Provision Newsletter

Economic conditions, including falling cash rates at home and abroad, are prompting investors to shake up their asset allocation. This is having an impact on allocations to direct real estate worldwide.

The state of play

At its October board meeting, the Reserve Bank lowered the official cash rate by 25 basis points to 0.75 per cent.

The RBA is not alone in its fight to kick-start the national economy. Developed nations worldwide are grappling with sluggish growth and below-target inflation figures, and there’s no end in sight for the mid-term.¹

“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation”

said RBA governor Philip Lowe in his statement supporting the cash rate decision.

One well-understood impact of this lower-for-longer environment is compression of returns from traditional safe haven assets like bonds and cash. As a result, institutional and retail investors alike are on the hunt for new opportunities, and we see that manifesting in a jump in investors’ interest in direct commercial real estate.

Key market observations

In the last 12 months, commercial real estate (CRE) has delivered an average return of 4.9 per cent, placing it amongst the highest income return of all asset classes.²

Further, investors worldwide have lifted their exposure to CRE, from an average of 8 per cent in 2012 to 11 per cent today.³  At AMP Capital, we anticipate this figure will continue to rise, reaching approximately 15 per cent by 2025.

However, it’s important to note that while falling cash rates will likely prolong the real estate capital growth cycle, which is currently in its ninth year of positive capital growth, we expect yields to compress in the office and logistics space over the next 12 months, as the cost of capital falls.⁴

Similar patterns and projections were identified in a report from Cornell University in the United States and capital advisory firm Hodes Weill.⁵

Its 2018 Allocations Monitor, which includes research collected from 208 institutional investors in 29 countries, said that, on average, institutions are expected to increase target allocations to real estate by 20 basis points over the next 12 months.

Further, the research found that after two years of “moderating” portfolio investment returns, performance increased in 2017. Real estate portfolios generated an average annual investment return of 9.2 per cent in 2017, up from 8.7 per cent in 2016, according to the report.

“This is consistent with industry-wide real estate returns, which trended upward in 2017, spurred by a rebound in economic growth which led to stronger operating fundamentals (i.e. rent and occupancy trends) across asset classes and geographies,” the report said.

Notably, the report also measured institutions’ view of real estate as an investment opportunity from a risk-return standpoint, using a so-called ‘Conviction Index’. After four years of steady declines, this index moved from 4.9 to 5.1.

Interestingly, on the flipside, despite 92 per cent of institutions reporting that they are actively investing in real estate, institutions remain approximately 90 basis points under-invested relative to target allocations, the report found.

One to watch

At AMP Capital, we anticipate the cash rate will continue to fall, potentially as low as 0.25 per cent by early 2020. As a result, we expect the hunt for yields and growth to intensify, as investors search for steady and prolonged sources of income. In this context, real estate will be one to watch as time wears on.

Author: Luke Dixon, Head of Real Estate Research – Real Estate, Sydney, Australia

Source: AMP Capital 10 Oct 2019

¹ Source: https://www.rba.gov.au/media-releases/2019/mr-19-27.html
² Source: IPD/MSCI Total Return Digest, Q2, 2019
³ Source: Cornell/Hodes Weill & PwC
⁴ Source: AMP Capital Real Estate Research as at September 2019
⁵ Source: https://www.hodesweill.com/research 

Important notes: AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMPCFM) is the responsible entity of the Responsible Investment Leaders Balanced Fund (Fund also known as the AMP Capital Ethical Leaders Balanced Fund) (ARSN 095 787 723) (Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital). The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, AMPCFM nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this article. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this article, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to their objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Bridging troubled waters: the pros of investing in infrastructure

Global markets are yet to enter any serious downturns. Still, fragile growth outlooks, high levels of market volatility, record-low interest rates and myriad geopolitical and macroeconomic risks – not least of which is a trade war between the world’s two largest economies – will leave many wondering how they will meet their investment goals in the short to medium term.

The current investment environment is no doubt an uneasy one for many investors. Rather than wait for economic winds to change, investors could instead look to investment classes with outlooks that are less dependent on external and cyclical factors as some others. In this regard, infrastructure investment offers some compelling features in an uncertain climate.

What are some of the benefits of investing in infrastructure?

1.  Consistent returns with lower volatility¹  through market cycles

Infrastructure assets are commonly “essential services” assets. This means people have to use them on a day-in and day-out basis. As a result, both utilisation and returns can often be less dependent on the prevailing economic climate than other investments. It is very hard for someone to get through a day without having to use some form (or forms) of essential infrastructure such as electricity, water, gas, schools, hospitals, roads, rail and airports.

In addition, infrastructure assets often benefit from significant barriers to entry in the markets in which they operate. They can have contractual protection from competition by government, while high costs and long lead times for construction provide natural monopolies, and give advance warning and further insurance against new competitive threats to existing revenue streams.

For this reason, returns are often more reliable than those associated with comparable assets outside the sector. Figure 1, below, compares the performance and volatility of infrastructure in various forms, with a range of other asset classes being Australian equities, global equities, global bonds, and global real estate investment trusts (Global REITs). It demonstrates that that over the last 10 years, on an annualised basis, and relative to other asset classes with comparable performance, returns on infrastructure have been delivered with much lower levels of volatility.

Figure 1: Return and volatility of selected asset classes, 10 years to 30 June 2019.³

 
Past performance is not a reliable indicator of future performance.

2. Reliable long-term income yields

Infrastructure asset revenues are often underpinned by regulation or long-term contracts, which provide a high level of visibility of, and certainty around, future cashflows from the asset.

The most obvious example of this in practice occurs with Public Private Partnerships or ‘PPPs’ which are often used by governments to deliver infrastructure projects such as roads, hospitals, schools and public transport systems.

Concessions for assets such as these are often granted over lengthy contractual periods (which can be 30 years or more) and typically offer ‘availability’ revenues, which are paid on the basis that the asset is made available and maintained in a fit state for the intended use, irrespective of the extent to which it is actually used.

For example, in the case of a school of this type, so long as the asset is maintained in a fit state and made available for use, the asset owner gets paid a fixed amount irrespective of the number of students that are enrolled in the school.

Isolation from usage risk in this manner provides a unique level of visibility and security of future revenues from the asset, particularly given that the counterparty responsible for making the availability payments is often a highly creditworthy government body. In addition, infrastructure asset revenues are often linked to inflation, which can help investors protect against the erosion of the value of their investment by inflation over time.

3. Diversification and reduced overall portfolio risk

Overall portfolio diversification is improved when assets have a low level of correlation² – that is, where assets don’t behave the same way at the same time. The infrastructure asset class, and unlisted infrastructure in particular, has historically demonstrated low levels of correlation with other asset classes, meaning its inclusion in a broader portfolio can be an effective means of reducing overall portfolio risk.

This is illustrated in Figure 2, below, which compares the correlation of various forms of infrastructure investment with a range of other asset classes being Australian equities, global equities, global bonds, and global real estate investment trusts (REITs).

As can be seen, most listed indices are highly correlated with one another, suggesting that even portfolios that were spread across a number of listed asset classes would be poorly diversified. Bonds are negatively correlated with other asset classes, and represent an effective option for diversification, albeit one which traditionally has offered lower long-term returns (see Figure 1.)

Infrastructure, and particularly unlisted infrastructure, displays low correlation with many other asset classes, making it another option for investors wishing to diversify their portfolio, and an attractive one given the historically strong returns illustrated in Figure 1.

Figure 2: Quarterly return correlations for selected asset classes, 10 years to 30 June 2019.³

Past performance is not a reliable indicator of future performance.

Conclusion

Many investors have cottoned on to the benefits of infrastructure, and we expect this to heighten. There is a significant need for new infrastructure in both developed and developing economies. With governments across the globe burdened with high levels of debt, fewer infrastructure projects are likely to be publicly funded. The need for private capital to replace ageing infrastructure or fund new projects will consequently persist over the long term, which we believe will support a broad and growing range of infrastructure investment opportunities.

Author: John Julian, Investment Director – Infrastructure Equity, Sydney, Australia

Source: AMP Capital 10 Oct 2019

¹ Volatility is a means of measuring investment risk. It is a probability measure of the standard deviation of expected returns, and hence can provide a useful comparative measure of the relative risk of different investments over a particular time period.

² Correlation is another comparative statistical measure. It shows how asset valuations move relative to each other. For example, if assets have a correlation of 1, their values move exactly together. Hence, the addition of assets with a correlation of 1 to a portfolio would provide no diversification benefit. If the correlation was -1, the valuations would move exactly opposite to each other, providing great diversification benefits by lowering the volatility of the portfolio. Interestingly, Figure 1 shows that the volatility of a portfolio of 50% listed and 50% unlisted infrastructure is much lower (~5.5%) than would be expected by simply averaging the volatility of each (~7%). This is because of the low correlation of unlisted infrastructure to listed infrastructure as can be seen in Figure 2 (0.13).

³ Notes to charts:
The charts compare the returns, volatility and correlation of a range of asset classes represented by the indices specified below. Different asset classes will offer different investment features, including differing levels of liquidity.

Unlisted Infrastructure represented by the MSCI Australian Unlisted Infrastructure Index. Listed Infrastructure represented by the Dow Jones Brookfield Global Infrastructure Net Accumulation Index. Global Treasury Bonds represented by Bloomberg Barclays Global Treasury GDP Index. Global Equities represented by the MSCI World Net Accumulation Index. Global REITS represented by the FTSE EPRA NAREIT Developed Rental Net. Australian Equities represented by the S&P/ASX 200 (franking credit adjusted). 50/50 Unlisted/Listed Infrastructure Portfolio represented by a 50% weighting to the MSCI Australian Unlisted Infrastructure Index, and a 50% weighting to the Dow Jones Brookfield Global Infrastructure Net Accumulation Index. All data in AUD. All data is for the period 31 March 2009 to 30 June 2019, except for the FTSE EPRA NAREIT Developed Rental Net index where data is for the period 31 May 2009 to 30 June 2019 (as the data series only began in May 2009).  

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Since I first looked at “Five great charts on investing for income” two years ago, the Australian cash rate has halved, 10-year bond yields have fallen by two thirds and interest rates have resumed falling globally. Ever lower interest rates and periodic turmoil in investment markets provides an ongoing reminder of the importance of the income (cash) flow or yield an investment provides. The environment of low interest rates is challenging for those relying on investment income to fund their living costs and investing for income can seem daunting. So this note looks at five charts I find useful in understanding investing for income.

Chart #1 Alternatives to bank deposits

The income yield an investment provides is basically its annual cash flow divided by the value of the investment.

• For bank deposits, the yield is simply the interest rate, eg bank 1-year term deposit rates in Australia are about 1.3% and so this is the cash flow they will yield in the year ahead.

• For ten-year Australian Government bonds, annual cash payments on the bonds (coupons) relative to the current price of the bonds provides a yield of 1% right now.

• For corporate debt, it’s a margin above government bond yields and depends on the riskiness of the company but is currently averaging around 2% in Australia.

• For residential property, the yield is the annual value of rents as a percentage of the value of the property. On average in Australian capital cities it is about 4.2% for apartments and around 2.8% for houses. After allowing for costs, net rental yields are about 2 percentage points lower. 

• For unlisted commercial property, yields are around 4.9%.

• For infrastructure investment it averages around 4%, but franking credits could add 0.45% to this.

• For a basket of Australian shares represented by the ASX 200 index, annual dividend payments are running around 4.3% of the value of the shares. Once franking credits are allowed for, this pushes up to around 5.6%.

The next chart shows the yield available on a range of investments both now and in December 2009 for comparison.

Source: Bloomberg, REIA, RBA, JLL, AMP Capital

Key messages: First, the yield on bank deposits and government bonds is woeful. Second, there are alternatives to cash when it comes to yield or income, notably shares, property and infrastructure but even here yields have generally trended down (albeit less so for shares). Of course, investors need to allow for risk. Bank deposits have close to zero risk but any move to higher-yielding investments does entail taking on risk.

Chart #2 The gap between yields on different assets provides a guide to value

The next chart shows average yields on Australian shares and unlisted commercial property relative to the one-year term deposit rate since 2000. With share and property yields not plunging to the degree bank deposit rates have, the gap between the former and latter is extremely wide. In fact, the share yield is in its historic range. All things equal, this suggests commercial property and Australian shares continue to provide better value. The same applies to unlisted infrastructure.

Source: JLL, Bloomberg, AMP Capital

Key message: comparing yields provides a guide to relative value, and shares and unlisted commercial property remain very attractive relative to bank deposits.

Chart #3 Shares can provide stronger growth in income with less volatility than bank deposits

Investing in shares entails the risk of capital loss, but can offer a higher and less volatile income flow over time. The next chart compares initial $100,000 investments in Australian shares (ASX 200) and one-year term deposits in December 1979 and the income they have provided over time (before franking credits are allowed for in the case of shares).

2019 data is year to date/annualised. Source: RBA, Bloomberg, AMP Capital

The term deposit would still be worth $100,000 (red line) and last year would have paid roughly $2200 in interest (red bars). By contrast the $100,000 invested in shares would have grown to $1.31 million (blue line) now and last year would have paid $47,792 in dividends before franking credits (blue bars). The point is that dividends tend to grow over time (because profits and hence an investment in shares tends to rise in value) and are relatively stable compared to income from bank deposits, which vary with interest rate settings. Over the period the worst decline in dividend income from shares was a 32% decline between 2009 and 2011, whereas the income from bank deposits plunged 68% between 1990 and 1994 and by 65% between 2011 and this year. And it’s set to plunge even more given the falls in term deposit rates since June. Once franking credits are allowed for, the comparison would become even more favourable towards shares.

Key message: shares come with the risk of capital loss, but a well-diversified portfolio of Australian shares can provide stronger growth in income with less volatility in that income than bank term deposits. The key question investors focused on income (or cash flow) need to ask is what is most important: stability in the value of their investment or a higher, more sustainable income flow than bank deposits offer? But if investors do go down the share path, it’s critical to have a well-diversified portfolio of shares paying high and sustainable dividend yields. Look for stocks that have a reliable track record of growing those dividends and that have dividends that are not threatened by things like excessive gearing.

Chart #4 A bird in the hand is worth two in the bush

A high and sustainable starting point yield provides some security during volatile times. Since 1900, dividends (prior to allowing for franking credits) have provided just over half of the 11.8% average annual return from Australian shares and as can be seen in the next chart their contribution has been stable in contrast to the capital value of shares.

Source: Global Financial Data, Bloomberg, AMP Capital

Dividends are relatively smooth over time because most companies hate having to cut them as they know it annoys shareholders, so they prefer to keep them sustainable.

Key message: a high and sustainable income yield for an investment provides some security during volatile times. It’s a bit like a down payment on future returns.

Chart 5 Yield provides a guide to future returns

The income yield an investment provides is a key building block in its total return, which is determined by the following.

Total return = yield + capital growth

Generally speaking, the higher the yield an investor invests at, the higher the return their investment will likely provide. This is self-evident in the case of bank deposits because the yield is the return (assuming the bank does not default on its deposits – which is very unlikely in Australia given government protections). It can be seen in relation to bonds in the next chart, which shows a scatter plot of Australian ten-year bond yields since 1950 (along the horizontal axis) against subsequent ten-year bond returns based on the Composite All Maturities Bond Index (vertical axis). Over short-term periods, bond prices can move up and down and so influence short-term returns, but over the medium term the main driver of the return a bond investor will get is what bond yields were when they invested. If the yield on a ten-year bond is 5%, then if you hold the bond to maturity your return will be 5%. Of course, a portfolio of bonds will reflect a range of maturities and so the relationship is not perfect, but it can be seen in the next chart that the higher the starting point bond yield, the higher the subsequent return.

Source: Global Financial Data, Bloomberg, AMP Capital

When bond yields are high, they drive high bond returns over the medium term and vice versa. For example, when Australian ten-year bond yields in January 1982 were 15.2% it’s not surprising that returns from bonds over the subsequent ten years were 15.4% per annum. Similarly, when bond yields were just 3.1% in January 1950, it’s no surprise that returns from bonds over the next ten years were 3.1%. At 1% now, we are off (the bottom of) the chart meaning record low bond returns for the next decade.

Similar, albeit less perfect, relationships exist for other asset classes – the higher the yield, the higher the subsequent return.

As always, there are some risks investors must watch out for. At the individual share level, a very high dividend yield may be a sign of a “value trap” – where current profits and dividends may be fine but there is an impending threat to the company and so the share price is low. Second, high distributions may also be unsustainable if they are being paid for out of debt and reflect excessive gearing or high-risk investments. There is no free lunch.

Key message: while returns have been solid lately, low investment yields do warn of lower returns ahead – most notably from government bonds.

Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

Source: AMP Capital 15 Oct 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Sidestep the negative effects of change with thorough succession planning and you’ll put your business ahead of the curve. Not only does this improve your company’s value, but it also provides something every good business manger strives for: your employees’ peace of mind.

You know this is true – succession planning is the cornerstone of any business that lasts. It smooths the way as one leader leaves and another takes over, creating an environment in which the new management – and your business – can be successful, while reducing the effects of the unavoidable turmoil of change.

Yet succession planning is so often overlooked.

According to Deloitte, 86 percent of leaders see leadership succession planning as ‘urgent’ or ‘important’, but only 14 percent believe they do it well.

This is something that I’ve seen regularly as the CEO of Star Business Solutions – an MYOB business partner.

Here it is in a nutshell:

• Succession is inevitable

• Planning is imperative to manage risk

• It can affect your entire business

• Consider the emotional aspects

• Data provides objectivity during uncertainty

Succession planning for a family business is especially important, because the organisation is more than just a company – it’s a legacy, tied to the life’s work of just a couple of people. It’s so complex that there have been entire books written on the subject.

But even in traditional businesses, the process of letting go and handing over the reins to a successor can be surprisingly painful for the exiting leader.

Managed poorly, it’s not uncommon for the process of succession to stir up feelings of resentment, resistance and even hostility in otherwise level-headed business people.

In the middle of all that upheaval, the organisation and your team are left struggling to keep the doors open and the lights on.

A great succession plan doesn’t just create organisational stability, market confidence and value, it also comes with a raft of other benefits.

• More diverse leadership – with the objectivity that comes from succession planning, you’ll be able to more clearly see what your company needs, rather than simply replacing leadership like for like.

• A career pathway mapped for emerging leaders – this means you’ll be more able to attract and retain top talent with the promise of genuine opportunities to come.

• A strong and healthy culture – panic-purchasing leaders is the fastest way to erode staff good will, and damage that intangible, yet utterly important element: culture. When you have time to consider your options, you’ll be able to choose leaders who will embody your company values and maintain a strong and healthy workplace culture.

Why succession planning will get you ahead

Having an eye on those inevitable future changes means you’ll transition more smoothly, and your new leadership will get fully operational faster. But that’s not all.

A succession plan is about more than just planning for the future – since so many businesses fail to do it, it actually gives you a competitive advantage.

You’ll be sidestepping the messiness, infighting and underperformance that so many of your competitors will deal with.

Systems ready for change

While software isn’t the be-all and end-all of business, an old or inefficient system can make a succession process far more difficult.

At the most basic level, when BAU relies too heavily on the knowledge of one leader, it creates risk – when that leader leaves, even with the best preparation, it’s likely they’ll be leaving gaps through which leak money, time and good will.

This is especially important if you’re replacing first-generation leaders, who’ve built the business almost from scratch. They may not even be aware of how much they know – the ratios, the leading indicators and warning signs, for example.

These can, and should, be taken out of leaders’ heads and embedded into the business intelligence reporting. This will mean the system plugs the knowledge gaps, and keeps everything ticking over, while staff and new leadership get their feet under them.

These systems should also enable leaders to track progress simply and quickly. This delivers much-needed oversight, allowing others in the leadership team, the board and any consultants to keep an eye on the business as the incoming leaders learn the ropes. This gives new leaders a safety net – they can trust that any major misses will be caught early by those in the business with more experience. Similarly, during a hand-over period, it allows the outgoing leadership to stay engaged with performance, without feeling like they’re breathing down their successor’s neck.

The data objectivity can also help minimise resistance and resentment. Planning for and finding a successor based on transparent, accessible data will let all management be engaged in the process, and more readily accept outcomes.

Plan for changes of leadership team, not just the CEO

Succession planning is so often focused on protecting the business when the CEO is replaced.

The reality is that this role, while truly critical, is only one piece of the management puzzle.

Any sudden or poorly planned exit of any of your senior leadership team can create problems. The new leaders, underprepared, could have gaping holes in their knowledge of your business systems and processes, and in their understanding of the new team.

At best, this will mean they take much longer to begin working at capacity. At worse, they’ll lose the respect and support of the people they’re leading, and make decisions that abjectly affect their department and the business as a whole.

A well-prepared leader will be equipped with the context and understanding needed to be successful in the role from day one – and for that they need to be entering the business under an agreed plan.

Establish long lead times

The ideal time to plan for succession of an organisation as a whole is when a business is established.

For senior leadership, preparing for their departure should begin as part of their induction process. Obviously, that rarely is the case, but it indicates how critical early preparation is.

With long enough lead time, preparing for this change becomes BAU for everyone in your business, rather than something that seems to come out of nowhere. It also gives you time to properly develop criteria for evaluating candidates and gives the outgoing leader a chance to prepare for the change – both practically and emotionally.

There can be huge problems with the outgoing CEO not letting go emotionally and practically. It can make the new leader’s job impossible and they’ll go elsewhere.

In a best-case scenario you’ll have five years to prepare for a change in CEO, with three years being the minimum. Succession plans for the remainder of the executive, and other management will need less time.

Establish accountability and advocacy

According to research from Deloitte, succession planning is often overlooked due to a lack of ownership – it’s not clear who bears responsibility for creating the plan or for finding top talent.

This means that while people acknowledge the importance of succession planning, they’ll assume it’s someone else’s job until told otherwise.

Similarly, having advocates at executive level will help build a succession culture into the organisation – staff at every level will expect succession planning as a normal part of growth and success.

Design for where you’re going

Most succession planning looks at what you need in order to maintain the status quo.

A moment’s pause will reveal the flaw here – succession planning should be about the future of the company, not its present.

Focusing on the needs of your business in the future won’t just better prepare your next leaders for the changing world but can help remove a barrier to successful planning itself: fear.

In most businesses, staff at all levels are incentivised to appear irreplaceable – and that butts up against the most basic goal of succession planning, which is, quite literally, to replace people. That often leads to leaders spending time protecting their patch and holding back from preparing people to take over.

If the goal is to build leaders for what the business is next, it removes the feeling that leaders are replaceable now.

This makes it easier for the outgoing leadership to accept that their replacement will – and should – do things differently. This can be particularly difficult if the outgoing leader still has an ongoing financial relationship

You might think, ‘It’s my money so I have a right to be involved here’, but it becomes counterproductive. You have to trust that you’ve made the right choice of leader, and then let them get on with their work.

Sidestep the messiness, smooth the transition

A successful business doesn’t stand still – it grows, innovates, maybe even diversifies. Meanwhile, your leadership can either stand still, or move forward with the future of the business.

A great succession plan, not just for the CEO but for all the individuals on the management team, creates an environment of stability, confidence and value in a business – definitely a competitive advantage. Not only that, but it diversifies the leadership, offers career paths for promising staff, keeps an eye on the future of your business, and maintains a healthy work culture for the present.

A smart leadership team will recognise the emotional and cultural risk of a poorly planned succession. You’ll manage a smoother transition by keeping software systems up to date (retaining specialist knowledge that’s currently in the heads of the Old Guard), assigning responsibility and advocacy for succession, and establishing clear future goals.

Most importantly, your plan will begin long before it’s needed, so when succession time happens, everyone is well prepared and ready for the inevitable.

Who knows? They might even look forward to the fresh air of change.

Source : MYOB 

Reproduced with the permission of MYOB. This article by Trish Hall was originally published at https://www.myob.com/au/blog/succession-planning-competitive-advantage/

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

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Understanding cash flow in the time it takes to play a game of solitaire.

In the time that it takes to go through your deck and figure out your game strategy, this article will help you understand what cash flow is and how to write a cash flow statement.

That’s only two minutes of reading time. Ace.

One of the biggest reasons businesses fail is because of “inadequate cash reserves”. That’s just a fancy way of saying they ran out of money.

Making sure you’ve got positive cash flow – meaning you’ve got more money coming into your business than going out of it – is the single biggest factor that will affect your financial health.

Cash flow is all about the liquidity of a business. That is, the amount of money flowing in and out of a business and how much cash you actually have on hand.

The state of your cash flow will change with your business. For example, you probably won’t have much cash flow when you launch your business, as you probably wouldn’t have made many sales.

But as your business grows, keeping on top of the cash coming in and out of your business will become more and more important.

How to write a cash flow statement

Cash flow statements are an overview of money a business has coming in (inflows), and how much it has going out (outflows).

It’s important to write up cash flow statements regularly so you know that there’s enough cash to keep the business functioning.

Cash flow statements are important for many reasons. These include:

• To make sure business expenses, such as bills and wages, are paid on time

• To apply for a business loan

• To convince potential investors to invest in the business

Cash flow statements generally include three main parts:

1. Operating activities

How does your business make money on a day-to-day basis?

The ‘operating activities’ section of your cash flow statement covers how your business makes revenue.

The cash inflows in this section record whenever customers buy your product and services. The cash outflows record your everyday operational costs, such as wages, materials and other expenses.

2. Investing activities

This section of the cash flow statement relates to any long-term investments the business makes. This could include the purchase or sale of property, vehicles or other equipment, which are considered non-current assets.

The investing activities section could also include financial assets, such as securities purchased on the stock market.

3. Financing activities

This section of the cash flow statement includes information about any financial activities your business undertakes. This could include taking out business loans or issuing stocks.

This is also the part of the cash flow statement that records any debt that the business needs to repay.

Managing your cash flow

How you manage your cash flow depends on what your business does and how often you make sales.

For example, businesses that sell many low-cost products and services every day – such as grocery stores – will have inflows every day.
But a construction company that might only do one or two big jobs per year might have bigger chunks of money coming in only a few times per year.

As you can imagine, the cash flow statements of these two businesses would look very different. How they manage their cash flow and put together their statements will also be very different.

We’ve put together some general tips for managing your cash flow, as well as more specific tips for managing cash flow in a business with significant seasonal differences.

Top 3 takeaways

1. Your cash flow is the amount of money coming in and out of your business.

2. A cash flow statement helps you keep track of the movement of your business’ money. Update this regularly so you keep on top of your business’ finances.

3. A cash flow statement includes information about operational activities, investing activities and financial activities.

Please contact us on |PHONE| if you seek further assistance on this topic.

Source : MYOB 

Reproduced with the permission of MYOB. This article by MYOB Team was originally published at https://www.myob.com/au/blog/understanding-cash-flow/

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

The first rule of being a good public speaker is understanding it doesn’t come naturally, says public speaking coach Andrew Griffiths. Here’s how to overcome that.

According to this study people prefer the idea of death to speaking in front of a crowd of strangers.

Gulp. Seems a bit drastic, doesn’t it?

But as entrepreneur, author and public speaking coach, Andrew Griffiths told Flying Solo the  good news is that public speaking is something we can learn to excel at.

Lucky for us, he shares a stack of excellent tips in this video.

Here’s a sneak peek at the top 3:

1.Prepare, prepare, prepare

According to Andrew a big part of the reason we feel nervous about speaking is because we feel under prepared. He recommends doing your research and writing your speech well ahead of time so you can practice.

2.Remove the ‘unknowns’

Where possible try and Google the venue to find out what size the room is that you’ll be speaking at, and where in the room you’ll be standing.

3. Get to know your audience

Always arrive early to the event and use that time to chat to people in the audience. Andrew recommends telling them that you’ll speaking and if they have any thoughts on the topic, as this can be great addition to your intro.

Source : Flying Solo

This article by Lucy Kippist reproduced with the permission of Flying Solo – Australia’s micro business community. Find out more and join over 100K others.

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.