So I slow down and review what I have done to make sure it looks right.

A quick test for you:

You have just five seconds to answer these simple questions:

1. What do cows drink?
2. What’s the opposite of ‘not in’?
3. How much dirt is in a hole measuring two metres squared, and three metres deep?
4. What weighs more – a ton of concrete or a ton of feathers?
5. How many of each animal did Moses take onto the Ark?

Time’s over.

And the answers:

1. Water, not milk
2. ‘In’, not ‘out’
3. None – it’s an empty hole
4. The same – they weigh a ton each
5. He didn’t. It was Noah.

How many did you get correct?

Not all I’d guess because you were rushing.

So slow down.

A final 10 second test to see if you have slowed down enough

How many letter Fs are in this sentence …  Fifty florins for a flagon of fluff Fred?

How many did you see? Five or Six?

There are ten.

So slow down more and get it right first time.

The post Slow Down and Stop Making Mistakes appeared first on Parfrey Murphy.

Shares are issued at a day one value. When a company reaches an agreed level of future growth (which is known as the “hurdle”) the shares will have an agreed value. This amount can be either variable (based on a percentage) or a fixed amount.

The shares are normally available for purchase at a nominal or small amount meaning only minimal outlay by the employees at the outset.

Flowering shares can deliver business growth. They can also help a company retain key talent as the shares only deliver if the employees stay with the company.

Any proceeds earned by the shareholders from the sale of the flowering shares will be taxed at CGT rates not at Income Tax rates.

Flowering shares should help align the employee’s interests with those of the owners of the company.

There is no limit to the amount of shares that can be issued under the flowering share plan.

Leaver provisions can be built into the rights attaching to the flowering shares. This will prevent ex-employees from retaining an interest in the company.

Flowering share plans are flexible and can be adopted to a variety of situations.

If you would like any advice or assistance in relation to the foregoing please do not hesitate to contact us.

The post Flowering Shares appeared first on Parfrey Murphy.

A big mistake that many in this position make is to look for opportunities at the lowest price. But price is only one of a number of factors that must be carefully considered. Failing to consider all these factors is likely to make it much more difficult for you to be successful in your purchase.

Here are 3 such factors that you need to think about.

1. What funds am I personally willing to commit?

The answer to this question will dictate the amount of funds you’ll be able to get from other investors and finance providers.

This is because their assessment of the risk of the venture will be linked to the amount of financial commitment they see coming from you. They figure that the more you put in, the more committed you’ll be and so the more likely that the venture will be successful.

Trying to buy a business for €2,500,000 when you’re personally investing €100,000 is going to be extremely hard to achieve. Whereas if you’re looking at one in a €200,000 – €300,000 price range you’re more likely to be successful in getting finance.

2. How much help will I need after the purchase?

If you’re taking over another business there will be a huge amount of knowledge that goes into running that business. For instance, there will be relationships with customers and suppliers as well as knowledge of marketing and how the industry works.

Do you have that knowledge already? Quite likely you’ll benefit from some continuing input from the seller.

This is where it becomes important not to be fixated on negotiating the lowest price. If the seller feels like they haven’t got a good deal or negotiations have become unpleasant from their point of view, then they’re less likely to be helpful to you after the sale.

This means it’s in your interests to keep a good relationship throughout the negotiation process and it may be better to pay a little more in order to ensure that you get the support you’ll need after the sale.

3. What are your plans for the new business?

When you’re buying a business you need to consider what you’re going to do with it and where you see it going. This is important to have in mind during the buying process because it will affect how you structure the finance.

For instance, if you have plans to expand the business, but you’ve maxed out your personal funds and finance facilities on the purchase you’re going to struggle to realise those plans.

Conclusion…

As you consider these and other factors you’re more likely to settle on a purchase and a deal that will bring you the success you want.

The post 3 Things You Need To Think About If You’re Buying A Business appeared first on Parfrey Murphy.

The tendency is to think I’m new, I’m small, I can do it cheaper. But in fact there are four problems with this thinking.

1. One of the most common mistakes made by business owners is to underestimate their costs.
2. Small businesses generally don’t have the right attributes to be able to get significant cost reductions in comparison with larger and more established ones.
3. Unless you have significant sources of capital to fund your business over a long period, all your competitors have to do is drop their own prices until they’ve driven you out of the market.
4. Any cost advantage you do have is normally only temporary, as other businesses put energy into matching you.

That’s not to say it can’t be done, but just following a simplistic ‘price-low’ strategy without being aware of all the factors is likely to end in disaster.

The fundamental flaw in the ‘price-low’ thinking is that it’s not really sales that are most important to a business. It’s profit. And the prices you set can have a dramatic effect on profit.

Consider an example…

Pricing Example

Let’s suppose we’re selling widgets and our profit and loss account for the last month looked like this.

We want to know if we’d be better off by reducing prices by 10% or increasing them by 10%. So we do some market research and find out that:

• Option 1 – Reducing prices by 10% would result in a 20% increase in the quantity sold.
• Option 2 – Increasing prices by 10% would result in a 20% fall in the quantity sold.

Which option would you choose?

Most will plump for option 1. 20% more sales with a price cut of only 10% will surely be better. We gain more in volume than we lose in price so it must be more profitable.

Are they right?

Let’s check the numbers.

Is option 1 more profitable? No. In actual fact raising prices despite the fall in number of sales is €8,000 more profitable.

The business that pursues option 1 is making a loss and if that continues the business will fail. And as well as being worse off than option 2, such a business is worse off than if it had left prices where they were.

What does this all mean?

This isn’t an unusual example.

The general truth is that cutting prices may increase sales, but at the same time can have a catastrophic effect on your profit. This is because lowering prices generally means you have to significantly increase sales volumes to make more profit.

In our example, to maintain a profit of €5,000 with a price cut of 10%, the volume of sales would have to increase by 50%. That means finding 1 new customer for every 2 you currently have! Would that be realistic?

On the other hand a price increase of 10% means you could afford to lose up to a quarter of your customers and you’d still maintain that €5,000 profit. That’s a lot less work for the same money!

Of course, every situation will vary depending on your profit margins, which is why it’s so important to do the numbers.

Is low pricing an impossible strategy?

Low pricing doesn’t automatically result in less profit. There are very successful businesses out there that are based on offerings at a low price.

Henry Ford with his Model T car, Ikea and McDonalds are examples of hugely successful businesses whose strategy was based on providing products at a low price.

But, and here’s the point, they made their products available for a significantly cheaper price and so tapped into a mass market. Their sales volume increased exponentially and so although the margin between sales price and production cost is tight they’re able to turn large profits.

The key for those businesses, though, is that they clearly understood how profits work. They didn’t just reduce prices and hope that increased sales would take care of the rest.

They carefully manufactured and designed their products, services and processes to be as efficient and simple as possible. Then these much reduced costs made it possible to set the low prices that attracted a mass market of customers.

So pricing low isn’t impossible, but it’s difficult. Why?

Most businesses don’t operate in the mass market. Unless mass market domination is the aim, pricing low is usually a faulty strategy that leads to unrewarded work, low profits and often losses. And it’s best avoided.

To see the effect on your profit of changing prices download the Parfrey Murphy App (http://parfreymurphy.ie/the-parfrey-murphy-app/) and simply enter your details in the ‘Increased Profit’ calculator. The App is completely free of charge and is available for iOS and Android devices.

The post Is Pricing Low A Good Idea? appeared first on Parfrey Murphy.

The balance sheet is a vital financial document for your business so learning what it means and how you can read it can make a big difference.

What is a balance sheet?

A balance sheet tells you something about the financial strength of a business on a particular day – usually your year or month end.

It will show you all the financial assets and liabilities of the business. Assets means what a business owns or has a right to, and that can be valued in money terms. Liabilities show what a business owes to another party.

There are different ways to value those assets and liabilities. For instance, you could value a building at the amount it cost you to buy, or the amount you could expect to get if you sold it today.

There are many arguments about how assets and liabilities should be valued, which is why there are accounting standards. These help accountants to be consistent in the way they treat transactions.

Usual practice is that the values will be based on the amount paid out or received by the business on the date of the transaction. But, there can be adjustments to these values and these will normally be explained in the notes to the accounts.

Does a balance sheet show you what your business is worth?

No, a balance sheet is not designed to show you the market value of your business.

The market value of many assets can be different to their historical cost on the balance sheet. For instance, a property could be worth a lot more than the business paid for it.

Also, your business may have assets that aren’t included on the balance sheet, such as goodwill. These hidden assets are difficult to value in the ordinary running of a business, but in the event of a sale could enhance the sales amount. The converse is true of hidden liabilities, such as warranties.

It’s also important to recognise that a balance sheet is a snapshot of the business on a particular date. The snapshot could look quite different on another day. As well, things could have changed between the date shown on the balance sheet and the date you’re reading it. For example, a debtor might have unexpectedly defaulted.

In what way does a balance sheet balance?

The balance sheet is based on the fundamental truth that the assets and liabilities of a business will always be equal.

To get your head around this you may need to firstly realise that for accounting purposes a business is viewed as separate to its owners.

Imagine a business that is just starting up and its owner placing €100 in the business bank account. The business now owns an asset of €100. But at the same time it also has a liability of €100, because it owes that amount back to its owners.

Its balance sheet would look like this.

Suppose the next day the business buys supplies for €40. It’s assets and liabilities would now look like this.

Now you might be wondering why profit is shown as a liability? Profit is a good thing, so surely it’s an asset of the business.Then on day 3 the business sells all that stock for €60. Its assets and liabilities will look like this:

Well, you’re definitely right that profit is a good thing. But for the purpose of the balance sheet the question is: does the business own the profit?

The answer is no. Profit is the return on the investment made by the owners of the business so it belongs to them. Therefore, from the business’ point of view, profit is due to be back to the owners so it’s a liability. And that’s how it’s shown on the balance sheet.

What do the individual elements of a balance sheet mean?

The format of balance sheets can vary, but the most common way is that the top half deals with the various assets and liabilities involved in the business’ trade. Then the bottom half focuses on the owners’ interests in the business.

Here’s a fairly simple example.

Current Assets – These are the items that the business is using in its day-to-day trading. Typically this would include stock, trade debtors (customers who owe the business money) and positive bank balances.Fixed Assets – These are items that aren’t normally traded by the business, but are needed in order for it to function. Examples would be property, machinery or vehicles. Fixed assets may be split between tangible – you can touch them – and intangible – you can’t touch them. An example of an intangible asset would be purchased goodwill.

Current Liabilities – These are the short-term debts – due in less than a year – that the business has in its day-to-day trading. Examples would be trade creditors (money the business owes to suppliers), taxes and a bank overdraft.

Net Current Assets – This is just the difference between current assets and liabilities. This can be quite a useful piece of information.

Long-Term Liabilities – These are debts the business has that will be repaid more than a year from the balance sheet date. Typically this would be long-term loans.

Net Assets – This is the total of fixed and current assets minus current and long-term liabilities.

Share Capital – This will only apply to companies, and represents the number of shares issued multiplied by their nominal value. The nominal value is the value set per share in the company’s constitution. It has nothing to do with market value.

Profit and Loss Account – This is the total of all the accumulated profits and losses since the business started.

Shareholders’ Funds / Owners’ Equity – This is the total of share capital and the profit and loss account and represents the total interest of the owners in the business.

In the case of partnerships and sole traders you will normally see a capital account instead of the share capital and profit and loss accounts. This is because they are owned in a different way to companies.

But the principle of a capital account is exactly the same. It shows the owners interests at the start of the period, then adds the profit made and deducts any withdrawals made by the owners.

Reading a balance sheet…

Balance sheets differ between industries. For example, the balance sheet for a shop will probably show very little in the way of trade debtors because most sales are made in cash form. But a solicitor generally sends invoices to clients and then has to wait a period of time before they receive the money. Their balance sheet would include trade debtors.

To read a balance sheet you need to understand what the business trade is. Then you’ll know what you can expect to see and what would be considered normal or not.

The point of view and objective of the reader also affects how they read the balance sheet. What one person might consider bad, another might consider good.

There is, however, a general 5 point method that you can use to weigh up a balance sheet.

1. Are net assets positive or negative?

Positive is good. It means that overall the business owns more than it owes.

Negative assets means that the business could be heading for trouble unless there is some other means to support it. If you see negative assets you should immediately be asking yourself where that support is going to come from.

2. Are net current assets positive or negative?

You’re now focusing on the short-term position of the business.

If net current assets is positive this is good. It means that the business shouldn’t have a problem paying its debts in the short term. That doesn’t necessarily mean there won’t be cashflow pressure, but it is a healthy sign.

It would also be worth weighing up the make-up of current assets. Obviously there’s a difference between cash in the bank – which is immediately available – and cash tied up in stock for resale. You would expect the stock to sell, but it may take some time and may not coincide with the dates that debts are due to be paid.

Therefore it’s worth only including cash and trade debtors and seeing if they outweigh the current liabilities.

If net current assets is negative then this suggests that the business could have a problem paying its debts. Again you need to be considering how that shortfall might be met.

3. Consider how long it takes trade debtors to pay…

It’s useful to look at how many days’ worth of sales are tied up in debtors. This calculation is done as (trade debtors/annual sales) x 365.

This will give you an idea of how long the business is waiting until it gets paid. The goal for any business is to bring this time down to as short a period as possible.

If sales don’t happen evenly throughout the year then this calculation can be distorted. A big sale at the year-end might make the time look longer than it actually is.

4. Consider how long it takes to pay trade creditors…

This looks at how much the business is relying on its trade creditors. The calculation is made as (trade creditors/annual purchases) x 365.

It’s common for businesses to use the credit terms they get from suppliers as a way of helping to finance their business. So generally speaking this ratio would reflect the credit terms a business has. But businesses handle things differently. Early payment can often lead to better discounts so a business might operate on quite a short trade creditors’ days ratio.

Generally here you’re looking to see whether the business is paying creditors more quickly than it receives money from debtors. If it is then there will ultimately be cashflow problems.

5. Consider the debt level…

Total debt is the amount of short-term and long-term debt. Clearly a business that is heavily reliant on debt could have a problem maintaining repayments if trading slows down.

It’s difficult to measure this looking at the absolute figures, and attitudes to risk and different situations will alter what’s seen as acceptable.

Normally you’d calculate the debt as a percentage of shareholders’ funds. This ratio is called ‘leverage’ or ‘gearing’. Generally speaking more than 100% would be considered too high.

Conclusion…

Hopefully you’ve seen that the balance sheet is an enormously helpful tool. It’s well worth taking some time to get familiar with its features and learning how to use it to successfully manage and grow your business.

The post The Keys To Understanding Your Balance Sheet appeared first on Parfrey Murphy.

In fact, McKinsey, the global consulting firm, suggest that pricing has a bigger impact on a company’s profit than anything else.

How can you make sure you’re making the right pricing decisions that make you the most profit? Read on to gain insight into pricing anchors and then 4 tried and tested ways for you to successfully apply them to your business.

Pricing Anchors…

Anchoring is profoundly important to pricing for profit. Here’s why…

A product is never really ‘cheap’ or ‘expensive’. Instead customers actually see prices as all relative. People like to compare prices before deciding on a purchase.

For example, if you’re out shopping for a television, you’ll look at the different models and compare the price and specification of each. One might be 55 inches and cost €1500 while the other might be 52 inches and cost €1000.

In making the comparison you’d probably think the 52-inch TV is the better value option given the difference is only 3 inches. This is exactly what the store you’re purchasing the TV from want you to think! You’ve inadvertently anchored yourself to the €1500 TV so that the €1000 TV looks like really good value alongside it.

When you understand the value of pricing anchors, you can then see how important they are in tiered pricing. You’ll see how top-down pricing can be used very effectively to…

• show your buyer that you’ve provided different versions of the same product at different prices,
• while subtly driving them towards the price you want them to pay.

How then can you apply this insight to your business?

1. Collect 3-tiered pricing examples

Some of the most successful companies in the world use 3-tier pricing, including Easyjet, TripAdvisor and Starbucks. Look at how they do it and think about how this could be applied to your business.

2. Build a ‘pretend’ tiered pricing offer for your business

This should be in line with the pricing you have in place now. But put pricing anchors in place by offering one or two different pricing tiers to what you already have.

Obviously you need to consider what you would adjust in the product or service to justify the price differences.

The key is to have a top, middle and bottom price. It’s proven that buyers feel more in control if they have options to choose from. No one likes ‘Hobsons choice’.

3. Test and measure with real-life buyers.

This is very important as you’ll never know what works until you try it.

Don’t be afraid to get it wrong or worry about any criticism. All the feedback you get is good and will allow you to adjust, improve and move forward.

Once you start testing your pricing options you’ll soon begin to see which options deliver the best results for you and your business.

4. Keep testing

Make price testing something your business does regularly.

Once you’ve arrived at a tiered system you’re happy with don’t rest on your laurels. Keep testing it, changing it and making the necessary adjustments to keep your pricing sharp, your customers in control and happy and you one step ahead of the competition.

The post 4 Tried and Tested Ways To Ensure You Get Your Pricing Right appeared first on Parfrey Murphy.

If you can eliminate this concern and reassure your buyer you’re more likely to be able to convert the sale.

Eliminate those concerns by using a guarantee

This reassures the customer that buying the item isn’t the end. Their interests will still be protected post-sale.

You could think about having a guarantee along the lines of:

• “If you’re not completely satisfied simply return [the product] within 30 days for a refund.”
• “Or if you don’t find this service helpful and worth what you’ve paid, just tell us and we’ll refund you. No questions asked.”

But won’t I be taken advantage of?

Often the main obstacle to providing a guarantee is the fear that you’ll lose out and be taken advantage of.

Or in some cases a business gives a guarantee, but it’s so limited with caveats and exceptions that it stops being a reassurance to the customer.

Allowing these concerns to dominate this decision is comparable to allowing an ant to dictate to an elephant.

Business owners consistently report that very few customers proportionally actually seek to claim on guarantees. Whereas offering guarantees significantly improves their sales conversion rates.

So, consider, what do you have or do that you could place a guarantee on?

The post Using Guarantees Wins Sales appeared first on Parfrey Murphy.

A question that you probably often ask yourself is: How can I get – or stay – ahead of the rest?

The first step to answering this question is to analyse your competitive environment. This allows you to see where you currently fit in the marketplace so that you can then find ways to improve your position.

A great analysis method is to use Porter’s Five Forces.

Porter’s Five Forces…

Michael Porter, born in 1947, is a highly respected economist who has had much influence in business thinking on strategy and competitiveness.

His book, Competitive Strategy, first published in 1980 became a corporate Bible for many in the early 1980s. Times of course change and academic thinking updates – including Porter’s own – but Porter’s Five Forces continue to be relevant and are taught as standard in business courses.

Porter’s Five Forces are a framework that you can use to analyse your competition position. By considering them you can develop a strategy to take advantage of opportunities or limit exposure to threats.

The Five Forces are…

1. Bargaining power of customers

This is where your customers are powerful in relation to you meaning that their actions can have a significant impact on you.

Your customers gain power if:

• There are only a few buyers and they have a significant share of the market. For example, Transport Infrastructure Ireland (TII) will have a lot of negotiating power in purchases made from contractors.
• The customer buys a significant proportion of your output, such as a supermarket supplier buying much of what a farm produces.
• The customer is in a position where they could buy or set up a rival to you.

Your customers lose power relative to you when:

• It’s difficult, or will cause them significant cost, to switch to another product or service provided.
• You have many, different customers so that no individual customer has a particular influence. This is the case with almost all consumer products.
• You’re supplying the customer with something that’s critical to what they do.

2. Bargaining power of suppliers

Basically this is the reverse position of customer power as this time you’re standing in the place of the customer.

Suppliers are powerful when:

• It’s difficult for you to switch to another product or service provider.
• There are only a few of them supplying your market.
• They supply you with something that’s critical to what you do.

On the other hand, suppliers are weak when:

• There are many competitive suppliers for the same standardised product or service.
• You buy a significant proportion of their output.

3. Threat of substitutes

Substitutes are products or services that aren’t directly the same as yours, but could be used in place of yours.

For example, the aluminium cans used for drinks can be substituted by glass and plastic bottles. This means that the demand for aluminium cans will be affected by the prices of glass and plastic bottles.

The more alternatives that your customers have, the more pressure you will feel in terms of the price you can charge, the amount of customers you win and so forth.

4. Industry rivalry

Of course a similar thing applies when you look at competition from rival businesses that supply the same product or service.

The more direct competitors you have – and everything else being equal – the more price-sensitive your customer becomes. If they can buy the same item cheaper elsewhere then they probably will.

5. Threat of new entrants

This is to do with how easy or difficult it is for a new business to set up in your chosen market.

There are usually characteristics in a particular industry that create some sort of difficulties for new businesses. These are called barriers to entry.

You’ll often be able to identify these barriers from your own experience of how easy or difficult it was to start your business.

It may be that a high amount of capital is needed, or certain qualifications and licensing. Perhaps patents and proprietary knowledge are a barrier.

The more difficult it is to start a new business in your industry the less threat you will face in winning customers.

What next?

Having analysed your competitive environment in these 5 areas, you’ll see where your biggest pressures are. For instance, are you heavily reliant on one big customer or one big supplier? Do you find new businesses continually starting up in your sector?

Once you’ve done the analysis and got a clear picture of your current situation, you need to form a strategy for improving your situation.

Porter himself identified 3 basic strategies that a business could employ.

1. Cost leadership
2. Differentiation
3. Focus

The idea is that picking the right strategy will help give you a competitive advantage.

Look out for a future post in which we examine the three strategies and how you might use them.

The post Where Do You Fit Within Porter’s Five Forces? appeared first on Parfrey Murphy.

This could range from wondering if payment plans are available through to which credit cards you take.

Face the facts…

The reality of modern life is that many people don’t carry cash or use chequebooks. That’s especially important to realise if your customers are the general public. If you don’t have card facilities you could be missing out on a huge swathe of potential customers.

If you have an e-commerce website then make sure you have a wide range of payment options that you accept. For instance, take Paypal as well as credit cards.

What about the costs?

Some payment options will carry more charges for you. But consider this…

Which costs you more…

• A slightly lower margin on an actual sale made?
• Or losing the customer altogether because they don’t have the right payment type?

Would a small charge cover it?

And don’t dismiss the idea of adding a small amount for using certain payment types. Customers will often accept that one source of payment costs more than another, but still be happy to use it because of the advantages or convenience for them.

In other words, don’t let what’s really a pricing issue lead you into losing customers.

By accepting payment in as many forms as possible you make it easier for that prospective customer to turn into an actual one.

The post One Tip That Will Help You Convert More Sales appeared first on Parfrey Murphy.

Many tasks that would typically be done on traditional desktop computers are now being done on mobile devices. So we were delighted recently to announce the release of our own free Parfrey Murphy app.

With only a few accountants in Ireland having their own App we’re excited to be at the forefront of the kind of technology designed to make life easier for our clients and friends.

So what’s in the App?

Invaluable finance and tax information on the go…

The Parfrey Murphy app offers 12 specialised calculators to help you with your financial needs, including:

• Income Tax
• Payslip
• Increase Profit
• Corporation Tax
• Loan
• Mortgage
• Savings
• Inflation
• APR
• VAT
• Inheritance Tax
• Stamp Duty

The App also provides frequently updated tax tables as well as details of key financial dates. These are great if you’re wondering how certain taxes will affect you. Or to remind yourself when your tax return is due and when your tax needs to be paid.

Receipts and mileage easily tracked on the Parfrey Murphy App…

Keeping track of receipts is vital and our App has you covered with the Receipt Manager tool. This feature allows you to take a photo of your receipt and then fill out some data. Now that you have your receipt stored on your device, you can export it rapidly via email.

Tracking your business mileage is a key task, but trying to remember and record it using pen and paper can be a pain. Our Mileage Tracker will record your travels for you and organise all your trips for viewing in one place. Then they can be easily exported by email.

You can also get access to our blog and website from within the App so you can stay up-to-date and informed with practical tips and suggestions that will help you grow your business.

Where can I get it?

The App is completely free of charge. Why not download it today and see how it can help you!

The post Have You Downloaded Our Free Parfrey Murphy App Yet? appeared first on Parfrey Murphy.