, in Small Business Connections, 56% of businesses expect the economy to negatively impact their business in 2021. Interestingly enough, the main worries appear to be Covid19 related pressures. What isn’t seen, is any inflationary pressures. Also in the survey, only 38.1% of respondents expect an increase in their selling price, this implies either that input costs are not expected to rise, or that these input cost rises will need to be absorbed with reductions in gross profitability.
If Goodhart and Pradhan’s assertions come to pass, and remember similar worries were abounds after the GFC, then this could arguably create difficult trading conditions for many businesses in the coming 12 months or so. So, Is Your Business Becoming Complacent? If so, how will this relate future problems and risks within your business, which could be exposed by a higher inflation economy?
Looking For Signs Of Complacency Risk Within Your Business
So, with this in mind, and you being the responsible director you are, Is Your Business Becoming Complacent? Luckily for you, there are a number of key indicators you can consult, and identify in plenty of time before they become a critical risk for your business. But where to start?
A good place to start, is your Asset Turnover Ratio. What is the ATR? Well, think of it this way. Are the cash and assets within your business working as hard as they may be? Think of the ATR as the business return from each unit of asset deployed within the business. Assets are things like cash, machinery, technology, and other revenue generating items. Now a number on its own could be pretty meaningless, but all businesses should show a figure above 1 (Dollar or pound depending upon your currency). What this means is that for every dollar or pound invested in your business, whether that is cash sitting in the bank, or in plant, equipment, or technology, is generating more than a dollar or pound in sales revenues.
It is important also to compare to multiple periods, either monthly, or annually to ensure that this is not declining over time. If it is declining, this could mean a number of things. I’ve included a little decision tree to understand where complacency may be creeping in from should your ATR be falling:
Asset Turnover Ratio Flowchart
Let’s assume that your sales revenues are remaining steady or even growing. If this is the case, It could mean that your plant and equipment is ageing, and not performing as optimally as it could be, or your cash reserves are just sitting there in the bank, and in these days of low interest days, basically providing a sub standard return. Could this cash be invested in greater productive areas?
We touched upon this but is your machinery, or technology getting beyond its sell by date and in such a rapidly changing world, not able to keep up with client demands? Is it causing blockages within supply, sales, or delivery areas of your business? It could be as simple as slow and outdated computer systems, or bottlenecks in supplies or delivery systems.
Returns On Assets And Equity Checks
Another measure to check, is your return on assets and equity. Again, is this declining over time? Cross check that input costs are not rising, with a check of your gross profit margins, and also check your net profit margins. If net margins are declining, this could indicate many things, not least your overheads are rising disproportionately to your revenues generated and could indicate over staffing, or reduced staff productivity.
To further check this, assess revenues and overheads per staff member. Are revenues falling per employee? No, then how about expenses per employee, are they rising. This could be a strong negative indicator. Now, financial numbers will not tell you exactly where a problem lies, your investigations will be needed for this, however, they can help pinpoint areas of concern. Are processes falling over, and you are needing to bring in extra staff. If this is the case, then the revenue per employee figures will be declining too.
What we have discussed, is that with the results from a number of surveys recently, the lack of investment in digital capabilities and possible inflationary pressures, businesses should always look for signs of inefficiency within their business. In answering Is Your Business Becoming Complacent? Luckily, there are platforms, such as Jazoodle, that can do this number crunching for you and provide insights into any signs of complacency that may be creeping into your business
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