July Issue 2024

RETAILERS NEED TO JUGGLE STOCK VOLUMES AND MARKUPS

We appreciate that retailers have a never-ending problem – a variety of stock, some of which you can achieve a high markup on and that you can sell high volumes of those products, which are generally referred to as “STARS.”

Unfortunately, for most retailers to achieve their profit targets, they have to sell more than “Star Products”. The next high-volume product for most retailers is a product category referred to as “CASH COWS.” This product range relates to high-volume products but with a low markup because of competitive pressures from the marketplace.

Retailers know that these products are important because they are staples and, in many cases, they are the prime reason that a customer has visited their store. While the customer is in their premises, there is an opportunity to sell a “Star Item”.

Then there are “PROBLEM LINES.” These could be last year’s fashions that no one wants this year or another product that has been superseded by a competing product. This category tends to be lower volume but could be high-volume depending on what happened last year! This category normally has a reduced markup because customers are not interested in those products unless they can buy them very cheap.

The last category of stock is called a lot of names – we have elected to call them “DISASTERS.” There is normally some sort of inquisition as to who ordered this stock! This stock category generally has a low volume, but that does depend on the circumstances, and a very low markup because the aim is to get rid of this stock – it is taking up valuable shelf space and is annoying team members.

One area to be alert to is to ensure that an “Automatic Reorder On a Computer System” hasn’t gone ahead and reordered this particular stock item when the quantity of stock had reduced to the “Reorder Level”, which can result in unwanted and unloved stock turning up when everyone was wanting to move on from the problems of that stock item.

For most retailers, this is the quandary – a wide range of stock with widely varied volumes and markups from low to very high. The problem is planning the marketing, store layout, and in-store promotions to be able to generate sales from a range of products so that sufficient income is generated to pay the purchase costs and overhead expenses and have enough money left to generate the targeted profit.

The “Retail Profit Calculator” that we utilise can assist retailers in setting targets of various stock components and the marketing and promotional activities to generate revenue that is required to earn the targeted profit for the business.

WORK IN PROGRESS FISCAL MANAGEMENT

This is a continuation of the articles relating to Fiscal Management that have been featured in the last two editions of Business Plus.

Work in progress is a very important item for construction and tradie businesses, but work in progress can also apply in other businesses. It is an activity where a lot of money can be invested unless there is close scrutiny of each

work in progress item that hasn’t been completed.

Contractors and Tradie businesses normally undertake work projects for their clients and charge the costs incurred for labour, labour on costs, materials, external contractors to the work in progress account where there are sub accounts for each work in progress activity.

If the business is preparing monthly financial accounts, the amount outlaid by the business for the benefit of customers not yet invoiced to the customers will be identified by the balance in the work in progress account as shown in the balance sheet.

The balance shown as work in progress represents a direct funding allocation that has been made for the benefit of customers.

Businesses that are undertaking these types of activities should ensure that the agreement with their customer is on the basis that progressive claims can be made for the customer to reimburse the Contractor/Tradies business for the outlays that have been expended for the customers benefit.

To minimise the amount of funding tied up in work in progress, it is desirable that a tax invoice is raised at least on a monthly basis for the work in progress activity that has been conducted during the month.

When the customer pays the tax invoice, it will reduce the cash outlays that the business has paid on behalf of the customer.

It’s a good practice for the owner/manager of the business to review the work in progress records at least monthly and to ask questions as to why an invoice has not been raised during the month for the work in progress activities.

The overall philosophy should be to ensure that progress claims are being lodged on a regular basis (at least monthly) so that the investment in work in progress is reduced to the absolute minimum.

The level of investment in work in progress should be compared to the estimate of work in progress in the budget and cash flow forecast in an attempt to ensure that the actual work in progress balance is always less than the budgeted work in progress balance. If this is found to be difficult to achieve, a recognition is needed that additional funding is going to be required to cover the investment in work in progress.

ARE YOU UNDERTAKING RESEARCH ACTIVITIES?

The start of a new financial year is a time that many people resolve to stop thinking about something and get started on the project, whatever it may be.

Many of these projects relate to “Research Activities.”

The Australian Government has a “Research and Development Rebate Scheme” that assists in subsidising some of the expenses incurred on Research and Development Activities.

To claim these taxation benefits, the research and development activities must have been undertaken by a proprietary limited company registered in Australia.

The company must have incurred at least $20,000 worth of expenditure that is able to be claimed as research and development expenditure for which full records have been kept.

Where does the research and development journey commence?

• It starts with an “idea” – it could be something done differently, or it could be an idea completely out of “left field”.
• If this is your project solely, you are probably going to work on it yourself. But if it’s a project within an operating business, the manager may agree to a small team spending an agreed number of hours exploring the original idea – could this idea be generated into an income-earning asset of the business or an asset that could be sold to another corporation?
• There is a need for some preliminary investigations – has someone else somewhere in the world already invented this type of product? This requires “Prior Art Searches” to be conducted. This is primarily undertaken by researching on the Internet to determine whether someone else has already developed a new product that solves the problem that you are thinking of, or the research might involve engaging an expert (patent attorney) to conduct searches for you.
• It is important that you keep records of the searches that you have conducted so that these files are available at some future date if they are requested by the Australian Taxation Office as part of an audit review of your company’s research and development claim.
• There is a need for you to be able to identify the new knowledge that you intend to produce from the core activities of the research and development process.
• It is important to note that the outcome of the research and development activities cannot be known or determined in advance on the basis of current knowledge, information, or experience but can only be determined by applying a “Systematic Progression of Work”.

NRF PRIORITY AREAS FOR INDUSTRY GROWTH PROGRAM

In the June edition of Business Plus, we discussed the Australian Government’s Industry Growth Program, which has now commenced Operations.

In this article, we comment on the National Reconstruction Fund (NRF) Priority Areas and the Government’s definition of the requirements for applicants to possess.

The guidelines indicate that the definition of manufacturing supports a broad understanding of the entire manufacturing process, focusing not just on production, but also on pre-production development and post-production services. The definition of products includes not only manufactured products for the end user but also the manufacture of inputs for use in final products.  It includes both tangible and intangible products like software.

VALUE-ADD IN RESOURCES

This is the area of the Australian economy that is involved in:

• Manufacturing products for use in or in connection with the mining industry; or
• Manufacturing products for use in or in connection with processing minerals; or
• Processing minerals

For example:

• The manufacture of exploration or drilling technologies, mining safety solutions, or products to assist with the transportation of minerals
• The refining and processing of spodumene to lithium hydroxide and then onto cathode active materials for use in battery manufacture, as well as the manufacture of technologies and other products used in this processing.

WHAT DOES IT MEAN?

Due Diligence

During a typical investment negotiation process, the investor will conduct due diligence, which will include reviewing:

• Business plan
• Market research document
• Intellectual property strategy
• Management team
• Debtors and inventory levels
• Team members
• Team training

The potential investor will normally conduct his/her due diligence investigation on the business model and assumptions (financial and otherwise) presented in the plans. If the investor is still interested in a possible acquisition or investment, the investor will then normally proceed with the review of the pricing proposal for the business.

Expenses

These are the costs incurred in producing net profit.

If you would like assistance on any of these activities please do not hesitate to contact Peter Towers, Managing Director, Towers Business Development.