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Archives for David French

Finance And Accounting For Small Businesses

One of the most exciting business activities we undertake here at The Investment Collective is to help small businesses, restructure, grow or divest.  The use of the word “exciting” is deliberate.  More often than not the task is an emotional roller-coaster, where best intentions are often undermined by client fear, once “supportive” banks, angry creditors and warring business owners.  Through our involvement with small business, one thing has become clear – many, many small business owners have no idea of how to run a business.

Now, before you bridle at my perceived arrogance, consider that we are nearly always called when things are obviously bad. We nearly always find that everything is in the owner’s head, the financial records are terrible, and there are no budgets, business plan or financial model in place.  Frequently, we find that the situation has been brewing for months or years and that the ATO is owed money.   Overwhelmingly, we are called in with the expectation we will “fix everything”, using the simple tools of charm and magic.

The basic fact is that shit happens in business.

You cannot accurately predict when you will lose a client, a crop, or a valuable staff member, but you can very much take ownership of your business, formally understanding it, and putting in place disciplines such as those mentioned above.  Compared to growing your favourite crop, or selling interesting products, or fabricating machinery this mightn’t sound too exciting, but without these disciplines, you won’t be getting much joy from anything when the shit does hit the fan.

Sound dramatic?  Consider that it can take several months to build a formal set of accounts from the data normally found in the back offices of small businesses, and to build bankable forecasts from that.  Believe me, you won’t have that time if you really are facing a downturn.  Consider also, that recognising and quantifying a downturn before it really sets in gives someone like me much more opportunity to address the situation early – something that the banks will appreciate and that will give you the best chance of coming through the other side.

So, business consultants like us can be a very big help in structuring and ensure your business is well run and able to manage through downturns, but in every case, the effectiveness of that help starts with you.

Get yourself a good accountant.

Many businesses choose their accountant because they are a “good bloke/gal”, but like financial planners, accountants come in all shapes, sizes and levels of professionalism and competence.  Too many are simply collectors for the ATO with a high opinion of themselves, and charges to match. But they don’t really deliver anything useful and too many clients view the role of the accountant as one of tax reduction.

What a really good accountant will do is not only help you fulfil your statutory obligations but make sure your accounts actually mean something to the business.  From the way your accounting software is set up to the production of financial reports, the accounting data is at the heart this.  It is your window into how things are really going and it needs to be collected and tabled regularly and rigorously, to clear and generally accepted standards, and in any event suitable for handing to the bank as-is.

At the end of the financial year, your internal accounts need to be reconciled to the formal statutory accounts, so that management accounts for the new year start from the right base.  If you don’t do this, you’ll be completely lost – it’ll only take a few months.

In summary, few accountants are good business consultants or strategists, and most business consultants and strategists focus on just that.  To get the best result you really need to consider engaging both, preferably in a form where they agree to happily work hand in hand.  If you do this, your financial records will become a tool through which business management becomes easier and easier, you will have fewer worries because you will be more in control, and you will have an informed support base armed with detailed and up-to-date data, for which there is no substitute when a storm approaches.

Please note that this article is prepared as general advice. It does not take your personal or professional circumstances or goals into consideration. To learn more about our business consulting services, contact us today.

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Islamic Mortgages

The far right and the far left are equal in their attempts to inflame this Islamo-Christian divide, with the result that the ill-informed jump on a dangerous bandwagon.

My Facebook page is the recipient of dozens of admonitions and representations that someone or another is doing something bad to someone else.  Often ill-informed or downright kooky, there is no effective mechanism to knock out these damaging pronouncements, and simply commenting is, excuse the French, pissing into the wind.

Take the issue of Sharia Law for example.  Now I am no expert in the field, but first of all, it strikes me that the general take-home message behind Sharia Law is not that much different to that of the Old Testament.  The idea of “an eye for an eye” is found at Exodus 21.24.  In management, I am a big fan of it, just this week threatening a self-assured young employee that I’d “cut his balls off” if he stuffed up a second time on account of not listening to important instructions.  Not surprisingly his commitment to the task has grown exponentially, even with the availability of Western Anesthetic.

More seriously, Facebook posts are now focusing on Sharia Lending.  Apparently the Koran states,

“Those who charge riba are in the same position as those controlled by the devil’s influence… As for those who persist in riba, they incur Hell, wherein they abide forever” – Qur’an 2:275

Riba translates as usury, which is the action or practice of lending money at unreasonably high rates of interest.  Riba is therefore not interest, but the pricing and charging interest in a (supposedly) unfair or extortionate manner.  The pricing of interest in western markets is well institutionalised, and takes into account inflation and risk.  In a well-informed, competitive and well regulated market, it is near impossible to charge extortionate prices.  That is why in the west, we place so much importance on competition policy and consumer protection.

The translative subtlety between riba and interest has opened a loop-hole for Islamist scholars, many of whom have opted for a direct interpretation.  They say any interest is against Sharia law, because (they claim) it is a form of “effortless profit”, or extra earning that is “not the result of exchange”.  Such an interpretation is a careless application of the truth.  Whether as an individual or an intermediary, it is not effortless to accumulate money which can be lent out in the future.

And isn’t taking on the risk that someone might not repay you a form of exchange.  Interestingly, just last week I set up a loan where the terms included paying it back within a year, with 30 percent interest.  “Oh, no, the evil of it” I hear you all say.  But what if I told you all the banks had said no, creditors were at the door and it was the only way to save a business, 5 jobs and the owners’ retirement savings.  Isn’t the business owner getting something pretty tangible in exchange for someone taking on this risk, pretty much no questions asked?

Semantics aside, it is possible, even easy, to borrow under Sharia law.  The loans are structured so that the “lender” actually buys the asset and arranges for the borrower to buy it piecemeal.  So a Muslim schoolteacher might buy a house worth $500,000 on the market by making just 30 easy annual payments of $36,324.  Sound familiar – too right it does – it’s what we call in the West an operating lease.  In an operating lease, the asset is owned by the lessee until all the payments are made.  Those of you that are familiar with financial math will immediately grasp the fact that given the annual payments and the value of the house, you can easily derive an underlying interest rate – in this case, 6 percent.  Muslims know this – they and their near neighbours invented algebra.

Given all this, why focus on Sharia loans as “evidence” that Muslim people are not compatible with The West.  Unequivocally religiously motivated suicide bombing and religious murder is incompatible with Western doctrines, but if someone likes operating leases over traditional housing loans, what’s the big deal?  In fact, perhaps The West should explore expanding the application of operating leases, to farmers and graziers in particular.

Not only that, the Christian Bible also contains many admonitions regarding the charging of interest, Leviticus 25:35-37, Deuteronomy, Exodus 22:25, Luke 6:34-35, Psalm 15:5 Romans 13:8, Matthew 25:27, Ezekiel 22:12, and Proverbs are some.  To me, the most interesting of these is Psalm 15:5:

“Who does not put out his money at interest and does not take a bribe against the innocent? He who does these things shall never be moved”

Islam or Old Testament, it seems that the idea that charging interest on borrows is in some way generally undesirable.  This is something I have thought a lot about in my financial career, and the conclusion I have come to is that borrowing limits the ability of an individual to be themselves and to achieve fulfilment (personally or in God, however you wish to view it).  Think of all those people trapped in jobs they hate, simply to pay the mortgage, or of women in unhappy marriages, because (perhaps amongst other things) the mortgage prevents them from setting their own destiny.

Perhaps the last work belongs to William Shakespeare, who through the eyes of Lord Polonius observed:

“Neither a borrower not a lender be,

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry

This above all: to thyne ownself be true.”

By David French
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The Value Of Time

If you study any formal course in finance it won’t be long before you are faced with the concept of “time value of money”.  What it means is that there is a cost to the delay in receiving money, and so we say that “a dollar received today is worth more than a dollar received in the future”.

There are two reasons why it is better to receive a dollar today than a dollar in the future.  First, if you receive a dollar today, then you can invest it and get an additional return.  Second, there is always a risk that you will receive less than promised, or nothing at all.

For more numerate readers, that you might consider accepting 97 cents now, rather than $1.00 in a year time.  If with certainty, you could earn 3 cents in interest over the year, then (taxes aside) you would be just as well off taking the 97 cents now, as waiting a year for your $1.00.  If you could pay off a loan, say a credit card, with the money received now, you might be as well off taking 85 cents now, rather than wait a year and pay credit card interest.  Essentially, the more risk you might not receive the money in the future, and the greater the return you can gain from investing the money now, the less you would be prepared to accept now.

So in finance, time has a clear monetary value and as touched on above, the methods of working out that value are well-established.  But what about other ways of putting value on time?

Applying the time value of money concept, it’s quite clear that getting something signed off or delays in finishing a project can be costly.  That’s probably obvious when considering large constructions – delays in finishing a big hotel (for example) mean there is a lot of money sitting around earning nothing – but it applies just as much to day to day activities that we all undertake at work.

When the tax office stuffs you around, when the local council continues to vacillate over an approval, when legislative changes or indecision prevents you from making a choice, all of these things create risk and delay.  They stall the receipt of revenue, they create project risk and the burn time you could be spending on other things.  Sometimes these delays and problems are so bad that they involve employing additional people.  Overall, the delays themselves make it more expensive to do business.

Perhaps the monetary side of that is obvious, but there are personal and social costs too.  Not building an efficient road network or a high speed rail link between Sydney and Melbourne steals people’s time.  Small amounts each trip perhaps, but over one’s life, time that adds up – time that could be spent with the family, time spent fishing or at golf, time spent blowing the froth off a few with good friends.  Perhaps that sounds trite, but I put it to you that those people who create delay, who don’t do their jobs well, who don’t care, who give you the run-around, who are attending to their personal stuff while charging you, who go on strike during your holidays, these people are stealing your life.

In an era where for many of us work is demanding, and responsibilities of all types high, it’s time we started to take a stand on time-thieves.  It’s time business recovered some of the ability to select and fire employees, to insist that Government departments and officers are held accountable, simply to enforce the social contract implied through employment and regulation.  Failure to do this means business operators will have to change more and more for producing the same goods and services, and those that cannot will simply drop out.

That’s what you can look forward to if the current combination of individualism, workplace bias, and allergic reaction to productivity improvements is not addressed.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.

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Some Thoughts On Brexit

Two years ago Analysts/Consulting Owen Evans presented a seminar for clients entitled Fun with Vertical Fiscal imbalances.  A core message was that Australian Governments had effectively no clue as to the extent revenues would fall as a result of the mining boom, and that we were in for a lengthy period of declining living standards.  The response, Owen said, was that government would increasingly be confined to short terms and instability would become the norm.  Let’s look at some facts that have emerged since then.

By a relatively large majority, UK voters elected via referendum to leave the EU. This was clearly a surprise to most commentators and markets, with Sterling and global equities markets getting thrashed on the day, the PM announcing his resignation (to take place by October) and roughly half the Labour Party front bench resigning. Watching it live was like watching lemmings jump into the sea below, a feeling exacerbated when the most interesting commentator turned out to be Lindsay Lohan.  Here are a few observations:

The short-term economic implications for the UK and Europe are clearly negative. The longer-term implications are also negative but may not be overtly visible. One must presume that global GDP growth falls very slightly over the next two years because of this. One also must conclude that interest rates are likely to stay lower for longer; and,

The direct impact on Australia and Australian listed companies is likely to be imperceptible. But there may be a small bias in favour of domestic-related businesses as opposed to exporters and interest rate sensitive stocks.  There is certainly no reason to think that Brexit will hasten a global economic recovery and for that reason, there is no rush to return to investing in mining and resources related industries.

The Brexit debacle was immediately followed by Australian voters demonstrating a significant swing toward a union leader from a Government roundly rejected by voters in 2013.  Preferring heart over head, Australia will probably end up with a hung parliament and a Senate controlled by individuals who variously want to ban live cattle exports (thereby effectively killing the NT economy), subsidise Tasmanian electricity generation and reintroduce financial transactions taxes, reintroduce tariffs that will increase the price of goods for everyone, and based on petitions of just 200,000 people, introduce rolling referendums to decide laws.  If you think that is kooky, consider that by the end of the year a boorish reality TV star could be the next US President;

These seemingly outcomes are both seemingly bizarre and based on a well-honed ignorance of what matters.

Western prosperity since 1946 has been based to a large degree on growth in trade, personal freedom and mobility, and increasing economic integration. The days of having three different electricity outlet types in the UK and 35 in Europe have been coming to an end. Brexit is a vote against trade, against mobility and against integration. In effect, 17m Britons voted for an immediate pay cut.  It seems unlikely that they would have done that, if they understood the impact.  The fact that two of the main proponents of Brexit have now stood down, suggests a total lack of belief in the BS they were peddling.

First, this is an unexpected outcome and following issues with US polling during the primaries it calls into question the capacity of western leaders to understand what exactly it is their constituents want or expect from Government.  Instead of making and delivering on policy Governments are deliberately pandering to interest groups/issues, because:

  1. there is no point in trying to convince rusted-on supporters and;
  2. because of the mistrust and pressures linked to a decline in living standards, we are living in a time where people are relying on their feelings for guidance, rather than education or logic.
  3. Add to this the internet which is enabling democracy by popular engagement, with the consequence that many people have plenty to say, but not much knowledge about what they are saying.
  4. Across the west we have an ageing population increasingly fearful of the impact of immigration.  It is borne of a nationalistic fervour and a desire to build barriers against all manner of perceived threats (but immigration in particular). 

A basic tenet of economics is that what is good for the population is not necessarily good for the individual.  Combined with the inability to measure voting intentions accurately combined with a willingness to vote against perceived self-interest (even if it is the general interest) suggests that unusual political outcomes may have become standard.  As a result of these factors, the gridlock that hampers decision making in many Governments is set to become more serious.

As we have said countless times in Client newsletters, we have entered a time of extended volatility and uncertainty and we are experienced in managing that.  This experience is critical when the main alternative to investing in markets is to put your money in the bank.  Interest rates of below 2 percent are about a third of the income generating capacity of most of the portfolios we build.  The choice to put your money in the bank ensures you lock in very low-interest rates, and that you are eating into an increased amount of your savings, just for day to day expenses.

In terms of the market outlook, Brexit will likely see markets unstable for a while.  But they were already unstable, and the portfolios we have built for clients have shown good results in withstanding that.  As we have said in Client newsletters, interest rates are unlikely to increase anytime soon, and in general that is good for the portfolios we build.

Given the trade advantages of the EU, we will be amazed if the long term outcome is not that the UK struck a deal with the EU such that most if not all of the primary economic advantages were retained, but that the UK exerted more control over its borders.  In this context, its worth noting that Norway subscribes to almost all of the EU rules, thereby retaining trade benefits, but without being a member (of course, it gets no say on how those rules are formed).

Overall, our view is that we are in for a very long period of sub-trend global growth and this will continue to result in global economic and social instability.  For many years there will be no free kicks and the rewards will go to those who can look beyond the emotion.  We believe that is the most valuable service that we can offer clients.

Originally published in our July 2016 newsletter, read more recent newsletters here.

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