There are many different ways in which your business or product can be promoted. Some of those ways are more effective than others. The only way to know which methods you should persevere with is to measure outcomes. Measurement is on the basis of return on each dollar spent.

Testing headlines, pictures, sales appeals and copy should be a natural part of your advertising. That testing need not be expensive. It may be as simple as asking somebody to read your ad copy aloud to you. If they struggle with a sentence re-write it. If there are parts they are unclear on assume that others will find the same thing.

If you have a database of clients you can test different messages on different parts of the database and measure the results. The most effective copy can then be utilised in wider advertising. As an example of testing consider the appliance company which was unsure whether a new air conditioner should be sold by an appeal to getting rid of humidity or to being cool. They tested and found that “How to have a cool quiet bedroom – even on hot nights” was two and a half times more effective than “Get rid of that humidity with a new room cooler that also dries the air”. The humidity appeal was removed from future advertising.

Test, test and test again!

It is important to test on a small scale anything that you intend to use on a larger scale. Testing gets opinion out of the way and puts the focus on a core business need – what is it that appeals to the customer and will encourage them to buy.

Small business advertising, and therefore testing and measuring, should be targeted at actual sales. For a small business there is no value in any other sort of advertising. Big businesses spend significant amounts of money to brand themselves and to stay in the limelight. A small business doesn’t have sufficient  budget available to them to be able to focus on branding as a goal in itself.

Spend most of your time developing a great headline

With any ad the experts say that no matter how striking any illustration in the ad it is the headline that is critically important. If your headline doesn’t catch the reader’s attention then the rest of the ad might as well be in Spanish. Some research has suggested that the headline is 50 to 75 percent of the advertisement. So, unless your business name describes accurately your business offer it shouldn’t be at the top of the ad – a common mistake.

Good headlines appeal to self interest and are based on benefits to readers. Remember that a technical feature of your product is not a benefit. The next best headlines are those that give news followed by those which arouse curiosity. Research also suggests that headlines that paint a gloomy or negative picture should be avoided. Often business owners will feel pressured to write clever copy in ads but simple, easy to understand, ads (and headlines) have been shown by testing to be more effective.

Strangely, once an effective ad has been found, business owners can be guilty of deciding to change them after they have run for a while. But it is the customer who should choose when the ad is no longer effective by not buying. If you have a good ad, it attracts customers and sales, then keep using it.

Stephen McFarlane is a Chartered Accountant and Certified Financial Planner. He is an adviser with the One to One Group and Triplejump both of whom are based in Timaru. A Disclosure Statement is available on request and free of charge at www.one-to-one.co.nz.

This joke might explain why. Three economists went out hunting, and came across a large deer. The first economist fired, but missed, by a metre to the left. The second economist fired, but also missed, by a metre to the right. The third economist didn’t fire, but shouted in triumph, “We got it. We got it”.

While the impression of economists success rate in determining the future direction of economic activity might seem hit and miss at best that is not where the term dismal came from. It appears that it was first used by Thomas Carlyle in a December 1849 article. His comments had much more to do with his disagreement with certain economic principles of the time than being disparaging of economists generally.

It is easy however to be disparaging of economists. For instance, in their supposed role of making weather forecasters look accurate. But if you consider the world we live in – every day millions of people interacting to create literally billions of economic transactions – it’s not an easy task they undertake.
They play a valid role in other areas however. They help us to understand how those human interactions and activity work.

Interesting mental accounting

Consider this story: A husband and wife spend a night in Las Vegas and the man tries his luck at the casino. He vows not to wager more than $5. So he puts his $5 down – on his lucky number, 17 – and wins. He keeps betting on number 17 and he keeps winning, so much so that towards the end of the night he is up more than $10 million. He decides to wager it all one last time on number 17. But this time he loses, and his $10 million gain is gone in an instant. When he returns to his hotel room, his wife asks him, “How did you do?” “Not bad,” he replies. “I only lost $5.”

That’s interesting mental accounting. As far as the gambler was concerned, the only money that was really ‘his’ was the initial $5. Yet he still lost $10 million. The same kind of thing happens in our day to day financial lives. Researchers conducted an experiment in which two groups of people were asked to bid on tickets to a basketball game. One group had to pay cash, while the other could pay by credit card. The average credit card bid was twice as high as the average cash bid. Why? Credit card bidders felt richer because they didn’t have to fork over any actual cash. It has certainly been known in our household that getting an item on sale somehow created a saving that could be proactively spent as a treat – invariably the same afternoon.  Say what!

It is important to look at the big picture

People tend to mentally compartmentalise their wealth. If they have $1,000 held back as emergency funds and $1,000 in credit card debt, at 18% interest, many wouldn’t  touch the $1,000 in savings because it’s for ‘emergencies.’ But if it was used to pay off credit card debt, they could save the 18% in interest charges, which amounts to $180 per annum. They could then use that $180 to start rebuilding the emergency fund and still have the credit card for backup.

Keeping untouchable money in mental accounts like ‘home down payment’ or ‘emergency fund’ can be a good thing of course. The trick is to ensure that our individual mental accounting tricks are working in our favour.

Significant financial events can influence more than the profitability of individual businesses. They can alter the investment attitudes of a generation. The Depression was such an event. In New Zealand the share market collapse of 1987 significantly affected investment attitudes. This decade, and more particularly the last two years, is likely to create a similar outcome.

Where to from here for investment?

That impact is not evenly spread however. Investment into shares will take time to bounce back. Property less so. And despite the failure, freezing or closure of numerous income based organisations such as finance companies and mortgage funds, enthusiasm for the latest good rate appears undiminished. Or at least that conclusion could be intuited from the enthusiasm shown in recent months for company fund raising. Recent issues include Auckland Airport, Fonterra, NZ Post, Tower, Contact Energy and AMP.

Corporate Bonds appear to be an attractive investment currently

This form of debt is generally known as a Corporate Bond (higher security) or a Capital Note (lesser security). The rationale is that the company needs to raise funds. Since the world wide credit crisis began in September 2007, it has become increasingly difficult for New Zealand companies to borrow offshore. The international market is not as keen as it was to lend to small companies on the other side of the world.

When an investor purchases a Bond or a Note they are providing a loan to a company. In exchange for the loan, the company promises to pay interest (called a ‘coupon’) to the investor over the life of the investment. The company will pay either a fixed interest rate (for example, Contact Energy’s recent offer of 7.75%) or a variable interest rate, which is usually pegged to cash rates. In the case of a variable rate, if interest rates rise the company will pay a higher rate of interest and vice versa if they fall (a recent example being Westpac’s government-guaranteed floating rate bond, which returns 0.6% over cash rates). Fixed coupon bonds are more popular with retail investors because they create the illusion of security. But just because the company is a household name and offers a fixed return does not make it a safe investment. Household names do strike trouble from time to time.

Are all bonds created equal?

It has been said that the ability of a company to honour its promise of income should be measured under conditions of depression and not of prosperity. It is also necessary to understand that they are not all created equal. In purchasing this investment we should want to be as high up the security ladder as we can. Unfortunately that space is generally already taken by the bank. That Capital Notes differ in security terms to Corporate Bonds is not readily understood by consumers. Some recent Capital Note issues include Fletcher Building, Infratil and Sky City.

Diversification, security and an adequate return for risk taken

Whether times are good or bad the basics of diversification, security and an adequate return for the risk being taken are key. But in income investing those rules are often ignored. One of the worlds’ great investors Benjamin Graham wrote: “It appears to be a financial axiom that whenever there is money to invest, it is invested; and if the owner cannot find a good security yielding a fair return, he will invariably buy a poor one. A prudent and intelligent investor should be able to avoid this temptation, and reconcile himself to accepting an unattractive yield from the best bonds, in preference to risking his principal in second-grade issues for the sake of a larger coupon return.” Food for thought.

Stephen McFarlane is a Chartered Accountant and Certified Financial Planner. He is an adviser with the One to One Group and Triplejump both of whom are based in Timaru. A Disclosure Statement is available on request and free of charge at www.one-to-one.co.nz.

It makes sense that we should wish to arrange our spending to maintain our required standard of living at the least cost. That’s simply being efficient with our money. And it’s no different from other spheres of our lives. We are entitled to arrange our affairs to minimise the amount of tax we have to pay, as long as we stay within the law. It is a mainstay of an investment plan that we should seek to minimise the risk taken for the targeted return. This is no different – although I can imagine my wife groaning at my having found a justification for frugality in our day to day living. Frugality in this sense is defined as being organised, knowing what the plan is and sticking to it. It doesn’t mean to suggest a lower standard of living. Choice should remain as to how we spend our dollars. The key issue is to be efficient in how we spend. To get the biggest bang for the buck so to speak.

Be efficient in how you spend

My references points for frugality had been overseas sources to date and so I was interested to Google New Zealand sources. There were various options including more hints for surviving the supermarket. But it was www.guide2.co.nz/frugal-living and a post from Ruth Brown which caught my eye in supporting the proposition that being considered in our expenditure can lead to better, not lesser outcomes.

Are you more like Frugal McDougall or Lavish McTavish?

There were two clans – the McDougalls and the McTavishs. Lavish McTavish never gave much thought to tomorrow. He wanted to give his family whatever they wanted. And if he didn’t have his own money, he’d use someone else’s – often borrowing from his generous neighbour Jack McBank. At night, you could pick Lavish’s house a mile away – it always had the lights blazing in every room. At the other end of town, lived Frugal McDougall – not much to his name, except a modest income and a plan – to take his family to see the world. Frugal knew exactly how much it would cost and how long it would take him to save it.   He also knew how he would achieve it – with his family’s help and just a few dollars at a time.  So when no one was in a room the lights were off, appliances were turned off at the wall.   They knew what was in the pantry and the freezer and they planned their meals around it.  They bought in bulk where they could and waited for specials.  They grew their own vegetables.  They made their own cleaning products from simple household ingredients.  Whenever anyone got a fifty cent piece, they would put it into a special jar.  Whenever they thought they’d like to buy something, they waited 24 hours to see if the urge wore off. Finally, in fact, much sooner than they expected – Frugal McDougall and his clan with a plan, were off to see the world. Unfortunately, at the other end of town, Jack McBank got sick of Lavish McTavish borrowing money and not paying it back and sued his kilt off and took his house. Frugal McDougall had by far the better outcomes.

Stephen McFarlane is a Chartered Accountant and Certified Financial Planner. He is an adviser with the One to One Group and Triplejump both of whom are based in Timaru. A Disclosure Statement is available on request and free of charge at www.one-to-one.co.nz.

Life just isn’t coming together at the moment (certainly in the imaginary world I’m existing in as I write this article). For starters I had a significant heart attack just over two months ago. I was in a coma for almost a week. I’m going to need surgery but I need to regain my strength first. Then there is the recovery period. I’m told that it could be close to 6 months before I am back at work full time. That is where my problem arises.

My business partner doesn’t seem keen to wait for my return. We had insurance covers on each other should this issue arise. Unfortunately we don’t seem to have completed the paperwork as well as we might. The insurance on my health was owned by him and he has now received the money – in his own name. Thanks very much he said. And by the way “I would like to own the whole business. There is too much uncertainty around your return date and if it is six months then why should I carry the pressure for that long. Sorry mate, but we need to move on”. But my business is a big part of my life. I don’t want to sell.

My make-believe business owner’s situation is unfortunate. In my own business that problem is not going to arise. For starters we considered the possibility that the owners of the policy proceeds are not bound to use them to purchase the shares of the business and that the funds could be applied to a purpose other than that which was intended.  So the insurance proceeds will be received by an independent entity.

And we have signed off a Buy Sell Agreement. This is a legal document which specifies how and under what conditions a shareholder will be required to transfer their shares and the process for doing so.

In the event of my death the transfer to the other business owners is automatic – they won’t end up doing business, or negotiating, with my wife or my solicitor. If I am disabled I get 12 months to get myself back to work. That is a period agreed by all the parties and the cash will be created through insurance to keep the business trading. The risk that we might recover but find that our ownership in the business has gone led us all to see 12 months as a fair outcome.

We have documented a valuation formula for the shares. I don’t want to be negotiating from my sick bed. The agreement specifies that my salary will continue for 3 months. My current account will be repaid after 12 months. I am only entitled to drawings in the interim if the bank balance is at a pre-set level. To the extent that the insurance proceeds have been received I can choose to trigger the buy sell agreement and sell my shares prior to the 12 month deadline if I want.

If there is insufficient insurance funding to buy my shares when the time comes then the agreement allows for the balance to be paid in three equal annual instalments. Interest will be paid on the outstanding amount at the prevailing ASB three month term deposit rate. If there is a surplus then it is to be distributed to shareholders in proportion to their shareholding. The remaining shareholders are required to indemnify me from the date of sale in regard to obligations to which I am a party.

Certainly of outcome is important, particularly at a time of ill health. A Buy Sell Agreement and an independent entity to hold the insurance proceeds are crucial to that.

By Stephen McFarlane

One of the owner’s roles is to be the manager. This is an operational or management hat. Another hat is to be a Director. This is a Board or governance role. Governance and management are two different and separate focuses.

Governance is about determining the vision for the organisation, defining where the organisation is to go. It is about developing strategy and then monitoring performance and progress. It is about delivering value for shareholders. As part of their role a Board may well develop an annual plan including financial and human resources, operational strategies and performance objectives as well as the longer term goals.

If the owner, having completed that task, possibly with the help of independent directors or facilitators, puts his management hat back on his role changes. Having been made aware of the board’s requirements he must now harness the financial and people resources of the organisation. This includes financial planning, accounting, cash flow management, solvency, investment, financial reporting and communication with financing organisations, team building, public relations, marketing, technology and so on.

In allocating and managing resources the owner is guided by the strategic goals delivered to him by the board. Because specific goals are known resource allocation should be more focused and effective. The requirement to report back progress to the Board maintains a focus on the plan and allows the strategy to be monitored and tweaked if necessary.

In a small business the governance and management functions generally meld together. Often the owner is too busy doing the day to day work to think about the longer term in a structured way or to measure progress. By not allocating separate time to each role, the owner risks not completing the governance role effectively. The focus of the business may therefore not be as sharp as it could be at an operational level.

An organisation that has taken the time to plan where it wants to go and to measure progress against that plan is more likely to be successful. The odds are certainly improved. The challenge for the owner of a small business is to recognise the variety of roles that need to be filled and to allocate sufficient time to each to ensure that the business reaches its potential. To wear all the necessary hats, but not at the same time.

By Stephen McFarlane

As a region we seem to be holding up well in the midst of what is a significant global financial event. And, in the New Zealand context, we are doing considerably better than Aucklanders, who have been struggling for some time. In fact there may be an opportunity to attract some of them to South Canterbury to assist with our skill shortages and to position ourselves for further growth.

Some local businesses will have noticed a downturn in business opportunities. Others will see the world as unchanged. But either way it is an appropriate time for each to be considering what the characteristics of a well run business are and how they are measuring up against them. Being proactive now, even if the warnings turn out to be for nought, is hardly a bad thing.

The list in front of me runs to 20 characteristics – which aren’t going to fit into a 500 word article, certainly not with any explanation attached. Nevertheless the section headings themselves are a good self check list. I have summarised some into groups.

Personal capacity and development (leadership)

• Excellent customer knowledge and service

Excellent product/industry knowledge

• Excellent systems and analysis of results
• Excellent cash control, stock management, work In progress control, debtor control and cost control

Excellent staff management, motivation and communication

• Excellent marketing expertise/the ability to assess market place opportunities
• Ability to change with market conditions/prices review

Excellent assessment of competitors
Adequate capital base
Use of professional advisors: accountant, banker, solicitor

• Networking
• Excellent planning

Excellent quality control
Excellent management/administration

These are the nuts and bolts of a well run business. They may seem obvious. But being obvious and being completed at a high level across the board can be two different things. I asked a local business man last week why a particular strategy, which had been successful for him, was no longer being pursued. His answer was that the good times had moved their focus away from the basics. They are now revisiting them.

Marking your business out of 10 for each of the characteristics listed above might be a good start to identifying weaknesses and then beginning to address them. Some thought as to the ingredients that made your business successful in the first place and whether they are still in place, albeit in a modified or improved form, would also be time well spent.

By Stephen McFarlane

I am reminded of the young man, aged 30 or so, I spoke with last year. He is not married and does not have children. He doesn’t have savings other than emergency funds at a minor level. He earns about $42,000 per year. I asked him these questions: “if you were to become significantly disabled through accident or illness what quality of life would you have?” “Who would look after you?” “What if it was longer term and you could never work again?” His answer was one I have heard many times. If I can’t work ACC will look after me.

For me that raises the question of where the balance should lie between personal responsibility and reliance on the government (being you and I as taxpayers). Is there a danger that ACC has become, in the minds of much of the population, the ultimate protection and therefore all they will ever need. No personal responsibility needed.

The ACC website advises that it offers a 24-hour, seven-day-a-week, no-fault eligibility for comprehensive injury cover for everyone in New Zealand no matter how the injury happened, even if you did something yourself to contribute to it. Nice. Visitors to New Zealand are also eligible for cover. Very nice.

But the clincher is that it’s a system that applies to physical injury – to accidents and not to illness.
I have seen a variety of statistics on this but all point to illness being a more likely cause than accident to extended time off work. The young man above is missing that key piece of information. But he is definitely not alone.

If illness does occur then his base income will be $184.17 on a sickness benefit or $230.19 on an invalids benefit. The latter equates to a gross income of $13,679 per year, considerably less than he has been earning. And not enough to give him any real choice in life. How will he live, where will he live, who will he live with, what will be his quality of life?

Personal responsibility (or just covering the bases) would suggest he have income protection insurance in place together with consideration of a lump sum insurance to give him choice in housing, seeking treatment and rehabilitation or in simply removing financial stress now and into the future.

As a single male on a solid income he can afford to have those covers in place. But apparently ACC will sort it out for him so there is no need.

By Stephen McFarlane

His book, called The Luck Factor, was sent to me as pre reading for a business conference. What do luck and business have in common? The habits that create what we might view as lucky outcomes are the same habits that can be successfully applied to growing a business.

Luck is generally a thing of superstition. Rabbits feet, broken mirrors, four leaf clovers, not walking under ladders and the number 13 all fit into that category. What Richard Wiseman, a psychologist, has been able to demonstrate is that luck can be the outcome of specific behaviours.

He has simplified luck into four principles. Maximise your chance opportunities, listening to your intuition, expecting good fortune and turning your bad luck into good by seeing the positives. Lucky people tend to do these things better than those who feel they are unlucky. Within each of the four principles are a number of sub principles.

A feeling from reading the book is that lucky behaviour is not rocket science. There is a logic to it. But the book did remind me that it is easy to get out of the good habits that worked for us in the past – be that in our personal or business lives. The book is an opportunity to be reminded that we can seek to control our outcomes and provides a framework for doing so. And for the doubters – Wiseman’s book backs up his principles with hard research. It’s not a superficial motivational book.

His first principle (maximise your chance opportunities) is a good example of logical outcomes. Lucky people tend to have good networks, they tend to have a relaxed attitude to life, they’re open to new experiences. People who might view themselves as not lucky, or unlucky, are not as strong in each of those areas. Logically people who make the effort to stay in contact with other people are more likely to have opportunities present themselves. Their more relaxed attitude to life increases the likelihood that they will see an opportunity and be encouraged to act on it. Others might see the positive outcomes that arise from this behaviour as luck. But it’s a natural outcome.

This same topic was the theme of a movie late last year – Yes Man. Jim Carrey stars as Carl Allen, a guy whose life is going nowhere-the operative word being “no”-until he signs up for a self-help program based on one simple covenant: say yes to everything. Unleashing the power of “Yes” begins to transform Carl’s life getting him promoted at work and opening the door to a new romance. I think we can all imagine the outcomes of saying yes more often.

The Luck Factor will never be a core business text. But if only one good idea is needed to make reading this book valuable then it’s worth a read.

By Stephen McFarlane