Chris Hooper | Shut Up & Save

Why the *#?! Didn't I Join AIESEC?

2013-01-02T19:45:00.000+10:30

Originally posted at Cirillo Hooper & Company

AIESEC is the world's largest youth-run organization, whose focus is primarily on providing a platform for youth leadership development. I had heard about AIESEC in my undergrad years once in conversation back in 2007. I didn't think anything of it, because I was working full time in the profession, and studying externally for the most part.

I was introduced to them again early 2012 when Mike from Our World Today introduced me to Jemma Schilling (who now incidentally now works at the firm, but that's a different story). She invited me to talk at their state conference, and I was happy to oblige.

At the conference, it turned out I already knew Trent Blucher from Fresheyedeas aswell as Chris and Mike from Our World Today. I met the other speakers and forged powerful new business relationships with Martin & Miriam Castilla from Smartline and Jo Schneider from DVE Business Solutions. I also was introduced to the Dean of Flinders Business School, and as a result got a job teaching there. Also at the conference I met some awesome university students, all of which were totally switched on and motivated.

Since then, I went on to hire Jemma in Cirillo Hooper & Company, had Waleed complete his internship with the firm, had four other AIESEC students register interest in the program next year, have had clients take on AIESEC members as staff members, three of them are volunteering to assist me with my charity One Day MBA and I've been invited to speak at more of their events.

These days not a day goes by when I don't talk about AIESEC, and how important it is in preparing university students for the business world. As Jemma put it, "It's like you're an AIESEC Alumni that never actually had anything to do with them at uni." Fortunately at 25, I'm still (kinda) young enough to fit in.

If you are a university student, and you're not working in your discipline, join AIESEC and they will help you bridge the gap between academia and 'The Real World.'

Jemma Schilling & Chris Hooper of Cirillo Hooper & Company with Jo Schneider & Rebecca Ham of DVE Business Solutions at the AIESEC Gala Night

Fixing Cars and Businesses

2013-01-02T19:43:00.002+10:30

Originally published at Cirillo Hooper & Company

n following from Jemma's last blog, I went out and bought Simon Sinek's book Start with Why on audible.com. In listening to it, it made me reflect on "The Why."

Our firm has had a very clear "Why" since we changed the purpose statement in February of 2012, this resulted total buy-in for the firm's mission. We now use the lean enterprise methodology of "5 Whys" to ensure internal projects we engage in are congruent with our firm's mission. I have no issue with the firm's mission, it's clear, we all know what we're doing and why we're doing it. The "Why" I'm looking for is, "Why did I become accountant?"

I once had the pleasure of meeting with an ambitious young high school student called Natasha. She was 17 and she knew she wanted to be an accountant and why she wanted to do it. I am certain she will be extremely successful in her career.

So why did I become an accountant? Initially as a young entrepreneur, I enrolled into my accounting degree, so I could run (or at least understand) the accounting in my own businesses. That was enough to get me through university, but I needed a more compelling "Why" if I was going to choose a business in accounting rather than another business. In his book, aptly called Accountants, Colin Dunn reveals that the third most popular reason for becoming an accountant was, "I am genuinely curious about business." It hit me, that was my why! I love business, just like an mechanic loves tinkering with cars, as an accountant I love tinkering with businesses. So in choosing to start an accounting firm rather than some other business was simple, if I chose another business I would only have one business to tinker with, through an accounting firm I get to tinker with heaps of businesses.

Having built on this idea some more, it dawned on me that working on a business is no different from working on a car. With that believe, I realise that any business can be fixed if you have the right parts and the right tools. The trick is knowing which parts to get and what tools to use.

Business Owners are Gladiators

2013-01-02T19:41:00.004+10:30

Many of your friends may have this misconception that being in business is easy because:

You don’t have a boss
You get to wake up whenever you feel like it
You get to do whatever you want
You only work four hours a week

While being a business owner is pretty awesome in the sense that:

Some get a bit of flexibility in terms of when and where they work
You get some pretty cool tax concessions
The harder [smarter] you work, the more you earn

That being said, most of our clients will attest to: being in business is still really, really, really hard work. I heard a good analogy last week, that said, "Business owners are gladiators." Too right they are, this vocation is not for the feint hearted and here’s some myths that I’d like to bust:

Most business owners I know work at least 50 hours a week and often more
When you’re not actually working, you’re thinking about the business
While you may not have a boss, your customer is the boss which means you have lots of people to keep happy
Most business owners I know particularly in the first five years are earning somewhere between $1 to $20 per hour after wages, overheads and taxes
Business owners seldom take sick days (unless it's really serious), most don’t take holidays

Just some food for thought if you’re ever thinking about quitting your day job. It's not all sunshine and daisies; it's really, really hard work. Make sure you know what kind of commitment you’re going to make. This is Sparta!

Innovation Accounting

2013-01-02T19:39:00.005+10:30

Originally published at Cirillo Hooper & Company

While there has been very little discussion of it in the Australian accounting profession, I thought it was high time I discussed 'innovation accounting' as coined in Eric Ries' bestseller The Lean Startup.

In its simplest form, innovation accounting Ries describes as "An Accountability Framework That Works Across Industries."

The notion behind innovation accounting is that while traditional accounting, although an integral part of any business, does not adequately satisfy the unique timeliness and relevance needs of the modern startup. The fact is that traditional accounting principles are used measure established business ventures as well as startups as if they were playing on the same field. The fact is the modern startup is on a whole different wave length from established traditional business, and thus the need for a new take on accounting is required.

The whole notion of Lean Startup is about the startup cycle of Build - Measure - Learn cycle, within that cycle innovation accounting plays different roles. I have elaborated on these roles as I see them within each area of the cycle.

Build

-Set a business hypotheses: This is typically the entrepreneur's business idea, but established in a scientific manner to test against.

"There is a market for widgets."

-Establish a minimum viable product (MVP) to establish real data: An MVP is the quickest way to obtain market feedback and test the business hypotheses without waste.

An MVP for widgets may be a basic website with to collect preorders or potential customers to register interest to buy widgets that don't even exist yet.

-Identify quantifiable metrics to monitor progress: The entrepreneur must identify what metrics are of relevance to validate the business hypotheses.

The metric for validating demand for widgets may include things like traffic, conversion rates and other leading web metrics.

Measure

-Establish the baseline: Once the metrics have been identified, the entrepreneur must use the MVP to establish a starting point to measure progress.

In our widget example we would set the baseline around the real data obtained from our basic website around the metrics that we set earlier.

-Monitor progress: The entrepreneur must now monitor the performance of the MVP under the original hypothesis.

For our widget site we would sit patiently and watch the data tick over until we are satisfied we have sufficient data to make modifications.

-Tune the engine: From here the entrepreneur can make changes or split test to drive performance from the baseline to the ideal, all while still monitoring the progress of our key metrics.

On our widget website we can make any number of changes namely the sales copy and the site design.

Learn

-Pivot or persevere: Having made adjustments to move from the baseline to the ideal, the entrepreneur can either decide to either pivot (change ideas or direction) or persevere with the current business model.

In our widget example we will either pivot to test the market for doodads rather than widgets, or we can perserve and proceed with our widgets business.

You can see from this example we have gone through a whole business cycle before your tradition profit and loss accounting has even come into play (Hence my previous article: Why your profit and loss statements don't tell you a thing). Even after a business is established, it should still never stop using innovation accounting to run the business.

Stop Trying to Invent the Next Big Thing

2013-01-02T19:37:00.003+10:30

Originally published at Cirillo Hooper & Company

This Thursday I will be speaking at Collaborate to Innovate (#C2IADL) on "The Next Big Thing" or more specifically, not waiting to discover 'The Next Big Thing.'

When I was involved with The Startup Club I used to rack my brains with fellow members trying to create the next Microsoft, Google or Facebook. Suffice to say many of my ideas did not make it past validation, and I was getting frustrated. So much so, that I was almost willing to give up on entrepreneurship as a career path and settle into a 9 to 5 in the accounting profession.

By the time I had finished my degree I had noticed several opportunities for massive innovation in my very own profession. I started putting ideas to paper and the rest as they say is history. I am now in the traditional business of accounting, doing some very untraditional things to gain market share and drive efficiency. Moreover, I now have an opportunity to go into other traditional businesses as a business advisor and introduce innovative new concepts.

The point I am trying to make is this: You do not need to be doing something new to be innovating. So if you're stuck trying to invent 'the next big thing', try starting with something you're already good at and innovating from there. It works for us, it works for our clients and it just might work for you.

Who knows?

While you're doing that, you may just discover 'the next big thing' along the way, except now you'll have the resources and experience to make the most of it.

Entrepreneurial ADD

2013-01-02T19:36:00.002+10:30

Originally published at Cirillo Hooper & Company

Can’t sleep at night? Can’t focus on one project for more than a day before jumping onto the next big idea? Getting bored of the business you’re in and ready to start a new one?

You probably have Entrepreneurial ADD (Attention Deficit Disorder). My brother David and myself suffer this affliction. I believe it’s from the buzz that comes with the challenge of building a startup from scratch. As soon as it becomes cashflow neutral the challenge is nowhere near as exciting and you start daydreaming about other business ideas.

The important thing to remember at this juncture, is that at cashflow neutral, no-one is really interested in buying your business yet. Further, if your business is at breakeven, then you have a validated business idea that works! The same cannot be said about any of your new ideas.
You need to discipline to persevere because the business, your customers and staff still need you.

Don’t go riding off into the sunset with another business idea just yet, finish (or bury) the one you started first.

2013-01-02T19:35:00.000+10:30

Originally posted at Cirillo Hooper & Company

As a small business owner you have to wear many hats. The operations hat, the marketing hat, the HR hat, the accounting hat, the IT hat, the legal hat and many more. This is done out of necessity rather than enjoyment or strategy.

You only have a limited amount of capital and you didn’t want to spend it on web developers, bookkeepers and lawyers, so you bootstrapped and did it yourself. You built your own website, you kept your books on a spreadsheet and you downloaded template contracts and changed a few words. This was done out of necessity, not enjoyment and probably saved thousands. My concern is you also might have a website that scares away customers, a spreadsheet that makes your accountant cringe and contracts as water tight as a sieve.

So when is a good time to stop wearing all the hats? It comes down to cash and opportunity cost. If you believe it is reasonable that you will get more business by having a professional website, then the investment was worth it. If you are spending all weekend doing your books, when you could pay someone a couple hundred to make the problem disappear, then it’s worth it. If the cost of getting a lawyer to review your contracts is cheaper than the potential lawsuit, then it’s worth it.

Sometimes an entrepreneurs biggest enemy can be themself. Know when to take a hat off and start focussing more energy on growing your business.

Photo: http://www.flickr.com/photos/staipale/3963327366/

2013-01-02T19:32:00.003+10:30

Originally posted at Cirillo Hooper & Company

Do you remember web 1.0 during the days between 1993 and 2001? Despite my age I do have vague recollections of dial up modems, Netscape Navigator, mIRC and the internet that was. Web 1.0 was static, top down, information only websites, where webmasters decided and created the content. It was in essence what webmasters thought you wanted to see.

By contrast to today, it was pretty boring.

Sometime after the Dot-com bubble burst in 2001 web 2.0 came into vogue. It was characterised by user oriented design, collaboration and social media. The internet suddenly became a whole lot more interesting, and now we couldn’t imagine life without it.

So what has this got to do with accounting?

Accounting 1.0 is the business framework of old. Much like web 1.0 it can be characterised as a top down relationship, with reactive partners providing services that they think you want. I remember an old joke about the accounting profession which pretty much sums up my notion of Accounting 1.0:

An accountant is a professional who can solve a problem you didn't know you had in a way that you can't understand.

Upon reflection, I resent that statement, but believe it to be true in some parts of the profession, As such I can identify these characteristics of Accounting 1.0

A numbers-centric approach to business
Giving answers (to questions that weren’t asked)
Accountant prescribed content creation, distribution and communication
Communication billed in 6 minute blocks
Time based billing on all services
Laggard adoption of technology

Conversely, Accounting 2.0 is the new business framework. I describe it as business partnership, where the firm and the client align their business goals and work together to achieve them. These are the characteristics of Accounting 2.0

A people-centric approach to business
Asking questions
User requested content creation, distribution and communication
Open and honest communication
Performance based billing on value add services
Leveraged use of latest technology to drive efficiency in both businesses

Have a think for a minute. Is your accountant using the latest version of Accounting? Or are they stuck on the dated Accounting 1.0?

2013-01-02T19:31:00.001+10:30

Originally posted at Cirillo Hooper & Company

15 May is one of the most important days in an accountant’s calendar. It marks the end of the tax season, and for many in the tax discipline, it is the proverbial calm before the storm that is end of financial year. The important word here is, calm, things will be quiet in the compliance department of our office (the same can’t be said for management accounting, sucked in Markus).

I have been working long days and weekends for the past month, and my health (and sanity) has taken a huge hit. Fortunately I am going on holidays tomorrow, 17 May 2012 for 10 days on a cruise around the South Pacific. I won’t have cell phone reception, which is probably a good thing, I’m calling it my ‘digital detox.’

This brings me to an important point. I am now committing publicly, that I am going to take at least one week off between 15 May and 30 June, for every year from now until I retire. Why? Because it is important to take a rest every now and then, or else you will crash and burn out.

I have been contacting a lot of my major clients this week to tell them that I will be on holidays, I was shocked to hear many of them haven’t taken time out of their business in years (even decades). While business owners are some of the most inspiring people I have ever met, they are also often the most highly strung (it might have something to do with the 16 hour days).

Just remember guys, as the Roman poet Virgil once said, “The greatest wealth is health.”

Bridging the Employer - Employee Gap

2013-01-02T19:29:00.005+10:30

Originally posted at Cirillo Hooper & Company

Bridging the Employer - Employee GapBy: Chris Hooper

Michael Johnson from Ultimate Achiever shared thisgreat quote by Robert Kiyosaki with me:

“Employees will work just hard enough to not be fired. Employers will pay just enough to stop an employee leaving.”

This really resonated with me, because it’s the main reason Cirillo Hooper & Company has invested so much time and money into researching human resource management. Being a disruptive thinker, I would ask the question:

“What if it didn’t have to be that way? How do you get employees working harder and employers paying more?”

The solution is simple, performance based incentives. A base salary is just that, a basic salary paid for physically rocking up to work. If you expect any more from your employees for their base salary, you’re kidding yourself. If you want to get your people excited, give them targets and bonuses for achieving those targets. This is a simple way to get your staffs’ objectives aligned with your business’ objectives.

Our goal is to pay more than half our base salaries in performance bonuses. We'll be happy because the firm will be performing and people will be happy because they’re making more money; not that it’s all about the money, but that’s a blog for another day...

Stop Cutting Your Prices

2013-01-02T19:28:00.002+10:30

Originally posted at Cirillo Hooper & Company

Nobody wins in a price war. In fact my brother put it quite well when he said, “It is a race to the bottom.”

Photography and fitness are classic examples that I have been interested in. They are both “lifestyle” professions where you get to do what you love for a living. The only problem with these businesses is that it is very crowded in the market place, and the first thing n00bies in the market place do is start slashing prices. I’ve seen both personal trainers and photographers charging $20 an hour, it makes me cringe.

So how do you compete in an industry where differentiation is difficult, while your competitors are slashing their prices? First, don’t cut yours. Second, find a better competitive advantage. Stop being all things to all people. Yes the market share is smaller, but it is also much easier marketing when you know your niche is and who your target market are.

Successful photographers and personal trainers I know niche themselves either by service or by sector or by both. For example you may be a wedding photographer, or you may be personal trainer dealing only with football players or you may be fashion photographer dealing only with models. You can command a better price for your services because you’re seen as an expert in your field.

Why your profit and loss statements don’t tell you anything

2013-01-02T19:25:00.005+10:30

Originally posted at Cirillo Hooper & Company

Personally, I shudder every time I look at our profit and loss statement. So much so, that I don’t even bother looking at it any more!

Why?

Because it is a historical document, it tells you what happened, I already know what happened, I was there! I want to know what’shappening and what is going to happen. Traditional accounting reports do not give me the business intelligence I need to make important business decisions.

This is where Key Performance Indicators (KPIs) and real-time-accounting come into play.

First, KPIs: Every single team member including working owners need to have ‘key performance indicators’ tailored specifically to their contribution to the business. KPI performance can be known as either a leading indicator or a lagging indicator. We want leading indicators because the help us predict the future. One classic example of a leading indicator is ‘number of prospect meetings per month,’ if we have a good idea of the conversion rate then we can estimate the number sales that are going to flow into the business in the future. I won’t dwell any further on the subject of KPIs, it is a discussion for another article.

Next, I will go onto real-time-accounting. We use a cloud based accounting platform called Xero. What is great about Xero is that is synchronises to our company bank accounting daily. This allows us to know exactly where we are at this point in time. This is great to know, and is so much better than waiting for reports that come monthly, quarterly or heaven forbid annually.

Budgets suck

2010-10-30T11:15:00.000+10:30

I hate budgets. I hate budgeting. I liken the idea of budgeting, to dieting; it sucks while your doing it and then you revert to your bad habits the minute you call it quits. For 99% of the population it doesn't work, so why do we even bother?

I suck at sticking to a budget and so does my wife. Being an accountant, I was able to quickly figure out that $1,000 in less $1,000 out; resulted in us living week to week. See I knew that what we were doing was bad for us, but we kept on doing it (sort of like junk food right?) People have a tendency to spend everything in their bank account (sometimes more), simply because the money was there. Then we'll usually suffer for about three days until that next pay cheque come in (see Wage Slave)

I knew something needed to change, but instead of trying to change our behaviour, I decided to change the system. I was going to tee it up so that it was actually illegal for us to pull our savings out of the bank and spend it on crap. I was also going to make sure it was going to happen without any conscious effort on my part. Because if it were up to my subconscious, that money would never make it into the bank account.

Then I read David Bach's: The Automatic Millionaire and it all made perfect sense.

So here's what we did:

Set up two First Home Saver Accounts because:

We were going to get 6% interest
We'd get the government co-contribution
Income was flat taxed at 15%
Money could not be withdrawn unless its for the purchase of a home

Then I decided to salary sacrifice 21% of our gross salary because:

Superannuation generally performs well in the long run
Salary sacrifice is flat taxed at 15%
As opposed to the individual marginal rates
Could not be withdrawn until retirement
By choosing a percentage contributions go up with our salary increases

All it took was an email to the payroll officer with a request to salary sacrifice 21% of our wage, then have the first $200 be directed into the home saver accounts. Most companies will be happy to help you out with this kind of request.

The end result is that I don't have to think about saving (even though I write about it all the time). The system I built does it for me. Yes, it took a bit of stuffing around, but it will be worth it in the long run.

Chris Hooper
Shut Up and Save

Take the emotion out of your investments

2010-10-26T19:05:00.000+10:30

Financial markets are not comprised of financial instruments, instead they are comprised of people dealing in said instruments. People are driven by emotions, emotions are at the best of time irrational. So if markets are people and people are irrational, it can be concluded that financial markets are irrational.

As such there are three cycles that every market goes through:

The Upside - Greed:

Optimism: The investor returns to the market with renewed confidence and high expectations.
Enthusiasm: The investor is excited as the market continues to rise and more investors enter the market.
Exhilaration: The investor is thrilled with the performance and high expectations continue.
Euphoria: The investor is absolutely stoked, but the market has reached a peak. The asset is now over-valued due to high demand created by a greed driven buying frenzy.

The Downside - Fear

Unease: A dip in the market leaves investor with a sense of anxiety.
Denial: The investor go into a state of denial, ignoring key indicators of poor performance.
Panic: The herd mentality kicks in, and the market goes into a fear induced selling frenzy.
Capitulation: The investor has surrendered, giving up anything thought of recovering their initial investment and will either sell at a loss or hold out until the next cycle.

The Recovery - Hope

Depression: The investor is depressed, wallowing in past mistakes, or blaming it on scapegoats like the government or the banks. There are no more sellers in the market place, and the intelligent opportunists start entering the market
Hope: The investor is hopeful as the market continues to strengthen as the opportunists continue to buoy prices.
Relief: The investor is relieved as the market has confirmed an uptrend, technical investors begin to enter the market looking for opportunities.
Optimism: The investor returns to the market with renewed confidence and high expectations and so the cycle continues.

This cycle is depicted below:

http://marketblog.wordpress.com/

If you can get this concept in your head and control your own emotions, you'll be able to identify and capitalise on opportunities within the market.

Until then,
Shut Up and Save (for the next opportunity)
Chris Hooper

Mission Statements: Not Just Corporate Hogwash!

2010-10-15T20:49:00.000+10:30

The idea of mission statements used to really piss me off! It was made even worse when I discovered the Dilbert Random Mission Statement Generator (no longer available online guys, sorry). It would spit out things like;
"We have committed to synergistically fashion high-quality products so that we may collaboratively provide access to inexpensive leadership skills in order to solve business problems"
This sounds like the kind of corporate BS I would expect to see plastered on the staff room wall of a Wal Mart.

But how do you expect your staff and customers to buy into that crap, when you don't even buy into it?

Now there's a reason why the mission statement is the first part of the business plan. It's because it is the most important part. Problem is it gets gleaned over so the entrepreneur can get to the juicy bits like marketing, or operations. Like building a house; when building a business, you need a strong foundation. Without a good foundation; your business is stuffed, no two ways about it.

I am now going to introduce a term I just made up five seconds ago; A Foundation Plan. A foundation plan is the first part of your business plan and it forms the basis from which all future planning and decisions should be made.

In his book, Strategy and the Fat Smoker, David Maister discusses four key aspects for developing a business strategy, or in this context a foundation plan. I have elaborated on these a little from my own research, and included a subheading under each of the four aspects. They are as follows:

Purpose: The Mission - Why does this business exist?

Stakeholders - The People - Who does the company work for?

Vision: The Direction - What are we trying to achieve?

Rationale: The Reason - Why are we trying to achieve this?

Values: The Principles - What values are driving this vision?

Ideologies: The Philosophy - What do we believe in?

Culture: The Way of Life - What can I, as an employee do to contribute to the mission?

Strategy: The Game Plan - What is the business going to do to achieve the mission?

I am going to leave it at that for now before I give away too much away. Suffice to say, if you answer those questions you're heading in the right direction.

Until then,

Shut Up and Save!
Chris Hooper

Business Plan. Do you have one?

2010-09-27T17:49:00.000+09:30

If you don't have a map, how do you know if you're going in the right direction? The same can be said for business plans. If you don't have a business plan, you could find yourself on the road to Nowhere, or worse the road to Bustville.
Many entrepreneurs that I have met have this misconception that business plans are only for those seeking venture capital or bank finance. Although they are correct to some extent; those seeking VC or loans need business plans, that's still no excuse for not having one for your business.

But where do you start? It's the first objection I hear. It's a valid question; it's not like they taught us Business Planning 101 in highschool (perhaps they should have). A business plan is a daunting task, and it is not one to be taken lightly. A business plan should serve as a vehicle to get your ideas out of your head and onto paper. Not only that, it should serve an operations manual for running your business. It should be reviewed and updated annually in light of changed circumstances; this is what I call a living business plan.

There are so many different formats for a business plan and I am yet to find a definitive standard. From my experience in business plans I can boil a business plan into five core components:

Business Background: What is your business about? What are your goals?
Operational Plan: How are going to run it? Who's going to be involved?
Strategic Plan: How are you going to achieve your goals?
Marketing Strategy: Who's your customer? How will you communicate with them?
Financial Statements: How will it be financed? What kind of profit are you expecting?

I won't go into too much more depth now (I'll save that later), I just wanted to plant the seed in your head so you can start thinking about getting your business plan sorted.

Until next time,

Shut Up and Save!
Chris Hooper

Debt + Employment = Modern Wage Slave

2010-09-24T20:22:00.000+09:30

Below are some rather colourful illustrations to challenge the way you think about the volatile mix of employment and bad debt (also know as wage slavery).

The entire world wants you to become a wage slave and they want you stay a wage slave. This really puts you behind the eight ball as you fight an uphill battle toward financial freedom. Question is; do you have the guts to fight for it?
Below is a list of organisations who are quite happy for you to remain a wage slave:

The Tax Man: I remember reading in the Financial Review before I even became an accountant, that those who pay more for tax advice generally pay less tax. Typically people who need to pay heaps for tax advice are not the wage earners, but the self employed, the business owners and the investors. As a wage earner, the government collects its tax from you every month from your employer by way of “Pay as You Go” withholding. Business owners, the self employed and investors can defer their tax payment until the very last day it's due (usually 11 months after the end of financial year!)

As a wage earner your tax optimisation options are limited to basic strategies such as negative gearing and salary sacrifice. The self employed, business owners and investors however enjoy a myriad of tax planning options limited only to the imagination of their accountant (and the boundaries of the law, hopefully).

As such it’s in the tax office’s (and the government's) interest that you earn wages so you can keep the government coffers full.

The Bank: Banks love wages slaves. Why? Because wages slaves as defined in my previous rant spend beyond their means, which means they often use borrowed money from credit cards, car loans, holiday loans and personal loans. Because this is unsecured debts (bad debt as described in another previous article), the banks get to charge higher interest rates and cash in big time.

What's got me thinking; is that it's actually harder for the newly self employed, business owners and investors to borrow as much money as their employee counterparts. This is because their income is irregular and not guaranteed. So in this way they're actually prevented from borrowing beyond their means, which is a good thing.

The Salesman: Anyone flogging big ticket consumer discretionary goods (ie the fancy stuff you can live without; cars, televisions, jewellery, holidays etc) are more than happy to peddle interest free their interest free payment plans if it means they'll sell more product. And as long as you're employed full time you can go your hardest! Just don't miss a payment or else you'll get flogged with a 20%+ penalty interest rate. God forbid you lose your job.

So do you get the picture; bad debt + employment = trouble. You'll find yourself going to work just so you can pay off your debts, and that my friend is not conducive to a happy life.

So until then,

Shut Up and (Stay Out of Debt)

Chris Hooper

Are you a wage slave?

2010-09-16T18:47:00.000+09:30

A wage slave is someone whose immediate livelihood relies solely on wages from employment. In the third world wage slavery is with respect to wages to the equivalent of basic sustenance. However a new form of wage slavery has evolved in developed economies.

This modern wage slavery is where someone spends exactly what they earn each week (sometimes even more) on goods that they think that they need. You may recall people you know talking about how they need some new clothes or they need a bigger house. Given that these people are living week to week, this means they have no capacity for saving and thus no way of earning passive income. Consequently they are entirely dependent on wages as their only source of income.

Now what happens if an anvil falls on their head and they cannot work for six months? Why that's what income protection is for, right? Well yes, that's exactly right.

Now what happens if you absolutely hate your job and its making you miserable? You find a new one right? What if you can't find a new job? What if you just hate working altogether? Well then you're stuffed! And that's the point I am trying to get to. If you're miserable and you can't tell your boss to go stick it where the sun don't shine, whilst knowing that you can make three months rent; then I am afraid you're a wage slave.

Don't be too upset, I'm a wage slave and most of the people I know are wage slaves. It's just how society is geared. You go to school, so you can get a good job, so you can buy a nice house (and spend the next 40 years paying it off). Did anyone else notice we didn't get much choice in the matter?

There's a system that we were ushered into; get a crap job, buy a car, finish school/uni, get a better job, buy a house, have kids, buy another car, retire 45 years later. There was nothing in the handbook about the options of starting a business, saving 12 months worth of living expenses or investing some money.

On that note, I'm going to end this rant before I get to worked up on my financial literacy soap box. In subsequent rants I am going to talk how you can get out of the rat race of wage slavery and my conspiracy theory about how the entire world is hell bent on keeping you as a wage slave.

Until then,

Shut Up and Save!

Eliminate your Unproductive Debt

2010-09-11T07:48:00.000+09:30

There are two types of debt. Good debt and bad debt. Put simply good debt is borrowing money to purchase an investment which will go up in value. Bad debt is using money you don't have to buy shit you don't need to impress people you don't like.

Let me elaborate.

Good Debt
As I said before good debt is when you borrow money to purchase in investment that will go up in value and generate income. Another good thing about good debt, is because it was used to purchase an investment the banks have security, thus they're inclined to offer a lower interest rate because they know they'll get their money back (one way or another). Another bonus is that in some circumstances you can actually get a tax deduction for the interest you pay on a loan to purchase investments.

I would like to stipulate that good debt is even better when the debt-equity ratio is within your risk profile and you can manage repayments. Good debt goes bad when you borrow too much money and cannot afford repayments or when the value of your investment drops below the value of the loan. If you want any more evidence of this notion just take a look at the sub-prime issues in the US.

Bad Debt
Bad debt is personal loans, car loans, credit cards, those "interest free" finance contracts and any other form of interest incurring finance. Bad debt is bad because the asset that you purchased with borrowed money loses its value the second it leaves the shop, but your still stuck with the debt. Because the banks have no security over the debt, they're inclined to charge you a punitive interest rate to cover the risk of you defaulting. You'll notice that the higher the risk of default the higher the rate of interest; a car loan will attract a lower rate than a credit card, because the bank can always take the car and get some of their money back.

So we want to eliminate our bad debts because they have no productive asset behind them and because we're paying a higher rate of interest on the debt. You'll notice that if you're paying 20% interest on credit card debt, there's very little point in saving money in a savings account that collects 6% (or worse trying to play the stock market). Keep it simple stupid; if faced with the decision of saving at 6% or paying off debt at 20% you always choose the debt. Why? Because the paying of the debt is like getting a 20% return on you're investment! Why wouldn't you choose it?

So before you shut up and save, perhaps you should shut up and pay off your debts. Then once your free from debt stop buying useless crap and start saving for your future.

Chris Hooper
(Shut Up and Save)

What you need to know about your business' cashflow (Part 2)

2010-08-29T17:07:00.000+09:30

In my previous article, I talked about what can happen to your cashflow if your customers take to long to pay you, or if it takes too long to sell you your goods or provide your service. Now I will offer come insight into what you can do to free up this cash flow.

But first, I would like to chunk down the idea of working capital for you. Working capital is comprised of three key elements:

Accounts Receivable / Debtors (People that owe you money)
Accounts Payable / Creditors (People that you own money)
Inventor / Work in Progress (The goods or services you sell to make money)

Now that we've got that out of the way, the following offers some tips for each of these key areas.

Accounts Receivable:

Ensure you issue your invoice promptly: This is probably the easiest thing to control and a prime contributor to lock-down.You've got to get in while its still in your customer's mind how good the product or service was.
Send invoices by email as well as post: This will save you a day of postage and will make doubly sure that the invoice hits its target.
Make sure your invoice is clear, concise and accurately spells out the terms of payment: This will ensure that there is no ambiguity to the terms of the contract.
Make paying the invoice easy, provide different payment options: Now I'm not saying that you need to rush out and sign up for BPay or credit card merchant facilities. It however make sense to offer a cheque and an electronic funds transfer option to allow them to deposit straight into your bank. Most people have internet banking and this will save you visiting the bank to deposit cheques.
Follow up immediately with invoices that exceed terms: Most of the time your invoice has been mixed up in a pile of paperwork, or simply forgotten about. A gentle reminder to your customer can go a long way to getting you paid sooner.
Don't offer credit to everyone: Business credit is basically like a loan, would you lend money to anyone off the street? Then you probably shouldn't give credit to anyone off the street. Credit should be earned through a good working relationship or a good reputation.
Ask for credit references: Many big businesses will provide you with a form that needs to be completed in order to obtain credit terms. This form will ask you to provide the details of suppliers you currently have credit terms with; the company will then follow up with these companies and assess your credit worthiness.
Ask for deposits: If you ask for proportion of the payment upfront before the delivery of the goods or service, you'll have at least covered some of your costs while you're waiting for the invoice to be paid.
Ask for the money up front or cash on delivery: It's a bold thing to say I know, but you don't walk out of the grocery store with a trolley full of food and pay 30 days later, so why should you business be any different. I know business to business credit is almost expected these days, but it is at least worth investigating this option. It will essentially resolve all your cash flow problems.

Accounts Payable

Get organised: keep all the bills in one place, get them onto your accounting software as soon as they come in.
Creditor scheduling: It pays to know who you have to pay and when you have to pay them by. It will help you plan and manage your cashflow better.
Strategic release of creditors: Find out what the due date is and pay on the absolute last day. This cash can be used for working capital in the meantime.
Tell the supplier if you're having trouble paying: If you believe that you're not going to be able to pay your creditors in time, call them before they call you. Explain the situation, they will understand because all businesses have been there. It will go a long way to preserving your relationship with your suppliers.
Prioritise your creditors: If you have to juggle your bills; figure out which bills are a higher priority and pay them first. There's no point paying your stationery company first if your electricity is about to get cut off.

Inventory

Don't order too much (or too little): Inventory management is a delicate balancing act. Order too much and you've forked out good money for stock that's going to be hanging around for a long time. Order too little and you're stuck with stock-outs that are going to cost you business and cause you administrative headaches. The trick is finding just the right amount to order to keep things ticking over. If you're concerned ask your accountant about economic order qunatities and inventory management.
Plan ahead: Spend a little more time considering your inventory needs for the month, this can go along way for getting your inventory levels right.
First in, first out: Stock that came in first should be going out the door before more recent additions are sold. Don't promote new stock, if you can move the old stock first.
Get it done quicker: For all those in the service sector, you need to understand that the sooner the job is done, the sooner you get paid. So get it done quicker. If it means you get paid quicker; try and look for "quick wins" the smaller profitable jobs and prioritise them over your slower projects.

Well I hope these tips help you out with your cashflow management.

Chris Hooper
(Shut Up and Save)

What you need to know about your business' cashflow

2010-08-06T18:00:00.000+09:30

For all those in business, and even those of you thinking about going into business; listen up. I am going to explain what cashflow is, how it works and how it is the number one killers of businesses.

When a business fails it has run out of cash, not profit. Therefore cashflow which is the cornerstone of is working capital. Management of both cashflow and working capital is absolutely imperative to survival.

So what is working capital?

Working capital is the transient funds used to support a business' day to day operations. So it is the money used to purchase of inventory, pay wages and bills. The money used to pay these things comes from one source; sales.

So by that logic cash flow is the analysis of how the cash from sales goes to paying your bills. On the face of it, you may just think that cashflow is as simple as money in & money out. Unfortunately it’s never that simple and here’s a demonstration:

Say you’re in a commercial office furniture business. First you need to fill your showroom with stock so you approach your supplier and order $10,000 worth of stock. The stock arrives and with it comes an invoice for 30 days terms. You put the stock up for sale, and hope that you’ve sold them all before that invoice is due. The 30 days comes due and you haven’t moved much stock, but you have got some cash in the bank so you pay your invoice on the due date like a good customer. The 30 days it takes you to pay your suppliers (creditors) are known as creditor days. The average time it takes you to pay these creditors is an important measure of cash flow performance.

The important measure is inventory turnover. How long does it take you to sell all of that stock that you just bought? Let's say in this example it’s 50 days until you get turnover all your stock. So when a customer buys this product the product gets delivered and you issue an invoice with 30 day terms. Unfortunately your customers aren’t as courteous as you are and it takes them 60 days for them to pay the invoice. This is known as your debtor days, and represents the last critical measure of working capital management.

So let’s put it all together in some sort of timeline. So you ordered stock, it arrived, you were issued an invoice for the order, in 30 days you pay that invoice, 20 days after that you sell the stock and issue an invoice, 60 days after that you actually get paid.

You can see there that we’re going to have some problems if we continue to do business this way.

Stay tuned to my next post to see what we can do to address some of these problems.

Until then enjoy your weekend.

Chris Hooper
(Shut Up and Save)

Who's Going to get your Super if You Die?

2010-07-22T18:07:00.000+09:30

As some of you may know I recently got married to my lovely wife Katie. Well she’s been running around the city this week changing her name at the bank, Medicare, DTED, Electoral Office and what not. She’s also had to change her name with her superannuation fund. This prompted me into the realisation that we’d have to look at our beneficiary nominations. Being newly weds it is only natural that’d we’d now elect each other as beneficiaries in case the worst were to happen. Would it surprise you if I told you I have come across clients with ex girlfriends, ex husbands, deceased siblings and estranged high school friends as their beneficiaries?

My question to you today is; who’s going to get your super if you die?
For members of big superannuation funds (Self Managed Super Funds are a whole other ball game) there are three main types of beneficiary elections you can make:

Binding
These nominations can be binding on the trustee and thus provide the member with some level of certainty that this nomination adhered to. Such nominations also provide for expeditious payment of benefits. Unfortunately these nominations must be renewed every three years to remain valid and can still be challenged in court

Non-Binding
These nominations do not oblige the trustee to follow the nomination; they are merely recommendations as to the member’s wishes. Such nominations are easily contested and may create delays in the payment of benefits. One advantage is that unlike binding nominations, there is no obligation to renew these nominations regularly.

Legal Personal Representative
The previously mentioned nominations are dealt with exclusive of the will, however a fund member can elect to have their superannuation entitlement paid to their estate to be distributed in accordance with the will.

So when your 2010 superannuation statement comes in the post soon, instead of filing it in the bin; why don’t you actually open it. Take a peak at the balance and have a look at who you nominated as your beneficiary all those years ago. If it’s not who you want it to be, it may be worthwhile updating your nomination.

Chris Hooper
(Shutup and Save)

Superannuation Revisited

2010-07-21T18:15:00.000+09:30

In the past couple of months I have been met with much criticism and confusion about my zealous love for superannuation. To explain: First of all, I work in the superannuation industry and know the laws and strategies inside and out. Second, I have done some in depth analysis and made some startling realisations which have swayed my own investment decisions.

To clarify on my previous article. Let’s assume you’re in the 30% tax bracket (between $37,000 and $80,000) this means that for every dollar after $37,000 that you earn, the tax man will take 30% tax as well as an addition 1.5% in Medicare Levy, as such you’re effectively paying 31.5% in tax. If you were to “sacrifice” this income into superannuation it would only be tax at 15%. So already by electing to save for your retirement over saving money in your own name you’ve saved 16.5% in tax, which is effectively the save as making a 16.5% return on your investment.

To illustrate, imagine you want to save $1,000 of your gross before tax salary; you can either invest it in superannuation or invest it in your own personal name. If you were to save this $1,000 in your own name, the tax man would want his cut and would take $315, leaving you with only $685 to invest. If you instead chose to put this money into superannuation, the tax man would cut you some slack and he would only take $150, leaving you with a much more attractive $850 to invest.

What compounds this paradox is that the tax man also wants to get his hands on the money that these two investments earn. So assuming a very conservative 6% return, the tax man would want 31.5% of this money if it’s in your own name. If its in superannuation its only going to get taxed at 15%. What this does (as discussed yesterday) is reduce your effective interest rate down to 4.11% in your own name and 5.10% in superannuation. Now 0.99% doesn’t seem like much on the face of it, but over a 45 year working lifetime that gross $1,000 that we invested each year at 6% results in a difference between $85,429.36 in our own name or $139,637.65 in superannuation; that’s a 63.45% difference. What frightens me is that if you increase the investment return to 10% the difference between the two over 45 years is whopping 104.59%.

Now this isn’t to say that superannuation doesn’t have its risks; just like every other investment. As my mother cautions the biggest risk is legislative risk; where those mugs in Canberra might decide to change the superannuation rules (again). As it stands however, salary sacrifice looks pretty good at the moment. But I’d contact an account or financial advisor before implementing a strategy because there are plenty of other considerations that need to be taken into account.

Chris Hooper
(Shutup and Save)

Why cash might not be king after all

2010-07-20T20:40:00.000+09:30

Personally, I have a problem with cash at the bank as an investment. Don’t get me wrong, cash is important, it stops you reaching for the credit card when an emergency (or impulse buy) pops up. Most experts suggest you have three to six months cash saved up in a high interest savings account, just in case the worst happens. I totally agree with this idea, try to imagine if you lost your job and you didn’t have savings to fall back on? You’d be living off a credit card until you get a new job, it’s not fun, trust me I was there when I left a full time job to go to university.

But I digress, let’s say you found a high interest savings account that was paying 6% interest per annum (which many are at the time of writing). Some may think, “Wicked, a 6% return guaranteed. That’s way better than the negative forty-something percent the stock market had last year. My money will be safe there.”

Wrong.

You’re money is only safe there if you plan on using it for something in five years time (such as a house deposit or car purchase). As a long term investment, cash sucks!

Here’s why:

It is unfairly taxed in Australia: Unlike shares and real estate, there is no Capital Gains Tax discount or dividend imputation here. The interest on cash is taxed at the full marginal tax rate. This means if you’re in the 30% tax bracket then 30% of your interest is going straight to the government.

Your earnings are eroded by inflation: If I were to pick a random year in the past, say 2005 inflation was 2.8%, the cash rate was 5.7% so a good term high interest account would collect 7.7% (about 2% over the RBA cash rate). Now once we donate 30% to the tax man we’re left with 5.39% in our pocket, then once we let inflation chew up the rest, we’re left with a measly 2.59% net return on our money. Good luck getting to a million dollars at 2.59%!

I think the only time cash makes an appropriate investment is when you cannot afford to lose your money in the stock market or real estate market. Such times would be; when you’re nearing retirement and when you’re saving for a house.

Why wasn't I taught this at School?

2010-06-25T19:46:00.000+09:30

I will blame someone for our collective financial stupidity: The education system.

While we were busy learning about chemistry, physics and history we seemed to have missed out on important lifeskills; fundamental things from how to fill out a tax return to how to iron our shirts. We are missing some real fundamental lifeskills from our curriculum.

These were the skills that our parents were expected to teach us, but chances are both parents were working all through our childhood an adolescence. This means we were simply left to fend for ourselves an learn from our own mistakes. That means that a few shirts will get burnt, and a few credit cards will get maxed in the process.

Now there's nothing wrong with this learning this way, it's character building and great for building independence. But wouldn't it be nice if we walked out of high school fully equipped to with everyday lifestyle skills.

What concerns me is that the big four banks are running their financial literacy workshops. Clearly they are pushing an agenda and raising the next generation of credit card junkies.

Have a good weekend.

Chris Hooper
(Shut Up and Save)