Beyond the Numbers Issue 6

14 Charlie and the trellis factory “If you are wise, you’ll listen to me”

Advisory board adviceFor business owners who want to get it right

Small town business, big picture thinking Emotional intelligence comes out on top

Tailored to fit Our financial reporting framework gets a makeover.

7

4

2

12 Taxing all the toys Tightening mixed-used asset loopholes

16 Give in to your dark side How your curiosity can kill the competition

beyondthe numbers | keeping your business future fit

Doing Dentistry DifferentlyTaking the bite out of getting teeth pulled

issue six spring 2012

The result was a full review of our

strategic direction and the prospect of

a brighter future.

An excellent source of ideas and skills necessary to run a smarter business.

You’ve just found it

For more information, including dates, venues and course content: W hayesknight.co.nz/events T 09 367 1623 E [email protected]

Consisting of four workshops and follow up coaching, Business Edge promises innovative tools, new skills, fresh ideas and the know-how to put progressive plans in place for your business’ future.

Interested business may be eligible for a subsidy that will cover up to 50% of the total cost to join the programme.

A course that

plus helpful, well developed tools and

solid ideas.

Searching for that business edge?

““ “““ “

1hayesknightnz

The information and advice contained in Beyond the Numbers cannot cover every financial situation or requirement. If you have further questions, we encourage you to contact a Hayes Knight business adviser for advice tailored to your specific circumstances. Hayes Knight is an independent member of Morison International and Hayes Knight Group.

contentsissue six

Beyond the Numbers is published for Hayes Knight NZ Ltd by Tangible Media www.tangiblemedia.co.nzEditor: Damian Bennett. Sub-editor: Vanessa Ellingham. Account manager: LauraGrace McFarland. Designer: Alice Huang. Cover Photo: Robin Hodgkinson.

The Olympic Games represent the pinnacle of sporting achievement, where the best of breed across different disciplines come together, to showcase our limitless human potential. This is something we try to bring to every issue of Beyond the Numbers and in essence is part of the culture of Hayes Knight: A restless desire to improve is in our DNA.

The opinions, experiences and advice in this issue cut across a number of business disciplines and, we believe, offer valuable insight into realising your full potential: Advisory board members will understand how they should be spending their time, employers will be introduced to the idea of discretionary output and you will find out how curiosity can kill the competition. Plus in the spirit of the Olympics we introduce two Hayes Knight clients who are hitting their stride and reaching new levels of performance.

Every sport comes with a set of rules: Bach and boat owners will soon feel the squeeze following this year’s Budget announcement and we unveil New Zealand’s new financial reporting framework and the implications on Kiwi organisations.

Finally, no Olympic Games would be complete without celebrating the athletes and their achievements. It’s been a great year so far for Hayes Knight. We’ve appointed two associates, Brendon Cutler and Mike Atkinson; our audit directors achieved licensed auditor status under the new regulatory regime in New Zealand and Matthew Bellingham was appointed president of the North Harbour Club. Plus our new business improvement course (Business Edge) has received a surge of positive feedback from the market and Hayes Knight is once again playing a pivotal role in the judging of this year’s Westpac Auckland North Business Awards.

We’d also like to take this opportunity to commend the national sporting organisations we’ve assisted, Triathlon New Zealand and Rowing New Zealand, on their incredible Olympic journey. It’s great to see fellow Kiwis making us proud on the world stage.

Craig fisherChairman, Hayes Knight New Zealand

the numbers | keeping your business future fit

beyond

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04

07

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features

We’ve got more growing up to doAdvisory board advice for business owners

Local support, far reaching resultsOut-of-towner gets the locals on his side – and it pays off

One size does not fit allOur financial reporting framework gets a makeover

news, views & tools for suCCess

Service with a smileA dentist you will like with a lofty business model to boot

Tax grab on the boat and bach?Controversial changes to deduction claims on mixed-use assets

Labour of loveUnlocking discretionary output

Charlie and the trellis factoryGood business practice for SME’s long term growth

Curiosity or just plain competiveness?How snooping on the opposition can highlight ways you can improve

The Godfather of all decisionsWill your business end up ‘sleeping with the fishes’?

The result was a full review of our

strategic direction and the prospect of

a brighter future.

An excellent source of ideas and skills necessary to run a smarter business.

You’ve just found it

For more information, including dates, venues and course content: W hayesknight.co.nz/events T 09 367 1623 E [email protected]

Consisting of four workshops and follow up coaching, Business Edge promises innovative tools, new skills, fresh ideas and the know-how to put progressive plans in place for your business’ future.

Interested business may be eligible for a subsidy that will cover up to 50% of the total cost to join the programme.

A course that

plus helpful, well developed tools and

solid ideas.

Searching for that business edge?

““ “““ “

2 hayesknightnz

Spend 30% of your time here



Get the right people (skills) at board & management

level to deal with tomorrow (succession).

Future focusSpend 30% of your time here

Internal focus. Working with management on strategy

development & execution.

Identify issues


External focus. Understand your environment, spot trends & communicate

with stakeholders.

ComplianceSpend 15% of

your time here

Strive for best practice, stay true to your legal obligations,

and monitor the risks your business faces.

KPI Monitoring


Don’t keep asking the same questions about the

numbers and budgets that you asked last month. Move on.

governance

The good news is that in the last six months more SMEs have picked-up on the importance of advisory boards and the benefits this leadership discipline brings. Business owners are asking more questions in an effort to get it right. Sitting on a number of advisory boards, both SME and corporate, I have encountered the questions below and helped a number of businesses work through them. So let’s crack into it.

We’ve got more growing up to doA tailored, low cost governance programme such as an advisory board may not solve the world’s problems, but it’s certainly a step in the right direction. In the last issue we gave a few pointers to help get the ball rolling. With the seed planted Aaron Wallace now tackles some of the questions that followed…

It is easy to generalise and say that the goal of introducing a governance framework is to focus on the strategic vs. the operational, but how do advisory boards balance their function as compliance officers with their function as shapers of the future? This is a question I’m often asked by clients. To give them some direction I often introduce them to Richard Westlake’s FICKS™ model (see below), which injects some discipline and keeps the board from veering off track.

3hayesknightnz governance

Staying focused is important. Think of the board of a well-known chain of DVD stores: where is the value in making sure every building regulation is complied with and every figure compared against last month’s results, if they miss the fact that the industry has been reinvented. Human behaviour and expectation has changed. People no longer want to go out of their way to visit the DVD store when they can rent the latest movie or TV-show via iTunes, or use the conveniently placed vending machines popping-up at major supermarkets. Little to no rent and no staff salaries makes for a profitable model. Suddenly these stores don’t have a business. These are the types of issues boards need to be thinking about!

The question of liability Choosing to introduce an advisory board member who fulfils certain absent skill sets or a role missing from the business is important. However, contrary to popular belief, because of the advisory nature of the role they are legally labelled ‘deemed directors’ and are therefore not free from liability. But don’t panic as it is simple to add them to your existing Directors and Officers Insurance without any additional expense. In fact most professional advisers will already have this insurance. When I accept a position on a new board the relationship is formalised via a simple one-two page agreement, which typically includes indemnities and insurance, plus:

+ My time commitment, term of engagement and fees.+ My role and what is expected of me.+ Outside areas of interest and confidentiality.

What’s the magic number? How many people should I have on my advisory board? This question comes up all the time. Given the relative size and complexity of businesses in New Zealand I’m going to put a stake in the ground and say on average 4-6. In my experience any good advisory board needs four key pillars:

1. The entrepreneur (usually the owner)2. The technician (understands the industry and

the ‘coal face’)3. The marketer, and 4. The numbers person As a business grows additional expertise can be plugged in if and when needed. Most businesses will automatically default the accountant to ‘the numbers person’. As the ‘numbers person’ I have to say this is only okay if they have a strong backing of strategic and commercial know-how. Using a ‘highly qualified bookkeeper’ is like trying to bash a square peg into a round hole; in short you are wasting your time. Remember to do your due diligence when filling any position externally. As the business grows in size and complexity your advisory board may evolve into a formal board of directors. While this might not exceed 6 members the key difference is all members will now actually have a stake in the business vs. advising from the side-lines. Finally make sure you have a governance and accountability framework in place, this will help set out the roles of the different members.

Spoiled for choice? Once we have identified the skill sets missing from their advisory board, clients then tend to ask me how they go about finding someone to fill that gap. As a member of the Institute of Directors I typically use this network to help find potential candidates. I then assist clients with the due diligence process to ensure they find the best fit. At a basic level some important questions to ask potential candidates, include:

+ What other boards are they on?+ What scars and medals do they have?

(experience is key) + Are they ‘giants’ in your industry? Do they know

your market?+ Are they a member of the Institute of Directors?+ What are their qualifications? (presentations and/or

publications)

The bonus of bringing in a strategic professional is that they will bring structure to the meetings and therefore augment the use of models such as FICKS. Pedigree is important and will inevitably be linked to remuneration. Contact me to find out more about the skills matrix and board selection criteria we use with clients.

Does money really talk? Another popular question: How much do you pay advisory board members? Remember people do not join advisory boards for money and fame they generally do it because they want to add value somewhere. If the member is a venture capital investor or shareholder, then the answer is simple: nothing. Their incentive is maximising the value of your company and their investment is incentive enough, but you absolutely need to compensate external members.

It is human nature not to value what you get for free, I’ve seen it time and again. You are more likely to take action on advice you pay for, plus this also makes the member more accountable. The amount of pay and the mix of cash vs. equity (if there’s any equity at all) are highly variable. Most professionals will charge an hourly rate between $200 and $400. While others (what we in the industry call serial directors) prefer a flat annual fee ranging between $25k and $35k. Take a deep breath. It is a leap of faith for many SMEs but I can promise you that the value gained far outweighs the cost. I’ve seen this first hand.

When to introduce new blood After a period of time a board will become comfortable with one another. This could be a signal that the company has hit optimal performance, but is more likely an early warning sign of complacency. Introducing a new member will keep a board on its toes by injecting fresh debate. Given the speed at which information, communication and technology (ICT) is evolving complacency is a sure company killer. As our reliance on ICT increases we will see more companies establishing separate governance committees to focus just on ICT.

Good governance produces higher quality decisions that can drive an increase in sales and margins, plus a reduction in costs. Contact your Hayes Knight adviser or Aaron Wallace on 09 379 1580 and elevate your business with a good governance framework.

it’s a leap of faith for many sMes, but the value to be gained far outweighs the cost.

hayesknightnz4 beyond the numbers

When an out-of-towner arrived in Matakana to take over one of the area’s largest employers, there was a little wariness amongst the community. James Kendall purchased the largely service-driven ITM Matakana Building Centre which relied, for the most part, on manual procedures.

Two-and-a-half years later, Kendall has rejuvenated the business through the implementation of modern software and systems, applying his 20 years’ experience in building supply and wholesale to the trade and retail environment.And perhaps more importantly, Kendall’s got the townsfolk on his side. By combining his expertise with sound emotional intelligence, Kendall was able to manage people through the change, supporting those unsure of letting go of old ways while boosting staff loyalty, engagement and pride in the business.

Meanwhile, the business has seen steady growth since Kendall and his wife Nicholle took the helm in late 2009.“It’s a strong trade business,” he explains. “There’s a lot of repeat business and it is very much service orientated. We don’t spend very much on advertising; the bulk of our spend is on our customers.”

Kendall says it’s “not just about selling a nail”, but keeping his customers coming back. “It’s the old saying, ‘people buy from people they know, like and trust’.”

When Kendall was looking to purchase ITM Matakana he enlisted the help of Scott Travis, business advisory director at Hayes Knight. “I believed I could do it, but at a time when the economy was at an all-time low I needed someone I could trust to help me.”

Kendall says Travis’ pragmatic approach and honest conversation has made him and Hayes Knight manager Amanda Billington trusted advisers ever since. “They ask the right questions – not always the ones I want to hear but they do challenge my thinking.”

The Hayes Knight duo gave advice throughout the acquisition journey, from assessing the viability of the venture to assisting with due diligence and obtaining the necessary funding from the bank.

Kendall says that because the previous owner had bought the business “13 years ago pretty cheap”, they had not been

Local support, far reaching resultsEmotional intelligence geared towards putting people first has earned ITM Matakana’s new out-of-town owner the respect of the locals. Along with the implementation of modern systems and a fresh business plan supported by accountancy firm Hayes Knight, financial results and morale are on the rise.

Kendall was able to manage people through

the change, supporting those unsure of letting

go of old ways while boosting

staff loyalty, engagement

and pride in the business.

Text by; Vanessa Ellingham,

Tangible MediaPhotography by;

Robin Hodgkinson

5beyond the numbershayesknightnz

6 hayesknightnztrusts

The ConsequenCes of a TrusT reseTTlemenT

By law, a family trust cannot last forever. It has

a ‘vesting day’ – this is the date when the final

beneficiaries are entitled to receive their share of

trust property. This cannot be more than 80 years

from the date the trust is established. Very few

trusts last this long or are intended to.

It could be time for your solicitor to review your deed of trust

from an estate planning point of view. Many deeds, particularly

those that are quite old, may have provisions that are no longer

appropriate to your current personal circumstances. A common

issue is when the deed has wide classes of discretionary

beneficiaries (such as children, grandchildren, cousins, nieces

and or nephews etc.) or it may not allow for the final beneficiaries

to receive the distributions to their ‘inheritance trusts’.

Resettling (transferring) your family trust to one that is more

suitable can trigger a number of tax consequences so bear the

following in mind:

+ Resettlement of a trust would trigger a shareholding change

for closely-held companies. Therefore consider the proportion

of a shareholding change to ensure shareholder continuity is

maintained. Not doing so may impact on the companies’ tax

losses, imputation credit accounts, or qualifying company

status.

+ Financial arrangements (loans, bonds) will require a ‘base

price’ adjustment which may result in additional interest

income.

+ Foreign portfolio investments may require ‘quick sale’

adjustments under the Foreign Investment Fund rules.

+ New Zealand listed share investments on capital account will

trigger a capital gain or loss.

+ There may be tax consequences for partnership

investments if the gain on the deemed disposal exceeds the

concessionary thresholds.

+ The deemed disposal of commercial/residential property

investments will likely trigger depreciation recovered.

+ Land held on revenue account may result in taxable income.

+ Where debts have previously been forgiven (for natural love

and affection), income can arise depending on any new

classes of beneficiaries (such as a company).

+ A resettlement may be a supply for GST purposes.

If you are thinking of taking this step contact your Hayes

Knight adviser or Luke van den Hurk on 09 367 1603.

burdened with debt. “[In this situation] you are buying the opportunity to put in better systems and processes.” He says the key here was to overhaul the manual systems to create a smarter business, and Hayes Knight was there to help.

The team assisted in implementing improved accounting systems and software, particularly in the areas of inventory and cash control. This created a solid foundation to grow the business from the ground up. “The result was increased transparency, knowing where our stock was at, knowing our margins,” says Kendall.

Today Kendall and the team meet monthly, with Travis providing the strategic direction while Billington keeps a finger on the pulse; preparing financial forecasts and cash flows to ensure they stay on the path to sustainable growth. Together they have worked on Kendall’s business plan, business valuation and designed and implemented an ownership structure in order to protect the assets.

Travis says Kendall’s ability to combine his expert knowledge of the industry with an integrity respected by his staff and community is what has set his business apart. “From our first meeting we were impressed with the level of energy that James exudes. This energy, along with his optimistic disposition, is infectious for everyone working with or around him.”

Travis says when Kendall arrived in Matakana he took a strong approach to building relationships. “James was quite conscious of that environment [of support for established locals], wanting to get people on side – the staff but also the community.”

“Financially James has been able to achieve some spectacular results, particularly in the area of margin and efficiency, inventory management and control, reducing wastage and at the same time improving customer service,” he says. With a 15 percent growth in sales volume Kendall is chuffed with the results. “This is substantial in such a depressed market.”

Along with solid financial results, he’s earned the support of the locals, growing business with existing clients and collecting new clients along the way.

A few newbies have joined the ITM Matakana team, and no staff members have left in the two-and-a-half years Kendall has owned the business, maintaining it as a key employer in the area.

Kendall attributes his success to the financial support he has received. “You can be a person with 100 ideas, but you’ll go bankrupt if you can’t put something on the bottom line.”

Contact your Hayes Knight adviser or Scott Travis on 09 448 3232 to find out how Hayes Knight can improve your business.

Left to r ight: Scott Travis, James Kendall , Amanda Bil l ington.

7hayesknightnz new standards

WhaT Is ChanGInG?Who has to follow General Purpose Financial Reporting (GPFR)?The Government has announced its proposed reforms to the statutory reporting framework and specified which entities will be required by legislation to prepare annual financial statements under GPFR. Under this reform the following types of entities will be required by legislation to prepare GPFR:+ Publicly accountable entities + Large entities • For-profit: annual revenue > $30m, or assets > $60m • For-profit (public sector): annual expenses > $30m • Not-for-profit: annual expenses > $30m • Entities with 10 or more shareholders

One size does not fit allNew Zealand’s financial reporting framework is about to undergo a radical makeover. The changes are significant for some organisations. It is therefore important your organisation is fully aware of what is changing and the implications. Craig Fisher reports.

Different accounting standards for different entitiesThe External Reporting Board (XRB), the Government’s accounting and audit standard setter, has released the proposed accounting standards that will apply to the different types of entities that are required to prepare annual financial statements under GPFR.

Rather than just having a single set of accounting standards applicable to all, the proposed accounting standards framework adopts a two sector (for-profit or public benefit entities) four-tier structure with differing accounting standards applying to each tier.

The new famework is more tailored so gone are the days of one size fits all approach to accounting standards

8 hayesknightnznew standards

a reduction in mandatory compliance and the associated cost. the owner now has a choice to adopt the financial reporting framework that will best meet their needs.

When WIll These ChanGes haPPen?The changes now have to be confirmed via the relevant legislation being enacted. In addition, some of the proposed accounting standards are new and still need to be developed. Therefore the changes will occur progressively over the next three years. The timing will differ depending on the type of entity:

Who WIll Be affeCTeD?Small and medium-sized private companiesFrom July 2013 the majority of small and medium-sized private companies that are not raising money from the public will no longer have to prepare general purpose financial reports. This means they do not need to follow all the accounting standards unless they choose to. Instead they will only be required to prepare special purpose financial reports to comply with their tax obligations.

The implications: A reduction in mandatory compliance and the associated cost. The owner now has a choice to adopt the financial reporting framework that will best meet their needs.

Large privately held companiesThose that are not raising debt or equity from the public (issuers) will have a statutory requirement to prepare annual financial statements in accordance with International Financial Reporting Standards and have these audited unless they opt out via a 95% majority vote. They will not have to file these for public viewing. ‘Large’ is proposed to be defined as annual revenue greater than $30m or total assets over $60m.

The implication: Possible changes to accounting policies where different reporting exemptions have previously been adopted e.g. deferred tax.

Overseas owned companiesOverseas owned companies and overseas companies operating in New Zealand have previously had to follow a different set of financial reporting requirements to many of their locally owned contemporaries. This difference has been removed, along with audit requirements for these companies. Instead their statutory reporting requirements will essentially be the same as New Zealand owned and operated companies.

The implication: Removal of some New Zealand statutory compliance.

Not-for-profit (NFP) entitiesLarge publically accountable NFP entities along with registered charities will be required to prepare annual financial statements in accordance with new PBE accounting standards. These standards will differ depending on the size of the NFP entity. Some of these NFP entities will also have a statutory requirement to be audited or be subject to a lesser level of assurance.

The implications: Many more NFP entities will have a statutory requirement to prepare GPFR financial statements. This increased compliance is designed to improve the accountability, consistency and quality of financial reporting in the sector. It is also proposed that in future many larger NFP entities will also have a statutory audit or assurance requirement.

NEW ACCOUNTING STANDARDS FRAMEWORKFor entities required by law to prepare General Purpose Financial Reports

Is the entity a Public Benefit Entity (PBE)?

Reporting entities whose primary objective is to provide goods or services for community or social

benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return

to equity holders

PUBLIC BENEFIT ENTITIES

YES

FOR-PROFIT ENTITIES

NO

9hayesknightnz new standards

WhaT’s nexT?Proposed application dates:

•For-profitentities:From1November2012withearlyadoptionpermitted

•For-profitentities:**Transitionaltierswillberemovedwhenproposedlegislativechangescomeintoforce

•PublicsectorPBEs:Forperiodsbeginningonorafter1July2014

•Not-for-profitPBEs:Forperiodsbeginningonorafter1April2015

For more information on the implications of these changes contact your Hayes Knight adviser or Craig Fisher on 09 367 1654.

NEW ACCOUNTING STANDARDS FRAMEWORKFor entities required by law to prepare General Purpose Financial Reports

Tier 1 Tier 2 Tier 3 Tier 4

Who is captured?

•Publiclyaccountableentities*

•Large(annualexpenses > $30m)

•Non-publiclyaccountableentities and non-large entities

•Whichelecttobeintier2

•Non-publiclyaccountableentities with expense ≤ $2 million


•Entitieslegallyallowedtouse cash accounting


Accounting Standards to follow

PBE Accounting Standards (PAS)

PBE Accounting Standards Reduced Disclosure Regime (PAS RDR)

PBE Simple Format Reporting Standard – Accrual (PSFR-A)

PBE Simple Format Reporting Standard – Cash (PSFR-C)

For-profitentitytransitionaltiers**

Who is captured?

•Publiclyaccountableentities*

•Largefor-profitpublicsector entities with annual expenses > $30million

•Non-publiclyaccountableentities and either, – large i.e. assets > $60million

or revenue > $30million (assessed over two preceding accounting periods), or

– companies with 10 or more shareholders (can opt out if 95% majority vote)

•Non-largefor-profitpublicsector entities


•Non-publiclyaccountableand either,

– all of its owners are members of the entity’s governing body, or

– is not large•Largeisanytwoofannual

revenue > $20million, total assets > $10 million, or > 50 employees


•Non-publiclyaccountable,not required to file financial statements and not large (as defined in tier 3)


Accounting Standards to follow

NZ International Financial Reporting Standards (NZ IFRS)

NZ IFRS Reduced Disclosure Regime (NZ IFRS RDR)

NZ IFRS Differential Reporting

Old Generally Accepted Accounting Principles (GAAP)

Financial Reporting Standards and Statements of Standard Accounting Practice

*Definitionofpubliclyaccountable:EntitiesthatmeettheInternationalAccountingStandardsBoard’s(IASB)definitionofpublicaccountability: •entitiesthathavedebtorequityinstrumentsthataretraded,ortobetraded,inapublicmarket •entitiesthatholdassetsinafiduciarycapacityforabroadgroupofoutsidersasoneofitsprimarybusinessesor, entities deemed to be publicly accountable in New Zealand by legislation being issuers as defined by the Securities Act 1978 or any other Act, registered banks, deposit takers and registered superannuation schemes.

10 hayesknightnzinnovation

The smell of disinfectant wafting into the waiting room, the sound of rubber gloves squeaking over each of your pearly whites – for most of us, a visit to the dentist is routinely unpleasant. But one West Auckland practice is set on freshening up the dental experience, with innovative practices and a lofty business model to boot.

DentalCare West offers a complete spectrum of dental services under one roof including routine dental examinations, orthodontics, dental implants, cosmetic dentistry and wisdom teeth removal. Open worker-friendly hours (7am to 7pm), the practice has positioned itself as a convenient one-stop dental shop.

Solid regard for customer satisfaction has proved a success, with a steady 10 percent growth over the last three years. During the same period the firm saw a 78 percent improvement in profitability.

In what founder and principal dentist Dr Scott Waghorn describes as a thank you to a loyal client base, in Christmas week last year the practice provided free dental care services for one day, churning through $25,000 worth of free work in eight hours. With donations of dental product and staff volunteering their time for the day, the team saw 104 patients.

“It was a fun day for all us all, but also eye-opening as we didn’t expect such a huge turnout,” Dr Waghorn says. “The first person was waiting outside at 3am and we had over 100 people there by 6am, when we opened at 7am.”

When Dr Waghorn isn’t dreaming up new ways to charm clients, he’s focused on delivering fresh dentistry innovation. It’s one of the only West Auckland practices to offer German-made CEREC ceramic crowns in only one visit. In just seven minutes a 3D image is taken of the tooth, matched to one of 40,000 teeth in a database and sent to the milling unit where the crown in built. It can then be fitted on to the tooth.

Service with a smileAn innovative West Auckland dental practice has a number of different offerings on its list, but what’s really helping it fly is help from accounting firm Hayes Knight

Dr scott Waghorn (r ight)enjoys working with Mike atkinson ( left )

as he can look at things from several

angles and offer sol id trustworthy advice.

Text by; Vanessa Ellingham,

Tangible MediaPhotography by;

Robin Hodgkinson

11hayesknightnz

In Brief:

Offering free dental care services for a day to the tune of

$25k isn’t the only way DentalCare West is shaking up dentistry. Fully engaged in

fresh innovation with an interest in giving back, DentalCare West has worked with Hayes Knight on a unique business model which incorporates both.

If you are looking to really make your business fly then contact your Hayes

Knight adviser or Mike Atkinson on 09 367 1634

innovation

By eliminating multiple dentist visits, injections and the risk of temporary fillings falling off, the speedy crown jobs are proving popular.

The firm has also invested in computer-aided orthodontics which enable patients to see the final outcome prior to treatment, giving an image for them to aspire to during the long months of tightening teeth. The system shaves six months off the standard two-year time for braces and DentalCare West is one of the only New Zealand dentists to offer this system.

Dr Waghorn’s practice makes a point of providing a range of services to keep his customers smiling.

“We now offer invisible braces, clear white ceramic braces and braces behind your teeth for people who don’t want everyone to know about their braces.”

Giving back to both the local and dentist communities is what makes Dr Waghorn tick. He has worked with accountancy firm Hayes Knight to create a business model that supports up-and-coming dentists looking to establish their own businesses.

Hayes Knight associate director Mike Atkinson has helped Dr Waghorn develop the model, bucking the trend of dental practices being owned by larger corporates.

“Research has shown that the best performing dental practices are owned and operated by one or two, sometimes three lead dentists,” says Dr Waghorn. “Our business model supports and helps initiate dental practices for a dentist, allowing them to get on with doing great dentistry whilst also owning the business they created. I was helped and supported greatly as a young dentist, and this is a way I found I can give back and have fun doing it.”

Atkinson says the business model was researched by Dr Waghorn, with the pair then bouncing ideas off each other, working to maximise opportunities and protect against risks, while setting the concept in a New Zealand context.

As well as a new business model, Hayes Knight recently aided Dr Waghorn in offering a shareholder position to a young dentist and member of staff as part of a succession plan.

“I have been one of Mike’s clients for five years now. He has been instrumental in assisting my business not only with general accounting but as a business advisor. It’s rare to find someone who can look at things from several angles and offer solid, trustworthy advice.”

There’s no suCh ThInG as a free lunChA quick and easy way to get hold of free money! This is how many tax refund companies market themselves, but using one could lead to future problems.

Contrary to some beliefs these companies are not associated with the IRD. Exploding on to the scene a few years ago, tax refund companies have earned a lot of money by doing something which you could easily do yourself for free. Checkout our simple DIY guide: www.hayesknight.co.nz/tax-refunds. Plus if you have a good accountant then you shouldn’t need to worry, as it is their job to ensure you get all refunds owing to you.

When you sign up to a tax refund company they become your tax agent and all mail from the IRD goes to them. This is dangerous because a person can only have one tax agent for each tax type for which they are registered. Therefore if you already have an accountant and you go to a tax refund company then you are automatically delinked from your accountant. Therefore they can no longer act as your tax agent or access your tax records. The tax refund companies can then receive tax refunds on your behalf; clipping the ticket before passing it on to you. It also becomes the responsibility of the new tax agent to let you know if you owe money to the IRD. If this part of the job isn’t done properly then there is a chance you could end up owing penalties and/or interest on top of any IRD debt.

Tax refund companies simply look at your summary of earnings via the IRD website to check whether or not you are owed a refund. If you are owed a refund in a particular tax year they will request your personal tax summary to claim it. If you have tax to pay in a particular year they will ignore that year.

This fast and loose approach means they are likely to miss any income or tax credits from PAYE income. Therefore the refund you receive may be higher than you’re entitled to which could cause you problems with the IRD further down the track, or you may have been entitled to a larger refund.

The IRD have recently introduced new rules to prevent taxpayers from cherry-picking the years of which they file tax returns i.e. not filing returns for years they’ve underpaid tax. From 2014 if a tax return is filed to claim a refund you must also file the previous four years and pay any tax owing for those years. Joining the dots, it would appear that part of the reason for the new legislation is to attack the tax refund companies. Our opinion: It is equally important for the IRD to make it easier to check your income tax position online and file a return so that eventually there is no need for these companies and any refunds end up where they rightfully belong.

Got a question about tax refunds? Contact your Hayes Knight adviser or call us on 09 367 1623.

solid regard for customer satisfaction has proved a success, with a steady 10 percent growth over the last three years. During the same period the firm saw a 78 percent improvement in profitability.

12 hayesknightnztax grab

This idea is not an entirely new idea. Hayes Knight first commented on the changes when they were announced in 2011 and overall we see the change as a good thing. The proposals are necessary to sort out a messy area of the law which is open to wide interpretation and hence confusion, rather than abuse.

If the family bach is rented to a third party on an arm’s length basis, the owner is generally able to apportion the expenses incurred during this time and claim a deduction accordingly. However, the real issue arises when people partly use assets like the family bach themselves but also lease them to others and then unfairly claim deductions for expenses such as interest, rates and depreciation.

The bach owner is not entitled to claim a deduction for expenses incurred for periods the property is not rented. However, there is a loophole in that some people are able to claim a deduction for expenses incurred during times when the bach is not rented but is “available for rent” simply because the property is not being used for the enjoyment of the owner or their family and friends.

Tax grab on the boat and bach?Perhaps the most controversial changes for many Kiwis to come out of the 2012 Budget are those that impact taxpayers’ ability to claim deductions for costs on private assets which can also be used to bring in additional income. These are called mixed-use assets and include the boat, family bach and holiday home as well as private aircraft. Phil Barlow explains.

The IRD’s view is that evidence of a house being available for rent should generally include active and regular marketing of the holiday home at market rates and the availability of the property for periods that demonstrate the holiday home is earning rental income or is generally available to earn rental income.

However, in the absence of a strict policing regime to determine when and if a mixed-use asset is available for private vs. income-earning use, unfairness arises when owners claim their bach is available for rent during significant periods of the year

just because the bach is empty. Many believe that claiming these deductions is unfair, particularly if the owner holds the asset primarily for private getaways.

The 2012 Budget proposes to close this loophole by introducing an apportionment approach, whereby deductions for expenses incurred in relation to mixed-use assets will be based on the actual income earned and private use. For example, owners who rent out their family bach for 30 days in a year and use it themselves for 30 days in a year will be able to claim a deduction of 50% of their general costs, rather than the 90% they can claim now.

The Government expects these changes to save the country around $109 million over the next four years. While this may not seem like a lot in the grand scheme of things, it is still a step closer to achieving a tax system which provides equal treatment to all taxpayers.

Contact your Hayes Knight adviser to discuss how these new rules could impact you. Alternatively please contact Phil Barlow on 09 448 3233.

The IRD’s view is that evidence

of a house being available for rent should generally

include active and regular

marketing of the holiday home at

market rates.

13hayesknightnz discretionary output

I recently heard ex-CEO of Air New Zealand, ASB and the Commonwealth Bank of Australia Sir Ralph Norris speak. What stuck in my mind most was the difference that discretionary output had made to the businesses he has been involved with. Discretionary output is all about the extra effort the employees in a business are willing to put in, over and above the strict tasks and time they are paid for. The only way this comes about is by having employees who are dedicated, loyal and who truly care about the business they are in and the customers they serve. It is the owners and managers of a business who create an environment where people are willing to provide discretionary output. Hearing Sir Ralph talk reminded me of how many businesses I had seen harness this power and how many others had missed the opportunity altogether.

So how do you create an environment in which people are willing to go the extra mile for the business? Unfortunately it is not simple and will be different for every situation. From what I have seen, it starts with the team knowing they are trusted, listened to, that their opinions are valued and that the work they do is truly appreciated – basic stuff that is very easy to forget and ignore. For any given team member, it is about making sure the role they have within the organisation is a balance between focusing on what they are good at and challenging and motivating them to develop further. The balance for each employee can be quite different.

I have seen many cases where individuals are forced to get involved in an area of a business that is so far removed from their natural style, all it does is cause them a huge amount of stress. They tend to fail at the task while, at the same time, losing confidence in their ability to perform their regular duties. Job satisfaction rapidly disappears, too. I’m a great believer in understanding an individual’s natural style and making sure their most important work-related tasks fit with this. There are a large number of questionnaire-based products on the market that will quickly and inexpensively aid the process of establishing an individuals’ natural strengths and weaknesses – Extended DISC is a great example and one with which we’ve had great success. Once you determine someone’s natural personality type you can understand which areas of the business they are most likely to be excited about and, conversely, what will have them running scared.

Labour of LoveOne of the benefits of being a chartered accountant is getting to see hundreds of different businesses in action and finding out what makes them tick. One area that caught Tristan Dean’s attention is the different ways that business owners and managers interact with people and the profound effect this has on a business.

There is an old story about a school for animals where the teachers were desperate for the animals to achieve well in all activities. The duck that scored great marks in flying and swimming was forced to spend all his time focusing on running as he had scored very low in this subject. Likewise, the cat that scored magnificently in running was forced to focus on swimming and flying. The end result was a duck that could not swim, run or fly very well and a scared, upset cat that refused to do anything.

I regularly hear people tell me that people management is the hardest part of being in business and I am yet to see a business (including my own) that gets it right all the time, even with the best of intentions. Based on my experience, if you can get it right even most of the time, you are a long way towards having a successful business.

For more information on the Extended DISC programme contact your Hayes Knight adviser or Tristan Dean on 09 448 3231.

Discretionary output is all about the extra effort the employees in a business are willing to put in, over and above the strict tasks and time they are paid for.

good business practice

While on a recent break overseas I was fortunate to meet an inspiring entrepreneur, we’ll call him Charlie, who runs a successful business manufacturing outdoor wood products predominantly for the domestic trade and retail market. While enjoying a quiet drink together our discussion soon turned to the economy and the difficulties faced by SMEs. I could sense Charlie’s confidence and sense of achievement as he described the measures and strategies he had implemented to ensure his continued success.

What I took away from our conversation was an appreciation for the way that reactive strategies of the past are now considered good business practice.

Getting on top of the overheadTo his credit, Charlie sensed early on that the recession was going to be more than a short-term event. He undertook a line-by-line review of his overhead expenses, cutting discretionary expenditure and reversing a trend of creeping overheads that had been established in previous years. For the remaining overhead, he undertook an exercise to evaluate whether he was getting good value in terms of price and quality, utilising supplier incentives and taking advantage of discounts on offer.

Striving for continuous improvementCharlie knew it was not just about overhead control – you can only squeeze a lemon so hard. Charlie wanted to improve efficiency. While producing a mix of custom and off-the-shelf products he was able to carry out a review of his processes and systems, identifying areas where improvements could be made in order to improve efficiency.

Reducing timber wastage was an easy target. For example, if they needed a piece of wood for a 470mm component then they would make sure to select a piece from the 500mm pre-cut bin and not just the closest bin to the work area. These types of observations lead Charlie to review and later reconfigure the layout of the factory.

Customer focusedWith a decline in demand from both trade and retail, Charlie recognised the value of his existing customers and sought to ensure that in an environment of price pressure and increasing competition he retained their business. By spending a bit more time with their customers in the initial phase of each project it was easier to identify what was really important to them. This, in turn, ensured that what was delivered was aligned to their customer’s expectations. For Charlie this often meant doing the extra hard yards or being more creative to achieve the desired result. However, the net result was almost no reworks, happier and loyal customers and more referrals for new work.

Charlie also took a good look at his customer base to understand and identify his most profitable clients so that he could ensure they received premium service.

Historically, Charlie had strongly opposed the idea of discounting because of the additional turnover required to make up for the lost gross profit. But in the current environment he has been prepared to consider lowering his margin if he believed it would assist in procuring a new customer. This was a particularly useful strategy when he had spare capacity on the factory floor or there was the prospect of further work on the horizon. That said, Charlie

Charlie and the trellis factory For an entrepreneurial and experienced small business owner, the reactive strategies of the past were the foundations for good business practice today. Scott Travis shares his encounter.

14 hayesknightnz

15hayesknightnz good business practice

...these types of observations lead Charlie to review and later reconfigure the layout of the factory.

was careful not to lock any customers into a permanent discounting arrangement, instead realising that sometimes a little sweetener can help move new customers over the line.

Team engagementIn order to get traction on the aforementioned strategies, Charlie said he had to have engagement from his team. Faced with the reality of increasing unemployment, he was determined to retain his employees. Charlie openly discussed why they’d chosen to implement these changes and the results he was expecting to achieve. He also sought regular feedback from the team on how the changes were working out and welcomed any suggestions for further improvement. He found that by including the team in the process and explaining why the changes were important, they felt valued in the business and were all working in the same direction.

Getting the numbers to workThe first step was to reduce short-term business debt as much as possible. Charlie was prepared to limit his personal drawings and leave as much equity in the business as possible to minimise his external financial requirements. He believed the investment of additional personal equity was necessary to strengthen up the balance sheet of the business. The flow-on effect was to reduce interest costs to the business. The business is now in a better position to seek additional working capital to fund growth or funding to replace plants and equipment when the time comes.

Cash is the oxygen of any business and, knowing this, Charlie recognised a need to improve the way he invoiced and collected his debtors. He ensured he always had

deposits from private residential customers and payment terms became balance of payment on delivery. For his commercial and trade customers he formalised his terms of trade and documented his collections process. He would initiate contact, ranging from gentle reminders through to referral to debt collectors, allocating responsibility to a reliable team member. Fortunately he never had to refer anyone to the debt collector, a result he credits to the due diligence done on potential customers.

Raw materials inventory management also came under review. Charlie had enjoyed the security of having surplus raw material in the factory – this meant he could take on new orders at a moment’s notice. The reality: this was costing him money by way of the additional insurance, shrinkage and degradation in wood quality as well as tying up cash. Inventory levels have since been reduced without any impact on the manufacturing process.

These strategies provide a stable and prudent platform for future growth. Many of our clients who reduced overheads two or three years ago have subsequently been able to grow their business to pre-recession levels while holding overheads in check. Similarly, the drive for efficiency has meant that many have increased their gross margin above pre-recession levels.

What else could you do to improve your position? Contact your Hayes Knight adviser or call Scott Travis on 09 448 3232.

16 benchmarking hayesknightnz

Curiosity, or just plain competiveness, is an inherent quality shared amongst successful business owners. They have their finger on the pulse, always looking for the latest intel on how their business stacks-up against the other players or, more importantly, leaders in their industry.

In the early 1980s Xerox found themselves in a losing battle against the Japanese competitors. When David Kearns stepped up as CEO he gave in to his curiosity and discovered that the average manufacturing cost of copiers in Japanese companies was 40-50% of that of Xerox. In addition to this Kearns uncovered that it took Xerox twice as long as it’s Japanese competitors to take a product to market; five times the number of engineers, four times the number of design changes and its products had 30 times more defective parts. It was no wonder the Japanese were able to effortlessly undercut Xerox’s prices. This discovery prompted Xerox to evolve their manufacturing processes into one that was more sustainable, but it also pushed quality control and therefore less waste and a lower number of defects.

This story highlights the essence of benchmarking and the importance of giving into curiosity.

You can only compare what can be reliably measured. The good news is that just about every business function can be measured: turnaround times, pricing, profit margins, average transaction values, environmental impact, staff turnover, faults/returns and even management style. In order to get an objective opinion, you could sit down with your adviser and decide on the ones most relevant to your operations. If your business already monitors its own KPIs that are important to your vision and strategy, then these might provide a solid starting point.

Comparing where and why your business is different from your local industry averages is the first step to researching performance discrepancies and getting your house in order. Conversely, this basic comparison can put to bed any nagging worries and give peace of mind that all those fluctuations were felt across your industry.

Time for us to play devil’s advocate: If you compete against the average, are you not likely to remain average? Most business owners have giants in their industry that they look up to and

Curiosity or just plain competiveness? You likely already know when something isn’t right. How can the competition afford to replace their fleet of vehicles and open that new store? There are those nagging questions about how well your business is performing and the perennial concern that costs seem to be rising faster than money is coming through the door. Mike Atkinson reports.

admire. Who is your giant? How do you perform against them? What makes them a giant? What can you learn from the trailblazers to implement better practices within your business? You may even find there are areas where you are ahead; which will help shape your priority list.

But how do you know when you are making progress? A lot of business owners are talking about dashboard reporting as one way to engage and encourage staff to embrace the strategic direction of the business. Having dashboard reporting that compares a business against a target (either external or internal) can be a useful tool. Simply put this reminds me of the oversized thermometer chart that exists in most sports clubs to track their progress during fundraising season.

Benchmarking is an on-going process for best practice businesses. But it’s a process that provides the benefits of exceeding your goals and reaching your full potential. With succession planning on the minds of many business owners, showing data that is benchmarked against your industry can provide useful data for a purchasing party.

Linked to succession, benchmarking also plays an important role when assessing acquisition and merger strategies. With more organisations competing for smaller funding pools, leaders are compelled to explore these collaborative strategies to deliver service, reduce expenses, reach more clients and get results. So when an acquiring organisation reviews its own benchmarking data, they are then able to see how they stack up against target businesses to find the best fit. Does the target company carry too much stock? Are their debtor collections poor? Are they paying too much rent? These are all questions that can be answered, provided the acquiring company is tracking some baseline benchmarks.

Remember – what you can measure you can manage. What you can compare, you can improve. And when it comes down to it, we all need to constantly push for improvement in everything we do in order to reach our potential – both in life and in business.

If you are ready to give into your curiosity and adopt a more competitive approach to business contact your Hayes Knight adviser or Mike Atkinson on 09 367 1634.

17hayesknightnz preparing for tomorrow

Perhaps a higher value and a smoother transition could have been achieved if their exit was better planned and proactive steps were taken at the outset. Baby boomers are getting older and health concerns are starting to plague the initial timeframes laid down by owners of all ages. For many, the luxury of time is a limited resource. Hands are getting forced and for some they’ve simply run out of time to groom their businesses, or even their successors, for a sale on their terms.

Advisory boards have been re-invented, with a shift towards engaging independent skill sets onto a management board to lend valuable input to the organisation’s steering committee. Some think of this as a combination of ‘growing up and coming of age’ that is being employed by many of our leading enterprises as they take a corporate trailblazing role.

Episodes of TV series like The Sopranos, Sons of Anarchy and Underbelly highlight the need for a successful leadership team in what are fictitious businesses. In a somewhat comical and even ironic way, these story lines emphasise the need for collective management to get a more powerful outcome. Not surprisingly, key characters want to be part of succession planning. What we can take from this is that planning should always be at the forefront of an executive’s mind and that there should be people available to lead an organisation should there be an unplanned exit of a key person. What would happen to your business if you had a serious illness tomorrow and had to quit immediately? Would it operate as profitably long-term, would it command

The Godfather of all decisions

the price you demand with minimal effort, or would your estate be left with some severe issues to work through?

Reluctance by a working owner to surround themselves with an independent board that consciously pushes their comfort zone and demands change is adversely affecting shareholder value and annual take home profit. It’s time for SMEs to get on board with the governance and succession program. This is a realisation many mature executives have already discovered and a lesson tomorrow’s leaders have recently learned.

We’re certainly seeing a difference in results between those businesses that practise this discipline and those that don’t. Sure, succession’s just part of the mix in a governance programme, but dealing with the issue before you need to is about creating choices and doors of possibility. Unplanned amalgamations or takeovers/ buyouts because a more attractive business model has been created means the exit process can be fast-tracked.

If steps are taken, there will be enough time and the chance of a successful exit will be dramatically increased. In Godfather terms, “the family will be looked after.”

Make sure you are prepared and have options. Contact your Hayes Knight adviser or Matthew Bellingham on 09 379 1584.

“There just wasn’t enough time.” Who would have guessed that this classic quote from Marlon Brando in the Godfather trilogy would be echoing through many boardrooms today? Especially from those wishing they’d started the succession journey earlier. Hopefully their businesses don’t end up ‘sleeping with the fishes.’

You know your numbers...

...but do you know their meaning?

You’ve heard the name, now hear first-hand how Xero is changing Kiwi businesses for the better. Beautifully simple to use, Xero is exceptionally powerful in the way it supports businesses from the ground-up. Learn how Hayes Knight and Xero have helped Kiwi businesses add rigour to their business planning. To find out more visit hayesknight.co.nz/events or contact Xero advisor Nicola Croft:

T 09 414 5444E [email protected]

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Beyond the Numbers Issue 6