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04 New Zealand 2050 Where will we be?

issue five summer 2011

07  Donation cap lifted Give and get back

12 Business health check Put yours to the test

beyond the numbers | keeping your business future fit

let’s clean up this town MW Cleaning’s secret green weapon tape removed 6 Red Big financial reporting shake-up

to grow up 10 Time The first steps towards good governance

ignites 14 Change new beginnings

Reinvention fuels growth for Modtec Industries


Find the profit potential in your business

What impact would an increase in your price have on both your cash flow and profitability? What impact is the time to collect debtors having on your business? Should your primary focus be on increasing sales through growth, improving margins or reducing costs? Beyond the Numbers training will help you: + Identify and understand the main drivers of profits and cash in your business, plus how this impacts on business planning + Determine the financial implications of any potential future changes to your business + Implement strategies that should be employed right now to make a real difference to your profits Funding is available for this training. For more information on the training and funding eligibility please visit hayesknight.co.nz or contact Business Improvement Specialist Mike Atkinson. T: 09 379 7013 E: mike.atkinson@hayesknight.co.nz W: hayesknight.co.nz


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i ssue f i v e

contents

beyond the numbers | keeping your business future fit

features Reinvention is one of my favourite words Whether the market has outgrown your product or you have outgrown your position, deciding to reinvent your business, your life or yourself can ignite new beginnings. Sometimes that decision is forced by the economy, other times it is offered by opportunity. Regardless of the circumstances that bring you to this crossroad reinvention is the choice that opens new doors, offers the promise of potential and increases your chances for success.

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New Zealand 2050

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Red tape removed

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Let’s clean up this town

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Change ignites new beginnings

This issue has some great examples of Hayes Knight clients who, in response to the signs of changing market conditions, had the courage to reinvent themselves and their organisations – and the results speak for themselves. Similarly, in today’s competitive market, the successful organisations have managed to wave goodbye to the good old days of running your businesses by the seat of your pants. Traditionally, New Zealand SMEs have often discounted governance as expensive or complex without fully appreciating the benefits that this leadership discipline brings. Now, challenged to find ground-breaking ways to climb the ladder to reach new markets, businesses have adopted a new approach to governance and want to know how to introduce a board. The outcome of the Penny and Hooper tax case was one recent shake-up that hit the accounting world. In another, the legislative framework that drives the requirements under which your financial statements are prepared will be undergoing a significant overhaul. This should reduce the burden of compliance on the engine room of the New Zealand economy, while allowing accountants, managers and owners to focus more on business. Let’s face it, quality, timely information has always been the intended purpose of financial statements since back in 1475 when Luca Pacioli first thought of the double-entry system that today we call accounting. Change has created a need to consistently manage, monitor and reinvent our business. So let’s turn up the music, get out of our comfort zones and embrace it. Enjoy!

Where we need to be

Big financial reporting shake up

MW Cleaning makes its eco-friendly mark

Reinvention fuels growth for Modtec Industries

News, views & tools for success

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Supreme Court loss for taxpayers

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Time to grow up

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Financial health check

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Hayes Knight news

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Should I stay or should I go?

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The last word

Learning from Penny and Hooper

The first steps towards good governance

Have you had your annual check-up?

Celebrating outstanding achievements. Out and about. Meet Marketing & Communications Manager, Damian Bennett

Why you need Perceptive’s client-retention tool Customer Monitor

Lead or bleed

Craig Fisher Chairman, Hayes Knight New Zealand

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.

Beyond the Numbers is published for Hayes Knight NZ Ltd by Tangible Media www.tangiblemedia.co.nz Editor: Deirdre Coleman. Account manager: LauraGrace McFarland. Designer: Alice Huang. Cover Photo: Tony Brownjohn.

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future thinking

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New Zealand 2050 What we consider important now, may not be so in the future… Mike Atkinson looks at where we should be heading.

Today, over-65s account for 12% of the population but receive 25% of government spending. By 2050, the increase in over-65s is estimated to be 150%, and 400% for the over-85s.

New Zealand is heading for significant change over the next 40 years. Our population is estimated to double to 8 million by 2050. Today, the power of technology is doubling every year; LinkedIn, valued at an estimated $4.3b, is worth more than Fiji; and revenue from the Facebook simulation game Farmville exceeds that of New Zealand’s wine exports. With all this change, we will face many challenges: inequality in income levels and educational attainment; labour force productivity; population density and housing pressure; rising health expectancy; the crime rate; and an aging population. Today, over-65s account for 12% of the population but receive 25% of government spending. By 2050, the increase in over65s is estimated to be 150%, and 400% for the over-85s.

Where are the opportunities? So how do we plan for this growth and manage change? How do we remain competitive on the world stage?

2011 1 2 0 2 2031 2041 2051

AgITO and New Zealand Trade and Enterprise have proposed two possible future trajectories for New Zealand by 2050. In the first, we have failed to build on our legacy as a primary sector leader and many nations have overtaken us in terms of primary product volumes, quality, efficiency, cost effectiveness and market positioning. Consequently, New Zealand is a small, aging and irrelevant country that makes a living on offering low-value tourism. Most of our productive assets and land are owned by overseas investors and our standard of living is very low so our children have left to seek opportunities overseas. The second trajectory, which Hayes Knight believes to be more accurate, suggests that having focused on investment into R&D and innovation, New Zealand has become the world leader in export product quality and innovation, particularly in the primary sector and food production. Our scientists have successfully continued to address environment challenges such as carbon emissions, clean water supply and harnessing renewable energies. By investing in innovation and intellectual property, New Zealand industry has become ‘weightless’, making significant earnings from licensing and investment management. The country has invested into complementary industries and enjoyed decades of economic growth and prosperity.

New Zealand has many comparative advantages: a sustainable reputation in the international market based on a clean and green image, low population density, renewable energy, an abundant supply of water, a society with a ‘can do’ attitude and a stable business environment. Sir Richard Branson has highlighted the tremendous opportunity Christchurch has to rebuild the city with green businesses at the hub. To maintain and build on these advantages and gain a competitive edge globally, we need to create a new economic vision based on a clean economy with wealth creation through five pillars – clean energy, clean transport, clean industry, clean agriculture and a clean environment. Our future global advantage should be based on the development of innovative thinking, providing low carbon intensity, high value goods and services, produced from renewable energy sources through efficient resource processes. Currently we are great at exporting raw products so that other countries can profit by converting these into value-added products. We need to understand how and where to add value in the value chain so we can reclaim some of the profit we give away to other nations. We often believe that yesterday’s solutions will overcome tomorrow’s problems and that past trends or patterns will continue. So we neglect opportunities offered by the future. The challenge is to spot new trends and exploit them early to create a competitive advantage over those less prepared. There are signals of what lies ahead all around us, we need to see them and act to capture and maximise the opportunity, while mitigating any risk. We need to find ways to differentiate ourselves, increase our productivity and be prepared to take on world markets by focusing on adding value to the value chain. New Zealand has one opportunity to keep a step ahead in respect of our primary resources and our clean green image. The time to act is now. Striving for a weightless economy will enable our country to be agile and to leverage off our other skills. The future is already here – let’s embrace it.


tax changes

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Supreme Court loss for taxpayers In life nothing is certain but death and taxes, a saying that was recently reinforced by the Supreme Court ruling of the landmark case of Ian Penny and Gary Hooper. The Commissioner alleged that the Christchurch orthopaedic surgeons used corporate and family trust structures as a means of tax avoidance. By Phil Barlow While the majority of the Court of Appeal agreed with this decision, the High Court, did not. In its recent judgement, the Supreme Court unanimously agreed with the Commissioner’s position and has upheld the Court of Appeal’s decision. The Supreme Court maintained that although the structures themselves were entirely lawful and unremarkable, the use of those structures by Penny and Hooper to pay artificially low salaries amounted to tax avoidance. For some, this judgement was not a surprise. However, it does still leave a degree of uncertainty hanging over taxpayers, because in the case of Penny and Hooper, although the structure itself was perfectly acceptable, the outcome was not. The judgement has reconfirmed the need for people to be more vigilant when restructuring their affairs. The IRD has released a Revenue Alert RA 11/02 on this issue. Whether you believe the decision is right or wrong, as a taxpayer, you probably do not want to end up in litigation. Consequently, you should generally be following the IRD guidelines.

In our view The one exception would be the 80:20 rule (outlined on page 4 of the Revenue Alert RA 11/02). The 20% business profits (80% salary) for entrepreneurship, intellectual property, business know-how, etc is pure guesswork by the IRD. Businesses have many varied profit drivers outside of the individual’s skill and personal exertion. What’s more, the market salaries (based on locum rates, temporary employee hourly rates, etc) provided by many of our clients do not support the 80:20 rule. Irrespective of this, moving forward you will need to ensure you do some homework in this area. At Hayes Knight, we believe that our clients typically know their industry and market best and therefore they’re generally in a better position to make a call on what is a ‘market salary’. In our view, it’s not something that a person’s adviser – or, for that matter, the IRD – can guess; although a person’s adviser may be able to help them in reaching a figure that everyone is comfortable with. Where you believe there is a possibility that your historic salary may not be considered to be market, the Penny and Hooper decision should definitely be discussed with your adviser to work out the best course of action. Suddenly significantly increased salaries is likely to show up on IRD exception reports and we suggest people exercise an element of caution in doing this.

The Penny and Hooper decision is a change from the past. We are now seeing court decisions based on public sentiment. The current public perception is that trusts are shams, used to avoid tax and evade creditors. We would hope the New Zealand Institute of Chartered Accountants (NZICA) and others will lobby the IRD to reconfirm the circumstances under which they will and will not seek to apply this case. The danger, otherwise, is that this case will be used carte blanche to support any position the IRD intends to take. It is also worth noting that this case relates to tax years in which the tax rates were not aligned. However, based on the tax rates currently in place, perhaps this case has less application moving forward, given there is potentially no tax advantage. That said, in certain circumstances, there could still be timing advantages. If you have any concerns regarding the restructuring of your affairs, we recommend that you seek advice from your Hayes Knight adviser. Alternatively, please contact our Tax Team: Phil Barlow Tax Director T + 64 9 414 5444 E phil.barlow@hayesknight.co.nz   Shelley-ann Brinkley Senior Tax Manager T +64 9 414 5444 E shelley-ann.brinkley@hayesknight.co.nz

It does still leave a degree of uncertainty hanging over taxpayers, because in the case of Penny and Hooper, although the structure itself was perfectly acceptable, the outcome was not.


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updates

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Red tape removed On 14 September 2011 the Minister of Commerce, Simon Power, announced proposed reforms to New Zealand’s financial reporting requirements for annual financial statements. The Government sees a theoretical annual saving of up to $90 million in compliance costs from the proposed changes. Report by Jason Stinchcombe

The key driver of these changes is to ensure that the reporting requirements are appropriate for entities at all levels. This will see the financial reporting requirements for profit-orientated organisations separated from those in the not-for-profit and public sectors.

However, there are differences between the proposed RDR disclosures and those currently available under differential reporting. These may be seen to increase the level of disclosure for some entities – such as the requirement to provide a statement of cash flows.

Central to the proposals is the concept of providing different levels of requirements to different tiers of reporting entities – and to end compulsory general purpose financial reporting for small and medium closely held companies.

Unlike the current differential reporting requirements, RDR contains no measurement differences from full NZ IFRS. For example, deferred tax accounting will become compulsory for entities reporting under RDR.

The proposals in summary:

Small and medium entities

+ Issuers continue to report under New Zealand

Most New Zealand for-profit entities will fall into this category1 and the proposal is to remove the requirement to prepare general purpose financial information.

equivalents to International Financial Reporting Standards (NZ IFRS) + Large entities without public accountability will have to report under a new reduced-disclosure regime known as RDR + Small and medium non-issuer entities are no longer required to prepare general purpose financial information. Instead, they must prepare special purpose financial reports primarily for tax purposes + A large entity is now defined as either earning revenue in excess of $60 million per annum or having total assets in excess of $30 million. That’s well and good, but we envisage that the IRD, your bank and other interested parties (such as shareholders) will still want to know that your accounts at least remotely resemble the actual picture.

Reduced Disclosure Regime RDR aims to give entities that aren’t publically accountable a scalable reporting framework that is less onerous than full NZ IFRS.

However, some form of reporting will still be required. The Government believes the users of financial statements in the SME market – owner/managers, the IRD and financiers – will be able to determine the extent of reporting they will require. Accordingly, the Government is proposing that Special Purpose Financial Statements be required under an amendment to the Tax Administration Act. NZICA and the IRD will develop a reporting format and the measurement basis will essentially be tax rules. The form and level of detail required in these reports has yet to be determined. For medium-sized companies now reporting under differential reporting requirements, this is likely to reduce the quantity of information disclosed. But for small companies, the reduction may not be that great. Hayes Knight will give clients further information once the required statement format becomes clearer. We will also be actively involved in the shaping of the new reporting formats

1 . E xce p t for issuers and companies wit h more t han 10 shareholders . T h e s e w il l be able to opt ou t of ge n e ral pu rpo s e fin a n cia l re po r ti ng req uirements sub ject to 95% shareholder approval.

We see this as a great opportunity to reduce the burden of compliance on the engine room of the New Zealand economy.


updates

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give and get back There have recently been significant changes to the treatment of donations for individuals and companies. The cap on the donation tax credit claims have been increased, access to donation tax credit claims has been accelerated through the payroll giving system and close companies can claim deductions for donations made. Many people still seem unaware of the lifting of the cap on donations and may be missing out on receiving a 33.3% donation tax credit.

Individuals If an individual makes a donation to a registered charity or a donee organisation, they are entitled to a donation tax credit (previously called a rebate) of one-third of the donation made.

to make them as practical and useful as possible for our clients.

Audit and filing requirements Under the proposals, only issuers and large overseas incorporated and owned companies will be required to file audited financial statements with the Companies Office. Large, privately held New Zealand-owned companies won’t need to file their financial statements, though they will probably be required to be audited.

When is all this happening? The effective date for the proposed changes is financial periods beginning on or after 1 July 2013. For a typical March balance date, the first effective year end would be 31 March 2015.

How will this affect the charitable sector? Search for ‘Financial Reporting Changes for the Charitable Sector’ at www.hayesknight.co.nz to find out how these changes will impact the charitable sector and not-for-profits.

Final thoughts While we await the final legislation and detail of what will be required of SMEs, we see this as a great opportunity to reduce the burden of compliance on the engine room of the New Zealand economy. It means accountants; managers and owners can focus more on business.

There’s no longer a maximum limit on the tax credit; but the total donations claimed cannot be more than the individual’s taxable income for that year. A donation is a voluntary payment where the payer receives no identifiable direct benefit to them or their family. To be eligible to claim the donation tax credit, the following criteria must be met: + Payment is to a registered charity or a donee organisation

+ The payer is an individual New Zealand tax resident

+ The payer earned taxable income during the year for which they are claiming the tax credit + The payer must hold a valid receipt + The payment must be for at least $5. The individual claims the donation tax credit by completing and filing a Tax Credit Claim Form (IR526). If the individual has made the donation through their employer via the “payroll giving donations” system, they don’t need to file an IR526 as they receive the tax credit at the time the donation is deducted from their salary.

Companies The 5% deduction limit on donations made by companies has been removed and all companies are now eligible for a donation deduction. The amount of the deduction is only limited by the level of the company’s net income. To receive a deduction, the donation must be made to a registered charity or a donee organisation. In addition, the payment must be a donation in which the payer company receives nothing in return. A company claims the deduction in its income tax return.

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Let’s clean up this town It takes courage to change course and steer your company into unknown waters. But that’s often where the greatest opportunities lie. Deirdre Coleman looks at MW Cleaning’s new green secret weapon As it so happens, their love of water played a role in Anne and Bob Quaid’s decision to take their company, MW Cleaning, in a new direction. Having bought the company from Anne’s parents in 2004, they scrapped its traditional way of operating in 2008 to become the first commercial cleaning company in New Zealand to switch to environmentally friendly products and methods. “We scuba dive around the world so we see what happens when waterways aren’t looked after,” says Bob. “We care about the environment and wanted to do something about it. We realised that being in the cleaning industry, we were at the ground level of that.” There was also the desire not to miss the boat, with US cleaning companies implementing greener business practices and consumers demanding more sustainable options. “Initially, we said ‘let’s do it so we don’t get left behind’,” says Bob, “and now we’re leading the industry here.”

In July 2010, MW Cleaning became New Zealand’s first (and currently only) cleaning company licensed by Environmental Choice NZ (ECNZ) – the Governmentendorsed eco-labelling programme. It’s a distinction the Quaids are proud of and one backed up by awards such as the ECNZ’s 2010 Innovator of the Year and the Westpac Auckland North Business Awards 2011 Excellence in Sustainability. “We’re not afraid to put our necks on the line and take responsibility for our industry. There’s no government legislation around it so no one’s checking up on those claiming to be green; that’s why getting Environmental Choice certification was so important for us,” says Anne. MW Cleaning has been operating for 38 years. After purchasing it, Bob and Anne made a few changes to the business model and doubled the size of the company in the first four years. It now has 34 contract teams – all trained in and passionate about green cleaning.

Photo: Tony Brownjohn

B o b a n d Anne Quaid of MW C le a n i n g encourag e p otential c u sto m ers to comp are ap p le s w i th a p p les. As MW C leanin g i s N ew Zeal and ’s only re co g n i s ed env ironmental ly f r i e n dly c leaning comp any i t m a ke s them a ver y g ood g re e n a p p le.


eco advocates

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Has switching to green been a complex and costly exercise? No, says Bob. “It was just a matter of taking the time to implement our processes, but there were no increased costs to us or our clients, as the new cleaning products were actually cheaper than the standard ones.” MW Cleaning uses locally made ECNZ-licensed Green Earth cleaning products that are biodegradable and VOCfree. Cleaning teams are given regular one-on-one training sessions and by attending overseas trade shows, Anne and Bob keep up with the latest in sustainable industry practices. “We look at everything our cleaners do and ask: is there a better way to create a healthier working environment, while also being kinder to the planet and our cleaning teams?” MW Cleaning’s clients receive information and training on the best recycling methods and can benefit from audits to see how the overall health of their work environments could be improved. Hayes Knight is among those clients and has managed MW Cleaning’s accounting requirements since 2006. Business Advisory Director Scott Travis says Bob and Anne are passionate about their business and always looking for ways to improve. “MW Cleaning is striving for innovation and looking for growth,” he says. “They’ve developed a vision of an ecofriendly service and are implementing it well. It’s created a lot of growth for them and a definite point of difference that’s independently verified.” MW Cleaning’s relationship with Hayes Knight goes beyond simply crunching the numbers. Hayes Knight has taken an active interest in the business, providing guidance and advice in several areas. As well as helping the company finance and secure new premises, Hayes Knight also introduced a new business structure that allowed the Quaids to generate more wealth and protect their assets. This included help with the formation of trusts and advice around tax minimisation. Hayes Knight also provided support when MW Cleaning switched from its very labour-intensive manual accounting system to a more modern one. “The Hayes Knight team is great, and we have a fantastic relationship with Scott,” says Bob. “It’s not just about the accounting, business support and advice we receive; they’re committed to sustainable business practices too, so we have a common view. Hayes Knight was even willing to act as guinea pig when we became ECNZ certified.” “Their focus on customer relationships and delivering quality service is very strong, and they’re excellent at drumming up new business,” he says. “In a difficult economy, their innovation has created the opportunity to continue to grow the business.” Since 2006, MW Cleaning’s turnover has grown by 85% and the Quaids are not ready to stop just yet. “We’re about a third of the way to where we want to be,” says Bob. “If we gain more market share, there will be more companies out there looking after the environment.”

Green thinking puts money in the bank “It’s not just about the accounting, business support and advice we receive; they’re committed to sustainable business practices too.”

Is the traditional way of reporting company performance really useful to business owners and other stakeholders? Is it time to embrace a new approach to measuring and monitoring performance, starting with the incorporation of environmental measures? Accounting has always been about the numbers, but the true measure of business performance goes beyond attributing a monetary value to things. A recent Nielsen Media survey of 293,000 Monday NZ Herald readers shows the importance of environmental responsibility: • 50% of those surveyed agreed that when buying a product or service, it’s very important that the company shows a high level of social and environmental responsibility. • 51% like companies to tell them about how they are making a positive difference to society or the environment so they can support them. However, the benefits of environmental reporting aren’t limited to enhancing a business’s public image. Improving environmental sustainability has a flow-on effect to better financial performance. For a manufacturing business that implements an environmental improvement and reporting strategy, key performance indicators (KPIs) may include less waste of raw materials, improved power efficiency and lower fuel consumption through better logistics. The positive long-term financial impact is more money in the bank. For many organisations implementing a system of non-financial performance measurement, the challenge is in accurately measuring and reporting on environmental factors. The key is to start by looking at the information available and selecting sources that are reliable, measureable and relevant to the user. If the business is working towards improvements in specific areas then time-bound targets also need to be set. This often involves considering ways to measure things that have typically been written off as immeasurable. There are now tools to calculate the impact of air travel, total carbon emissions, power use, etc. But, a more humble approach will still prove valuable for businesses without the resources to measure and monitor to this level of detail. Measures such as kilowatts of power used, kilometers travelled or litres of fuel consumed are generally easy to obtain and still give an accurate idea of a business’s environmental impact, particularly when tracked over a period of time. A growing number of consumers are now advocating for corporate responsibility. With the opportunity to gain a stronger competitive advantage with customers, while also driving bottom line efficiencies, incorporating environmental KPIs into businessperformance reporting is a natural step forward in growing a stronger business.

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business advice

h ay e sknig h tnz

Time to grow up New Zealand SMEs have often discounted corporate governance as expensive or complex without fully understanding the benefits this leadership discipline brings. But, as Aaron Wallace reports, governance is now becoming a pillar of market-leading organisations. In this competitive climate, businesses must find groundbreaking ways to reach new markets. It’s vital to consistently manage, monitor and improve your business, and that’s where corporate governance can play a crucial role. Governance is about structuring, operating and controlling a company with a view to achieving long-term strategic goals for shareholders, creditors, employees, customers and suppliers. It is, and will continue to be, the cornerstone to success and business longevity. Fortunately, many business owners now see the benefits of incorporating this executive discipline into their business. However, who should be on that governing board, how it could be run and what resources or issues it should consider, are common stumbling blocks. Opportunities are being lost by those unsure of how to answer these questions. Every business is unique, so it’s difficult to put together golden rules for running a board, but here are some points to help get you started:

What’s the ideal mix? Boards are often looking for members to fulfil certain skill sets or roles missing from the business, such as financial, legal, marketing or operational. A diverse mix of people who can challenge each other is a powerful combination. Successful boards often employ an independent adviser who can bring discipline, experience and objectivity. They regularly get asked to chair the board, as having a dominant shareholder or CEO in this position can lead to issues being sidetracked. The key is to get the right independent person.

Having the external accountant or company lawyer on the board is common; but these professionals should act in an advisery role with a ‘big picture’ or business focus. A pure technician may not be the best choice. Likewise, an experienced member of a large corporate or NZX-listed company may not be the best fit as the mechanics of a SME are significantly different. It’s important that the board creates a sense of trust and respect, among its members and with external parties. It must be shown as a winning team and not a pack of interested individuals feeding their own agenda.

What are the rules? There should be a governance or competency framework. This will often be linked to a Constitution or Shareholders Agreement that outlines the decision lines and powers of each management level in the organisation, including the board. There should be a drive to search for better ways to operate the business and meetings should be challenging, but not destructively confrontational. Operate by the rule: ‘say what you mean, mean what you say, but don’t be mean in how you say it’. While healthy debate is good, the board should feel as if they can have a beer together at the end of a meeting. All board members must buy into the strategic direction of the business and champion this theme at every opportunity. Leading by example will help get the troops to buy in to the direction and future sustainability of the organisation.


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Content and issues to discuss Meetings should be governance by nature, not operational. While reviewing compliance matters should be considered the gatekeeper to business risk, performance orientation should be a recurring agenda item. Any proposals around strategic opportunities or a reorganisation of current operational matters should be sent to all board members in advance along with a detailed paper to support these proposals and provide a healthy and informative discussion. An agenda should be weighted to monitor and manage the business but also to look forward to building a stronger model. It should be about growth as much as it is about survival. Discussion around progress towards the rolling five-year plan must always be on the agenda, as should the review of standard reports such accounting matters, monitoring of marketing activities and non-financial performance indicators.

Running the initial meetings Those first meetings will be untidy and slightly unstructured as the board finds its feet and builds a structure that’s meaningful to your organisation. At different times, the focus will be on current ‘hot issues’ such as marketing, liquidity, R&D, personnel matters, strategic growth etc. At initial meetings energy must be put into developing and agreeing on the company vision, creating a ‘brand map’ and building a five-year plan everyone will buy in to. Where there are several owners in a business, identifying shareholder/director values, reviewing a commercial remuneration model and

business advice

setting a valuation methodology for an eventual exit may also be involved. A common hurdle owners must get over when establishing a board is the recruitment of the optimal team. Reluctance to remunerate for board positions can prevent owners from attracting the best members. Not all positions will be remunerated, so ‘paid for’ positions could be limited and cost effective. Given the purpose and role they perform, a director’s fee should be considered an investment, not a cost. The proviso is that any external party joining the board must be passionate about building a better business and making it stronger. Members must appreciate that their role extends beyond turning up for a monthly meeting. The position requires varying time input and topical issues will determine which board members need to offer more of their skills between board meetings. Most businesses never reach their potential due to a lack of skill, capital and resources. A tailored, low-cost governance programme may not solve the world’s problems, but it’s certainly a step in the right direction.

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A diverse mix of people who can challenge each other is a powerful combination. Successful boards often employ an independent adviser who can bring discipline, experience and objectivity.


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health check

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Put the

health of your business to the test

Our questionnaire will help you assess your business to see if it is ‘fit and healthy’ and if it can perform better through healthier more efficient ways. The goal is to identify areas which are restricting cash flow, reducing profits and placing the business at risk. To have maximum impact this questionnaire should be carried out following a discussion with your management team and other key staff.


health check

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Each question will be scored from 0-5 to provide a total score out of 115 0: Never 1: Rarely 2: Sometimes 3: Half of the time 4: Most of the time 5: Always

Management Information and control 1. M  onthly management accounts produced within 20 days 2. U  pdated financial forecast monthly 3. C  ash flow monitored 4. K  ey performance indicators in place 5. M  onthly board / advisory board meetings 6. M  inutes & actions produced from meetings 7. B  usiness strategy written & monitored

01 2 3 4 5 01 01 01 01 01 01

2 2 2 2 2 2

3 3 3 3 3 3

4 4 4 4 4 4

5 5 5 5 5 5

Key Relationship Management 8. S  upplier relationships monitored & documented 9. C  ustomer relationships managed & documented 10. E  mployee engagement 11. K  now & met bank managers in last 4 months

01 01 01 01

2 2 2 2

3 3 3 3

4 4 4 4

5 5 5 5

Systems and Processes 12. C  redit control & reports available regularly 13. S  tock and WIP control monitored monthly

01 2 3 4 5 01 2 3 4 5

Financial Wellbeing 14. P  rofitable in the past 3 years 15. I nterest covered > 2.5 times1 16. P  ositive working capital2 17. E  quity > 100% debt 18. D  ebtors days not increased in last 12 months3 19. S  tock days not increased in last 12 months4 20. G  rowing gross profit and sales 21. C  ash balance > 25% of monthly sales (inclusive of GST) 22. N  on risk sector 23. N  o reliance on a few key customers

01 01 01 01 01 01 01 01 01 01

2 2 2 2 2 2 2 2 2 2

3 3 3 3 3 3 3 3 3 3

Interest cover = Earnings before interest & tax / Interest expense Working capital = Current assets – current liabilities Debtors days = (Average debtors excl GST / Credit sales) x 365 4 Stock days = (Average stock / Cost of goods sold) x 365 1

2 3

Score:

81-115 Minor 51-80 R  equires 31-50 Requires 0-30 I mmediate improvements improvements intensive care business necessary & closer & closer survival at risk monitoring monitoring

This health check is designed to give you a quick assessment of your business’ health. Should you wish to discuss your score in more detail or if you have a questions please contact your Hayes Knight adviser.

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5 5 5 5 5 5 5 5 5 5

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change for good

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Change ignites new beginning Through reinvention and innovation, Modtec Industries has overcome challenges and fuelled growth. By Deidre Coleman Change can be frightening, but in business embracing it is often essential, not only for survival, but also for growth.

“From our first meeting, Hayes Knight clearly had a vision and shared fantastic new concepts relating to growth and the value of business beyond the numbers”

Evolving with the changing market has been vital for Silverdale engineering and manufacturing company Modtec Industries. Modtec designs and makes zinc die-cast components and steel-tube and powder-coating products such as monitor arms and mounting systems, freight containers, modular office desk systems and medical beds. But when it was founded in 1969, the company was in the very different business of manufacturing fence stains. Six years later, the current chief executive Bruce Davies bought Modtec, sold the fence-stain business and reinvented the company as an engineering firm focused on leadingedge design. The company has never looked back, going o n to win several top design, recycling and exporting awards. “Our first products to market were a range of cap guns and toy sewing machines,” says Davies. “We had an ambitious timeline of six months to set up a tool room and a zinc die-casting business, as well as design and produce the tooling and finally deliver the finished products.” They met that deadline and over the next few years Modtec became a supplier of zinc die-castings to several New Zealand exporters and a number of Australasian firms in the office furniture business. By 2002, increasing offshore competition, particularly from Asia, had placed Modtec and other New Zealand engineering firms under a huge amount of pressure. Modtec was becoming less profitable and Davies knew another big change was necessary. As luck would have it, a discussion with a customer led to a new opportunity designing, producing and distributing computer monitor arms to Europe. Davies admits that establishing a start-up business again was tough, but well worth the effort. Integ International Ltd has carved out a profitable international niche providing modular monitor arms and mounting systems for the commercial furniture and medical markets in Australia, Singapore, the US and the UK. Its products are all designed and manufactured by Modtec. For the past five years, Modtec has been working with Matthew Bellingham and Brendon Cutler from accountancy firm Hayes Knight, which has provided significant input into the company’s strategic direction, export strategy, succession planning and board structure.

“From our first meeting, Hayes Knight clearly had a vision and shared fantastic new concepts relating to growth and the value of business beyond the numbers,” says Davies. Hayes Knight has set new standards for Modtec as the company’s accounting and governance partner, he says, and added substantial value in several areas. Among these is the development of financial processes to ensure more certainty and accountability to deliver results to the company’s stakeholders. “By accepting change as the norm, Modtec has seen consistent annual growth of more than 25 percent,” says Davies. “With help from Hayes Knight, we’ve introduced lean thinking into all our processes. “Matt has helped us improve the structure of the business to enable growth, to simplify our governance and reporting activities, and has worked with me on an exit strategy. Hayes Knight has also done a great job of building better partnerships with the banks and providing leading-edge financial and environmental-responsibility reporting.” Exporting is now the spearhead of Modtec’s success, with the company winning several export awards, most recently the Excellence in Exporting award at the 2011 Westpac Auckland North Business Awards. Australia, Modtec’s largest export market, is still growing with India, China and the surrounding APEC countries delivering profitable opportunities, says Davies. Modtec has representation across the US and is achieving good results. “We had a plan to grow Modtec into a global business delivering sustainable productivity tools to the workspace – whether the workspace was an office, bank, airport control room, hospital or prison,” says Davies. Hayes Knight has added value in the areas of export planning and strategy, helping Davies revamp the organisational structure and recruit a global sales and marketing manager. Earlier this year, Hayes Knight introduced Modtec to contacts in India as the company set up a manufacturing and distribution facility in Bangalore. Further recent expansion includes the establishment of sales offices in Sydney, Melbourne, Perth and Shanghai, as well as a new Integ development and training centre in Albany.


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From the CEO Is it time to change? Four years on and we’re still talking about the poor state of the economy, yet the bad news keeps coming. First our government bailed out finance companies through the guarantee scheme, which at the time seemed like a huge rescue package. Since then the US has been borrowing trillions of dollars to rescue any business, however marginal their situation. Now Italy, Greece and most likely Spain are on the brink of bankruptcy. But the questions on my mind are how did it get so bad? How did it go unnoticed? Why didn’t somebody say stop? These are questions we should be asking ourselves in order to reach our full potential. This leads me to a wonderful quote:

M o d tec Ind ustr ies C E O , B r uce D av ies, w i th Hayes Knig ht C E O Matthew B e l l i ng ham.

Like all SMEs, Modtec has had to overcome its fair share of cash flow and growth challenges, says Bellingham. “While developing its export markets, Modtec also recently faced issues with the high exchange rate so we’ve put some foreign exchange management strategies in place to assist with that.” Modtec is poised for significant growth over the next 12 months, so Bellingham recommended implementing a board to attend to strategic and risk matters. “We worked with Bruce to put in place the appropriate governance framework, provided some recommendations regarding the initial appointments and chair the company’s board,” he says. “Bruce is very open to advice, hugely enthusiastic and a real pleasure to work with. His is a great example of someone buying a small business, trading it in a market that used to exist and having the vision to keep the business viable and suit the changing market. “Bruce established a solid business early on but he didn’t sit back and rest on his laurels; he was always looking ahead at where the market was going, innovating, pushing development, investing in R&D and in people – and the results speak for themselves.”

“One secret to maintaining a thriving business is recognising when it needs a fundamental change.” – Harvard Business School This is a big focus for me at the moment as CEO of Hayes Knight, and indeed as an adviser and board member to many clients. There is no question that the world has changed, but it will be our ability to adapt which will make or break our respective businesses as we move into 2012. Innovative development and thinking isn’t enough. Business models need to be reinvented to keep up with the changing pace of life, new developments, emerging technology and evolving consumer behaviour.

combine good technology with great design…they wrapped it in a great business model. Apple’s true innovation was making it easy to download digital music by creating a ground-breaking business model that combined hardware, software and service. The model defined value in a new way and provided game-changing convenience to the consumer. Everyone is talking about reinvention, surveys report that over 50% of business owners and CEO’s believe business model innovation is critical and two thirds say they need to extensively adapt their business models. So why aren’t CONTACT: more businesses doing it? Probably because it’s hard. Perhaps it is easier Matthew Bellingham to break this daunting task up into CEO, Business three clear steps: Improvement Director atthew.Bellingham@ 1. R  ealise thatE  theMkey to success is hayesknight.co.nz not thinking about a business model; T +64 9 379 7013 instead it’s about focusing on the +64 21a 676793 opportunity M to satisfy real customer W  hayesknight.co.nz who needs a job done. twitter.com/hayesknightnz 2. Construct a blueprint laying out how your company can fulfill that need at a profit. 3. Compare that blueprint to your existing model to see how much change is required to capture the opportunity. For a business model to work, we need four interlocking elements: 1. Customer value proposition (CVP). 2. Profit formula. a. Revenue model

In 2003, Apple introduced the iPod with the iTunes store, revolutionizing portable entertainment, creating a new market and transforming the company. In three years, the iPod/iTunes combination grew to an almost $10 billion product. Apple’s market capitalisation catapulted from around $1 billion in early 2003 to over $150 billion by late 2007. This success story is well known; what’s less well known is that Apple was not the first to bring digital music players to market. A company called Diamond Multimedia introduced the Rio in 1998. Another firm, Best Data, introduced the Cabo 64 in 2000. Both products worked well, were portable and stylish. So what did Apple do differently? Perhaps it was because Apple did something far smarter than simply

b. Cost structure c. Margin model 3. Key resources 4. Key processes These four elements form the building blocks of any business. The customer value proposition and the profit formula define value for the customer and the company, respectively; key resources and key processes describe how that value will be delivered to both the customer and the company. As simple as it may seem, this is one way of looking at reinvention in a sustainable manner. Let’s face it; there has never been a better time to start this journey.


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client Spotlight Congratulations to all our clients on their fantastic achievements… o Konnect Net: Innovative Hi-Tech Services Company of the Year at the NZ Hi-Tech Awards. o Recovery Solutions Group: Employer of Choice Award at the Westpac Auckland South Business Awards. o Sir George Fistonich, owner and Managing Director of Villa Maria Estate, received the esteemed Lifetime Achievement Award at this year’s International Wine Challenge in London. o Villa Maria Estate’s wines have been deemed fit for a Queen. Forty cases of Villa Maria Estate’s Private Bin Sauvignon Blanc were selected for inclusion in Her Majesty’s 5000-bottle wine cellar. The wine was also served at the British Film and Television Awards to the Duke and Duchess of Cambridge and film stars. o JPS Marketing won three categories at the Australasian Marketing and Promotional Awards (APPA). o Modtec Industries: Winner of the Excellence in Exporting Award at the Westpac Auckland North Business Awards. o MW Cleaning: Winner of the Excellence in Sustainability Award at the Westpac Auckland North Business Awards. o Labyrinth Solutions: Finalists at the Westpac Auckland North Business Awards. o Canary Enterprises and Modtec Industries: Finalists at the Air NZ Cargo Export Awards Auckland. o Au Pair Link, Maclean Computing and Elizabeth Knox Home and Hospital: Finalists at the Westpac Auckland Central Business Awards. o Bonson Industrial has expanded its operations and moved to a 13,000sq m site in Portage Rd, New Lynn. o Cam Calkoen runner-up for the Vodafone Foundation’s prestigious Grahame Maher Award. o Amy Holder, a teacher at Wakaaranga School, recently won the OfficeMax “A Day Made Better” competition. o MOTAT has opened its Aviation Display Hall, one of the most impressive aircraft collections in the Southern Hemisphere.

AIMES Emerging Talent

Above: Re cipie n ts o f the ai m es E me rgin g Ta le nt A w a rds , ju dge s a nd H a ye s K n igh t c eo Mat t hew Be l l in gh a m.

Hayes Knight CEO Matthew Bellingham presented the AIMES Emerging Talent Awards to six brilliant individuals – Lydia Ko, Aine Kelly-Costello, Rebecca Dubber, Alexandra Foster, Seok Jun Bing and Adam Gerrett. Hayes Knight is proud to be the sponsor of the Emerging Talent Awards. A subset of the AIMES Awards, the Emerging Talent Awards recognise and reward the efforts of North Harbour’s ‘rising stars’. Not only do these awards ease the finance burden of pursuing excellence, but many recipients also go on to win major AIMES awards.

Below: H a ye s K ni g ht c e o an d Co n ve n o r of Jud g e s Ma t t h ew Be l l in g ha m , s pe a k in g a t t h e We stp a c A u ck l an d N o rt h B usi ne ss A w a rds .

westpac Auckland North Business Awards

Bo t to m: K e l ly S a m so n wi ns t h e H aye s K n ight A wa rd fo r t h e to p gradu a t ing stud e nt in t h e Bach e lor Of B usi ne ss Co - O pe rat ive E d uca ti o n.

As part of our on-going support of excellence in the business community, Hayes Knight once again played an integral role in the Auckland North Business Awards, with Matthew Bellingham appointed Convener of the Judges. The judging team put around 500 hours into selecting the finalists and winners of the 13 categories, including the supreme winner. These awards continue to pay tribute to the considerable skill and talent that can be found throughout North Auckland. Congratulations to all the winners and finalists.

AUT Business Awards

Kelly Samson received the Hayes Knight Award for the top graduating student in the Bachelor of Business, Co-operative Education Programme at the AUT Business Awards. “The practical focus on business tasks and issues was excellent preparation for my employment as a business analyst at Gen-I,” he says. “AUT was a fantastic investment in my future!”

Breaking News

Hayes Knight is delighted to announce its support of the HER Business Network and Sport Auckland’s Sporting Excellence Awards – two great organisations pursuing and promoting excellence for the benefit of our communities.


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Damian hasn’t wasted any time bringing his great communication skills, energy and initiative to the role and ensuring Hayes Knight enhances its online presence but also embraces new technology.

DAMIAN BENNETT joined Hayes Knight as Marketing and Communications Manager in May 2011.

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1 The Hayes Knight team dominated at the recent Tough Guy and Gal Challenge. One thing’s for sure – they didn’t look this spotless at the end! 2 Congratulations to Hitendra Patel who has been selected as performance-analyst coach for the New Zealand Under 18 Women’s Hockey Team. 3 Congratulations to Matthew Bellingham and Craig Fisher. Matthew has been chosen by the New Zealand Institute of Chartered Accountants to Chair its new advisery committee (the Public Practice Advisery Group) and Craig has been appointed a member of the Government’s Auditing and Assurance Standards Board. 4 Damian Bennett after completing the Jerry Clayton North Shore Half Marathon (his first one) in an impressive time of 1hr 46mins. 5 Sam Wheelans and Cath Hay won Best Costume at the mid-year Lost at Sea party. 6 James Phillips (ASB Bank), Matthew Bellingham (Hayes Knight), Mike Hutcheson (Image Centre Group) and Aaron Wallace (Hayes Knight) at the release of the sixth edition of Succeed magazine. 7 Hayes Knight supports Loud Shirt Day. Michelle Hyland from our Albany office had the Loudest Shirt. 8 We went all out here at Hayes Knight to show our support for the All Blacks.

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What are some of the new initiatives you’ve implemented since joining Hayes Knight? There are two key areas I’ve focused on: client retention and breaking the firm into the social media space. Retaining a client is as important as winning a new one – the investment is low, the margin is high, the trust is established and the

relationship is often intimate. The guys from Perceptive have a great product (Customer Monitor) that’s not only allowed us to identify our most at-risk clients, but also strategic areas to focus on for long-term improvement. My job is then to work with the management team to put tailored strategies in place to ensure we’re providing the best possible service to our clients. Why is it so important for Hayes Knight to be in the social media space? Broadly speaking, businesses are being forced to change the way they interact with customers,

whose trust is increasingly invested in their peers, rather than in the brands with which they interact. It’s not too dissimilar from what generally happens in the accounting world – when seeking a new accountant, people have typically asked their lawyer, banker or friends in business. Going forward, though, more of these conversations will be moving online. I discovered soon after I started at Hayes Knight that many of our clients were already having conversations via Twitter! How have you been making use of Twitter? Since July, Matthew Bellingham and I have both

been tweeting regularly – every day or two – about what’s happening with our clients, our team and what’s going on in the accounting and business world. But it’s been more about engaging in conversations, sharing our opinions and experiences at both a professional and personal level. The result: we’ve not only made new connections, we’ve also already had the opportunity to pitch for work and it’s still early days. By integrating Twitter (and other social plugins) with our website, we’ve also managed to drive website traffic.

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Should I stay or should I go? No one likes to lose business, especially if you don’t know why a customer has gone to your competitor. Customer Monitor is a valuable new client-retention tool with some powerful advantages. Chris Pescott, CEO of market research company Perceptive, talks about how it could help you... What is Customer Monitor? It’s a word-of-mouth measurement application designed to increase a company’s retention of customers. It essentially makes a business more profitable by highlighting customers at risk of leaving and helping the company improve its overall level of service.

“If you listen and act on feedback, you can turn extreme detractors into How can it help a business? your customers who are unhappy, only 8% will ever tell extreme promoters.” Of you; the other 92% will simply leave and you won’t get the

chance to put matters right. With Customer Monitor you can find out who’s had a bad experience, identify them and rescue them before they leave. Stopping a customer leaving is far easier and cheaper than trying to attract new customers. There’s also a strong body of evidence that says if you listen and act on feedback, you can turn extreme detractors into extreme promoters. A key goal is to make your customers evangelistic about your business because the average happy customer is likely to tell three people that you’re good, but upset customers will tell 11; and with social media that 11 could translate to 1100. SMEs need to listen to their customers so they can swoop in and fix those relationships.

What makes Customer Monitor so powerful? It just cuts to the chase. Many customer feedback mechanisms are very cumbersome and complex. But, really, a business just needs to know three things: How likely are you to recommend me? Why did you score me the way you did? How likely are you to come back? The vast majority of customer feedback programmes are annual client surveys, but Customer Monitor is a regular poll so it’s a real sound check – it’s very quick and more overview driven.

What measurement tools does Customer Monitor use? Customer Monitor incorporates a number of different tools, which give solid, clear measures on a long-term basis so you know how your company is performing over time. MARCS ranks your 10 Most At Risk Customers each month, so you can quickly identify those that need love and go and salvage the relationship. Net Promoter Score (NPS) offers a way of understanding the degree to which your customers are likely to recommend your business to their friends and colleagues. Customer monitor also has a loyalty score built into it and analyses the narrative of what your customers are saying, including why they’re likely to recommend you and the likelihood of them making a repeat purchase.

What types of businesses can use Customer Monitor? Companies in every industry and of every size. It’s designed for a business with just a couple of staff right through to major nationwide companies, and being a cloud-based application, it’s not bulky. Hayes Knight is among the many users of Customer Monitor. CEO Matthew Bellingham shares his thoughts…

Why was Customer Monitor a good fit for Hayes Knight? Beyond the numbers – this is our promise. For us, part of going beyond the numbers means building lasting relationships with our clients and we do this by exceeding their service expectations. As with any company, knowing what your customers are thinking and how they feel about your business is the first step. Being accountants we are familiar with the expression ‘time is money’. We’re aware that our clients have busy lives, and we wanted a cost-effective way to monitor client feedback that was unobtrusive, quick, simple and did not require a huge amount of internal resource. Customer Monitor was the perfect fit. Professionalism sits at the core of our culture, so the fact that Customer Monitor is backed by a full-service market research company was also an important factor.

What has been the impact? The insights have been fantastic. One of the most satisfying things about Customer Monitor is that by identifying our most at-risk clients we’ve been able to take immediate action and save relationships. The system also gives us a big-picture view, allowing us to pinpoint opportunities for improvement at a firm, team and even a director level. This information is fed into our Client Focus Group and they then brainstorm solutions. The flipside of this is that we can also see what we’re doing well and share and celebrate this with the team. More importantly, we now have a measure that allows us to monitor and compare our performance, allowing us to not only see the impact of any changes we make but also to set performance targets for the future. Hayes Knight has partnered with Perceptive to promote Customer Monitor. To find about introducing Customer Monitor into your business, contact your Hayes Knight adviser or Chris Pescott (chris@perceptive.co.nz).


the last word

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Lead or Bleed Something the Rugby World Cup has taught me is that as a leader you have to take responsibility for being the architect of your own result

You must also have a few options should the game change. Daniel Carter (Plan A), Colin Slade (Plan B), Aaron Cruden (Plan C), Stephen Donald (Plan ...) still pushing for the same end result, but just running with a slightly different strategy to get there. It’s no different in business. The current marketplace has shown that the goal posts are continually moving – evolving technology, immediate communication and delivery expectations, offshore competition, regulatory changes, sustainability... the list goes on. It’s not easy and yesterday’s strategy may now feel like a collapsed scrum on our own try line. It’s at this point that a team looks to its leader to step up, dig deep and show the way out of this dip, or even better, the new way forward. Employees are looking for direction and an assertive leader to take them where they should be heading. They want to be led and led proudly. We’ve been looking for leadership from our politicians in these difficult financial times, from the captains of our national sports teams, from our rescue crews as they scramble to avoid environmental disaster, and from our business owners as we challenge ourselves in what could be seen as the harshest economic climate in 50 years. It’s time for the real leaders in business to step forward and shine. Qualities such as a true entrepreneurial spirit, commercial sensibility, the skills to motivate the team to come along on the journey, and an on-going desire to look for ‘what’s next’ must be in their DNA. Will the real leaders please stand up? We’re recruiting now!

Tenacity or grit alone will no longer do it if we want to move our businesses forward. We need to grasp all the tools available to us; we need to review our strategies so we use tomorrow’s technology; we need to push for entry into new markets and up the ante in our industry sectors. We can’t be participants any longer. Running out of puff after four years of recession isn’t an excuse, it’s a cop-out. We are seeing a lot of commentary around governance, strategic planning, succession initiatives, rebranding, research and development, and IT synergies. Leaders should be questioning their own use of these cornerstone disciplines and – if not implemented already – looking to assert them in their business. Real leaders don’t sit back and wait for their competitors to try something first to see if it works – by then it’s too late to react. Having passion, a motivating personality, technical respect, and being an innovator is what is required in today’s competitive landscape, not only to stay alive, but to stay ahead. A good leader will surround themselves with others who can fill any missing link. I challenge all business captains to get around the boardroom table and create a winning plan. We know that today’s status quo will not be tomorrow’s benchmark so we need to improve what we offer, how we offer it, and how we create it if we want to improve our result. We must lead our businesses; anything less may see us bleed the life blood out of them as our competitors pass us by. Remember: there’s only one Business World Cup, and you’re playing in it every day. You get out what you put in. – Radar

“It’s time for the real leaders in business to step forward and shine.”


Sharpen up your game Hayes Knight is proud to introduce Business Edge. Boost your management capability and gain a valuable new perspective on running a successful business. Business Edge will give you the confidence, skills and know-how to put progressive plans in place to ultimately: 1. Manage your business better 2. Survive the turbulent phases 3. Keep it future fit Business Edge provides the optimum mix of group and one-on-one learning (plus guest speakers). The disciplines you learn will continue to serve you long after the programme comes to a close.

Funding is available. For more information on the training and funding eligibility please visit hayesknight.co.nz or contact Business Improvement Specialist Mike Atkinson. T: 09 379 7013 E: mike.atkinson@hayesknight.co.nz W: hayesknight.co.nz


Beyond the Numbers Issue 5