IMHO: Lifting dividends and share value

With holidays already “a long time ago” March 31 is fast approaching. For most boards, that means work on your FY 2025 budget is already underway.

The mindset of what a board finds acceptable is interesting. Often, for owner managed businesses, the default is to what you did last year, and then try and squeeze a bit more out. In the professional sector, you can quickly accept there will be write offs and some staff who don’t manage to get their budgeted numbers. There’s always a reason.

There are often very good reasons too. Work doesn’t always arrive when you want it. The person best suited to deal with this may be busy. Someone less skilled gets the job which requires supervision and review. It might be a job used to train a graduate, an investment worth making. Work can also go to whoever has capacity at the time, even if they are overqualified and carry a high charge out rate.

The reasons behind the budget might be valid, but let’s not stop there when this hits the board agenda. Let’s explore the investment we are making.

10 people at 80% productivity, at $180 per hour and with 10% write offs, will give you a revenue budget of around $2.26m. If this is up on last year, you might be happy with that, but let’s try a different mindset.

The starting point is that budgets go through a waterfall down to a final number.

• Days in the year
• Down to days available
• Down by a productivity %
• Down by write offs and inefficiencies.
• Down by expenses
• Down by tax
• Down by capital investment and retained earnings.
• Equals available for dividend.

What if your team was 100% busy and there were no write offs? On the same numbers, revenue would be up by 39%. That’s a $879,000 increase in revenue, all going straight to the bottom line. For directors, that’s funds for reinvestment, dividends, and a lift in EBIT, which would drive share value.

You will be saying, “yes but that’s unrealistic”. Quite true, but it tells you that you are investing $879,000 on inefficiency. If you were making that sort of investment on anything, you would want to know it was worthwhile. It would also be helpful to know why, and what this is made up of.

• Poor engagement?
• Poor pricing?
• Poor pipeline?
• Poor systems?
• Poor work allocation (over/under qualified working on jobs)?
• Poor training?
• High investment in training?
• Overworking jobs?
• Duplicated effort?
• Accepting work from the wrong sector(s) of the market?
• Accepting clients, we should not be working for?
• Other….

If you knew this, you would be able to use the 80/20 rule to focus in on what is causing the biggest losses. You should then be able to assess the payback if you found a way to fix this.

Where management is providing you a budget for 2025, look at the investment you are making in inefficiencies and ask for an explanation. The analysis and management of unproductive time and write offs could be the most profitable exercise you do this year.