Challenging Realities Ahead For Small Business Sector

Challenging Realities Ahead For Small Business Sector

Falling confidence, fragile operating conditions and the shadow of inflation are just some of the economic challenges stacking up for small business owners in 2022.

This year’s Pulse Tracker from The Alternative Board tells the story of small business survival through the second year of the pandemic and, while the strong, steady beat of the small business pulse remained consistent through the first onslaught of COVID19, it has now quickened with anxiety as the realities of the pandemic’s midpoint move into view.

The Pulse Tracker charts the progress of small businesses and their owners through a year that has seen them grapple with employment issues, cash flow crises, supply chain breakdowns, port disruptions, rising costs and other problems.

Alfredo Puche, Managing Director of The Alternative Board said: “Confidence remained high until July, despite the many obstacles and uncertainties but the Delta outbreak cracked that confidence with many business owners who had resolutely worked their way through the highs and lows finding themselves exhausted – and some have reached breaking point.

“July also saw the first red flags with business owners warning their prices would have to rise in response to higher input costs. The prolonged lockdown in Auckland plus restrictions across the rest of the country eroded confidence even further, with many feeling it was time to sell up and move on”.

The latest phase of the pandemic is crunch time for many, taking some by surprise with its severity and cementing the view that doing business is likely to get tougher.

With the end of the year in sight, owners are analysing the potential scenarios 2022 might deliver and planning how they will cope. Inflation, rising interest rates, worsening supply chain issues, the implementation of vaccination policies plus the advent of a new variant have fuelled the uncertainty clouding the months ahead.

The Pulse Tracker tells this year’s small business story, as seen through our quarterly Pulse Check, which provides ongoing insights into how owners have managed during 2021, where they are now, and how they will tackle the challenging realities ahead.

The Alternative Board supports small to medium-sized businesses and their owners through advisory boards consisting of other local business owners, expert one-on-one coaching, a suite of business planning tools and business mentoring. The Pulse Check is a quarterly monitor of the sector and the Pulse Tracker aggregates and analyses the research results for the whole year. Each edition of the Pulse Check has a confidence level of 90% and a 5% margin of error.

You can download a copy of the tracker report here.

We will continue to check the pulse in 2022 with the next edition scheduled for mid February.

Each Pulse Check has had a confidence level of 90% and a 5% margin of error.

What’s the Forecast? How to keep a weather-eye on your Financials

What’s the Forecast? How to keep a weather-eye on your Financials

I was talking to a business owner recently who was worried what her end of year results would look like after the pressures of a global pandemic, economic uncertainty and operational constraints had had their way – and she was hoping that somewhere there would be an extra 100k to pay off the mortgage.

We talked through her business plans and goals and decided the right place to start was with a financial forecast so, equipped with her profit and loss, balance sheets for the last three years, a whiteboard, laptop and two large cups of coffee, we settled down to cast a weather eye on her financials.

We discussed the previous three years’ revenues, how COVID19 had affected one of their product lines – and forced them to create two new ones. Then we created a monthly sales forecast per product line. At this point – and very sensibly too – she asked me how she could forecast what she was going to sell so first we examined the different product lines, their gross margin, analysed market demand, production capacity and last – but not least – which product they enjoyed the most. Then we looked into production capacity and her wish to grow the business sustainably.

She decided to split the revenues of their four product lines as follows: 40% for the highest margin and enjoyable one, 25% for the second and 20% and 15% for the others. Thinking also covered the efforts to improve processes, increase capacity and get new customers, so she decided to increase the revenues every quarter by 10% for the two top products, maintain the third and reduce by 5% the lowest margin product line. Pricing also needed consideration and we decided to increase by 5% the prices of the first two lines every six months and once per year for the other two. By this time we had finished our coffee and had some sales goals set for the business.

But more caffeine was needed as we then had to look at the resources necessary to produce and sell the lines. We started with the Cost of Goods Sold (CoGS) or materials and subcontractors costs and estimated an increase of their buying cost of 2% per quarter. With Revenues and CoGS to hand, we could calculate her Gross Profit (GP) by subtracting them and comparing it to the previous year. All looked good, with an increase from 76% to 78%, which meant more money available for paying salaries and expenses.

Next was Direct Labour (DL) – the people who produce the goods. Our previous calculations made it easy for her to determine the number of hours and people needed and it was evident she would need two new employees in the third quarter. But when we calculated the Contribution Profit (CP) over the months, subtracting the DL from the GP we saw that adding both employees at the same time would affect the CP too much, so we delayed hiring the second resource for two months.

Gradually, we moved through Operational Expenses (OE), including Indirect and Administrative Labour (IL), expenses such as the lease costs, power and marketing. To achieve the new sales targets Mary thought that a new sales representative would be needed and as training was key to doing the job well, she decided to add that resource in the first quarter of the year. Subtracting OE from the CP we arrived at the Operating Profit (OP).

Then Non-Operating Expenses (NOE) and Non-Operating Incomes (NOI) were entered into the Forecast and the Net Profit (NP) calculated. At the start of the year it looked a bit low due to increased labour costs but as it was not below the new break-even point of 10% NP and, Mary was achieving her mortgage goal, we decided to go ahead with that configuration. The financial forecast was finished! Mary now had a plan with clear goals and deadlines for her and her team, so she was able to return home feeling more confident.

Forecasting can seem overwhelming – and confusing – at times but the good news is that some of the tools available such as Numereyes can be a powerful and easier way of working out where you are with your business – and charting where you want to go.

Americas Cup shows innovation is a process

Americas Cup shows innovation is a process

As we marvel at the speed and agility of the four America’s Cup teams on Auckland’s harbour this weekend, it is interesting to reflect on how they got there and how they continuously innovate and improve.

To innovate you need an open and collaborative process and sometimes, businesses of all types rest on their laurels and forget the creativity and passion that got them started. Many years ago, Edward De Bono developed the Six Hats thinking process to encourage productive discussion and innovation in organisations, rather than blame or arguments. The Thinking Hats take away ‘right and wrong’ and encourage people working in a team to take different views.

First is the ‘Blue Hat’ that facilitates or conducts the process and keeps the team on track.

The ‘White Hat’ analyses – for example, it produces the engineering data which helps the high performance teams work out how to get the boats to go faster.

The ‘Green Hat’ is the creative hat full of alternative ideas – who else would have thought of leg-powered bicycle grinders on our boat in Bermuda?

The ‘Yellow Hat’ is the sunshine – full of optimism, it looks for benefits. In our Bermuda bicycle example leg muscles are larger than arms. This gave the AC50 grinders more power to supply the hydraulic systems which raise and lower the foils and pull in the huge wingsail.

The ‘Red Hat’ is the intuition hat, driven by emotion. “My gut feeling is this will or will not work.” Intuition is often built on complex judgement based on years of experience and may be an art rather than a science.  Boatbuilding is an art and it is worth reflecting that, in business, restructuring often fails because the human element, the emotion, is not properly taken into account.

The ‘Black Hat’ is the caution or critical judgement hat. Engineers try to make sure the loads on these boats are safe. Get it wrong and death is a real possibility. However, imposing too much health and safety too early can kill creativity.

The boats we see in January and February will be very different to those we see this weekend. The ‘Blue Hat’ will oversee continuously trialing and optimisation on the water – proof that innovation is a continuous process.

As a small business owner, you’ll be wearing many hats – De Bono’s colourful collection and the Captain’s Hat too, as you steer your enterprise through the choppy waters of 2020 and beyond. A start up business is often born from a Green Hat creative idea, or from an optimistic Yellow Hat applying someone else’s crazy thinking. Bridging the ‘valley of death’ and not running out of cash in a start-up requires a big Blue Hat to navigate uncharted territory. Often it takes many years – and continuous innovation – to get your business model right.

I am currently working with a customer whose Black Hat thinking began an innovation process, building an automated system that manages lead generation and marketing through to sales, operations, accounting and pricing. Any information technology system implementation requires all the hats to get it to work, and because of the new automation his net profit margins are now much higher than his competitors.

As your business matures, it is easy to become stale – competitors whittle away your super profits and you continue to cut overheads. If you look at breweries, beer is in decline, and they have had to develop or acquire new categories to achieve growth or sustain profits. Innovation and creativity is the lifeblood of your business and is underpinned by your passion for what you do. Keeping your creativity alive is essential, as is innovation because, if you stop innovating or let your creativity stagnate, you can end up like Kodak.

Kodak was so blinded by its success in selling film it completely overlooked the disruptive potential of the digital camera invented by Steve Sasson, one of its engineers, in 1975. However, the real disruption occurred when cameras merged with phones and people shifted from printing pictures to posting them on social media. Kodak missed the trend and had to deal with the resulting consequences.  

So remember as you watch the boats fly through the harbour this weekend, every captain must innovate, be prepared to change course and adapt – or run the risk of losing the race.

How do you grow your employees during a skills shortage?

How do you grow your employees during a skills shortage?

Skilled workers are getting harder to find – as our Spring Pulse Check revealed. The big question is how do you keep your employees happy and engaged so they’re not tempted to head somewhere new?

In pre-COVID times a pay rise might have been just the thing to keep them onboard but as times get tougher that may not be feasible. How do we tackle this tricky topic in these difficult days?

Pay and conditions are top of the list for many employees but in today’s world people look for more from their employer including the opportunity for personal and professional growth. Excellent internal communication is vital to ensure your employees know what is going on and that they feel listened to and understood. Small businesses frequently report that their staff are like family but sometimes, as can happen in any family, people don’t talk to each other enough and problems arise.

All businesses – small or large – must remember that while employee engagement is important, the employee experience is now a critical consideration. The employee experience has a number of different aspects, internal communications being one, with the others including training and development, recognition of their work, how change is managed, flexibility and a sense of purpose.

You may not be able to provide a pay rise at this point in time but the other aspects of the employee experience are within your grasp.

Focus on training and development and, again, if budgets are tight, look for help and support through schemes like the Regional Business Partner Network. Communicate constantly – keep your employees briefed on the changes and challenges the business may face and celebrate the wins. Recognise their efforts – it could be as simple as publicly acknowledging a job well done – but let them know you appreciate their skills and abilities.

After our year of working from home, working through disruption or not working at all, we all understand the need to keep people engaged when the organisation is operating remotely and there are many approaches to help with this but don’t forget to maintain the good communication habits you cultivated during the crisis and stay connected to your employees.

If you find you can’t recruit someone who has the skills necessary to support your business look to your existing staff – there may well be someone already working for you who is willing to grow and is capable of doing the job but they will need you to invest in the extra training or development to undertake the role and, of course, pay them appropriately for their work. 

Above all, be a trustworthy employer. Your employees will be looking to you to lead them through this period of time and effective communication, a good employee experience and a demonstration that you care will help keep your ‘work family’ together and growing happily.

Small businesses look beyond COVID-19 with confidence

Small businesses look beyond COVID-19 with confidence

For the third month in a row, small-to-medium size businesses outside the hard-hit sectors of retail, tourism and hospitality are proving confident, optimistic and actively planning for their future beyond COVID-19.

Our September Pulse Check shows exceptional levels of confidence and optimism with business levels booming or the same as last year, relatively unchanged levels of employment and sustained sales.

More than 80% of you are confident you’ll make it through, more than half report sustained or improved business levels, nearly two-thirds are optimistic about the next twelve months and 65% are already working on future strategies and getting business plans in place.

On the downside, 2020 has taken a toll with business owners feeling exhausted and that’s a real concern. Government support and business advisors have helped get through the difficult days of 2020 but despite weathering exhaustion, lockdowns, alert level changes and varying levels of uncertainty, you’re not giving up and have your head down, planning your way to the future.

For some, the forthcoming election, mainstream media stories and government policy are reducing confidence, while for others, their own resilience drawn from past experience, government policy, and the thought of open borders is a confidence booster.

Stephen James observed: “Our members are, for the most part, outside the sectors acutely affected, such as retail, tourism and hospitality. It may seem that member confidence levels and optimism are at odds with other commentary but our small business owners are efficient and resilient because they have to be. Small business owners regard their employees as family, do their utmost to retain them and are able to adapt and evolve business practices swiftly with the right support, even among those hardest hit.

“It’s heartening – and speaks volumes for business owners – that so many have got through with relatively unchanged levels of employment, due in part to the government support people have  turned to and a willingness to change where necessary.

“One of our priorities will be to help business owners cope with the high levels of exhaustion they’ve reported. We see this as a danger area as, no matter how resilient they may be, working through an ongoing crisis is hard and it is draining. Supporting our business owners helps them to help their business, so developing strategies and solutions to what we know will be an ongoing challenge is an area we will be working on with our boards and through our coaching sessions”.

The September Pulse Check surveyed 266 of our members and associates between September 18 – 27 with a confidence level of 90% and a 5% margin of error. You can download a copy of the results in full here.

The Alternative Board conducted the September Pulse Check survey of 266 of its members and associates between September 18 – 27 with a confidence level of 90% and a 5% margin of error.

We’ve Done It Before – We Can Do It Again

We’ve Done It Before – We Can Do It Again

A sudden slip into Alert Level Three, the blast of the emergency ‘COVID’ warning through our phones and once again we’re into the balancing act of keeping our businesses moving in exceptional circumstances.

Last month our Pulse Check results told us how adaptable and flexible New Zealand’s small business are, with business owners altering operations and changing practice in order to survive the challenges that 2020 has thrown at us all. Just as we have rolled out our August Pulse Check – which you can access here if you would like to participate – the beat has changed again and, in Auckland, we are facing at least three days at Level 3, probably more, with the rest of New Zealand parked up at Level 2 for the time being.

We asked our Auckland team for their thoughts on the current situation and their advice was simple — we’ve been here before, rely on past experience and know that it will pass.

The Alternative Board’s managing director Stephen James said: “Knowing it will pass, spend some time addressing a few scenarios. For example, if Level 3 lasts, as announced, for three days what do you need to do? Or, if it remains in place for two weeks or if Level 4 is declared and we have full lockdown for an indefinite period — what then? Develop plans of action for each scenario and communicate these to your staff and stakeholders.”

Scenarios are very helpful when it comes to managing uncertainty as Alfredo Puche explained in his recent blog post. Other helpful advice is to be found in Gordon Stuart’s tips on surviving a recession and Karen Van Eden’s thought-provoking piece on thriving in times of uncertainty.

Whatever your approach, remember that The Alternative Board is here to help you, the business owner, manage and grow your business regardless of circumstances — and we are all here, ready to help you.

As Karen says: “We’ve done this before – together we can do it again. Stay safe, stay well.”

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