November 2023 Issue

THE INNOVATION JOURNEY REQUIRES PLANNING

Continued from October’s edition

Innovation Requires Budgeting

Budgeting is part of the “Predictive Accounting Process” which is very important for all business operators but in particular for businesses that are contemplating undertaking the “innovation journey”.

Why?

Business operators need to know where the funding for the business is going to come from and what the end result of research activities, going through the patenting process, focus groups, estimating costs, securing funding by the issue of shares, will be.

This is the process that most people undertaking and completing the “innovation journey” have to go through.

It all starts with “strategic planning” – what is the concept – what is the idea? Have you researched that no one else has already registered this process somewhere in the world?

“Budgets” need to be thought through – you need to visualise the work that needs to be undertaken and who can undertake that work and at what cost.

What expenses are going to be incurred relating to rent, power, telephone, professional fees, supplies for the research and development activities?

The “Cash Flow Forecast” is where all of this information is brought to account to determine whether you are going to have enough money to fund the innovation process until you generate income from sales.

The “Cash Flow Forecast” will highlight the funding shortages. The Directors then need to examine the forecast shortages to see whether alternative strategies can be implemented and if not will have to give consideration to either borrowing the funds or attempting to raise capital direct from the public.

The “innovation journey” is not easy, but it can be very rewarding, but it needs to be planned!

If you would like to have a discussion about the commencing an Innovation Journey, please give us a call on 1800 232 088 or send an email to or visit our website www.towersbusiness.com.au.

GOALSETTING IS VITAL!

If you are pursuing a strategy to for your company to be committed to “Scaling up” it is important that your VISION has been divided into separate goals.

If you have an objective to raise capital to assist in funding the growth process, Investors are seeking companies which exhibit a strong understanding of the need to create real value for the company and not just to generate quick returns.

Investors are trying to determine whether the Directors and Leadership Team have the required skills and stamina to pursue the goals that the company has set.

Goals need to be set on the basis of whether they are short term, long-term or periodic and these goals then need to be incorporated within the task allocation allocated to a Leadership Team Member for follow-through and achievement.

Investors like to see Goals outlined in a format:

• What are the “Exit Goals”? Investors in a start-up company or a company undertaking the “scaling up” process are generally not interested in being a long-term investor. They want to know whether the Directors have set a policy to achieve an exit by a set time.

• “Next Month’s Goals” – what needs to be completed by the end of the next month? This is obviously a high priority!

• “Next Quarter Goals” – this is a normal planning process for a Leadership Team – what is to be completed in the next quarter?

• “One Year Goals” – this is normally a larger project that is going to take a year to complete. The Leadership Team should implement monitoring measures which will ensure that the project is completed on time and that regular updates on progress are submitted to the Business Review Meetings each month.

• “5 Year Goals” – whilst this appears to be a long time – time can go fairly quickly. The Directors and Leadership Team should have a clear strategy on the results that they would like to achieve over five years. It is advisable to implement a reporting process to ensure that the Directors are kept informed of progress.

WHAT DOES IT MEAN?

Creditors’ Turnover

Is the average number of days taken to pay creditors. The calculation is:

Annual purchases by credit divided by 365 = average daily credit purchases.

The creditors’ balance at the end of the month is divided by the average daily credit purchases = creditors’ days outstanding

Example:

Annual purchases by credit = $1,345,000

Daily credit purchases = $3,684

Creditors’ balance at the end of the month = $182,000

Creditors’ days outstanding = $182,000 divided by $3,684 = 49.4 days

Current Assets

Are items owned by the firm which are usually turned into cash within the normal operating cycle of the business (usually twelve months). Example of current assets are cash, sundry debtors, stock, deposits and cash floats.

Current Liabilities

Those amounts owed by the business which in the normal course of business will normally be repaid within the operating cycle of the business (usually twelve months). Examples of current liabilities are:

• bank overdraft
• amounts owing to sundry creditors
• accruals
• provision for employee benefits due now or within 12 months
• loan commitments due for repayment in the next 12 months
• income tax payments due for payment in the next 12 months

CASH FLOW FORECAST IDENTIFIES FUNDING SHORTFALLS

In the “Predictive Accounting Process”, Budgets are prepared for each operational activity and key drivers are prepared for the subaccounts relating to debtors, creditors, work in progress, research and development, capital expenditure. The financial implications of the Budgets and the various key driver accounts are then reflected in the cash flow forecast.

This is a component of a business that has a clear concentration on the future. In a larger business, this activity is a joint effort by the CEO and the Chief Financial Officer (CFO). The CEO is the visionary, whilst the CFO’s role is to incorporate that vision into the financial forecasts.

SMEs should be no different. However, most SMEs will not have a full-time CFO. This is a service that our accounting firm can provide.

One of the key indicators that cash flow forecasts reveal is whether the SME is going to run short of money – every CEOs nightmare!

Raising capital from the public is an option that is available to every small company in Australia.

Every company can utilise Section 708 of the Corporations Act to raise up to $2 million in twelve months.

Young companies that were involved in Research and Development have been given a special advantage to raise capital, as there is an incentive available to investors in the Early Stage Innovation Company capital raising process.

Other companies with a turnover of less than $25 million annually are able to raise up to $5 million in a twelve month period from the public, by utilising Crowd Sourced Funding Equity Raising.

Arranging suitable funding is important for all businesses.

YOU NEED TO PLAN TO START A BUSINESS

You would not go on a cross-country holiday without looking at a roadmap to work out where you are going to stop and what sightseeing activities are available on the way. In 2023/24 with higher interest rates and high levels of uncertainty around the world which are causing supply chain difficulties there are a lot of matters which need to be taken into account in planning your business.

Planning to start a business is very important. You need a plan that you have sat down and thought about and that you have given some thought to “contingencies” that could occur. Over the last few years we have all experienced severe difficulties relating to working from home, supply chain difficulties, higher prices caused by Russia’s invasion of Ukraine and now the war in Israel.

These difficulties have highlighted the necessity for a potential business operator planning to start a business to really think through what could happen to the business and your potential customers and for you to build “contingency plans” into your overall Business Plan.

Your Business Plan should be written down, not just be in your head. By writing the plan you have the opportunity to revisit it, make changes, discuss it with your family, friends, colleagues and your accountant. In the plan you should consider:

• How is the business going to operate?
• Where are you going to source raw materials or products for your business? If the source is overseas have you factored in the potential of “supply chain difficulties”?
• If you are sourcing raw materials or stock overseas should you try to find alternative suppliers in a different part of the world so that if there is a problem with your preferred supplier making deliveries to you that you might still be able to obtain supplies from an alternative supplier who has not been hindered by wars and conflicts?
• Where is the market for the products and services that your business will produce? If it is overseas is there likely to be delivery difficulties for you to supply your customers?
• Have you given consideration to the team members that you will need to engage? What skill levels will these people need? Have you made enquiries of employment agencies, TAFE colleges, government organisations to determine the availability of people that fit your team member characteristics?
• What type of skill development training program are you going to require within your business to up skill your team? Who will deliver this training program?
• What is your Marketing Plan built around social media, your website and local media?
• What are your strategies relating to how sales are going to be negotiated with potential customers?
• What are the working hours for this type of business – will these hours suit you and your family?
• What type of facilities do you need to operate this business? Have you made enquiries of real estate agents as to the availability of suitable premises that comply with the local government town planning requirements?
• What other “contingencies” have you thought about – have you built them into your plan?

If you are planning to commence a business, it is important that you get accounting and legal advice before you make any agreements or sign any legal documents. We can assist you with a customised Business Plan to suit your business objectives and discuss with you the implementation of business systems which will assist your business to survive.

Good luck with the planning of your business venture!

PORTFOLIO ALLOCATIONS ARE IMPORTANT!

You will find that the management of the business benefits from the preparation of specific responsibilities for the key portfolios within your business.

Portfolios relate to specific tasks that are outside the mainstream day to day activities a person might normally perform. The portfolio responsibilities need to be documented as a specific work allocation with an indication as to who the person responsible for the portfolio is, who they report to and how often are they required to report.

Most businesses will have 40 – 60 portfolios that should be allocated to the Leadership Team and team members, so as to ensure the efficient operation of the business and not having everything being the responsibility of one or two people. That is not good business management.

Consideration should also be given to the appointment of “replacements” if a person allocated to the portfolio is absent from work due to illness, holiday, study leave, long service leave etc.

Some of the portfolio allocations that you might want to consider if your organisation include:

• Premises Suppliers – raw materials
• Shipment of raw materials Suppliers – stock
• Ordering of stock Shipment of stock
• Receipt of stock Stock control
• Dealing with suppliers Marketing
• Social media Website
• Sponsorship Advertising
• Marketing promotion Customers
• Customer relationship management Customer advisory committee
• Ongoing communications with customers Team members
• Hiring of team members On-boarding of new team members
• Team training Corporate governance
• Public relations Directors duties
• Board of advice coordination Environmental issues
• Legal Company Secretary
• Financial Regular financial accounts
• Insurance Taxation
• Debtors Creditors
• Budgets and Cash Flow Forecasts Financiers
• Competitors Competitors files
• Software development Research and development
• Protection of intellectual property Patent attorney liaison
• Computers Risk management
• Shareholders/partners Security of data and website

There are many other portfolio allocations which could relate to specific businesses. If you would like to have a discussion with us relative to suitable portfolio descriptions for your organisation, please don’t hesitate to contact us.