Years ago, while at university, I had the world’s most boring summer job. At least until I got handed a fascinating survey.
I was interning with one of the Big Four accounting firms. Well, their New Plymouth office.
As an intern, you get handed first-run work. Dealing with bags of receipts and entering them into a system.
There is a stale, bored silence in accounting offices. The freezing works of the white-collar world. And unless you make it to a more client-facing senior post — or become a partner — your raison d’être is to process numbers.
The survey changed all that. At the time, one of the universities was conducting an annual survey of business results across the country.
That got assigned to me. So I had to go through every business on file and pull numbers from their financial statements. Revenue, cost, and profit numbers.
It soon gave me a clear view of which were the most profitable businesses in town. This would later pave the way to some of my investment strategies in the share market. Strategies we profile and follow in our Lifetime Wealth Investor newsletter.
Of course, I was sworn to strict confidentiality. But what I can tell you is this: if you want to buy into, own, or start a successful business, these factors will guarantee you the best profits:
- A moat. Your business offers something few other businesses can replicate or offer. At least without overcoming big hurdles.
- High margins. The products or services you offer have a big difference between what they cost and what you can sell them for.
- Steady volume. Big volume is hard to achieve in a small country. But regular, repeat purchasing from customers or constant export demand can keep a business thriving.
- High return on capital. Every business requires some investment. The most profitable are those that can invest a small amount to yield high earnings.
- Customer dependence. When your customers have no other option but to come to you for their needs, this can drive the above factors.
A light bulb moment
So, the most profitable businesses served by this accounting firm?
- Specialist medical professionals.
- Low capital professional service firms. Such as lawyers, insurance brokers, and real estate agencies.
- Some property developers.
- Productive farms with low or no debt. Though not so often.
Specialist medical professionals represent a good example. They have a moat, since it takes years of training to become one. The margins on their services are very high. Often beyond a clinic and some equipment, the capital investment required is not huge. And customers depend on their services to maintain their health.
But there’s another factor I noticed too.
The government often provides a key incentive to their business. Many medical professionals receive government payments to subsidise lower income patients. Or via work in public hospitals.
Much of the work done by lawyers and accountants comes about due to government regulations.
Real estate agents and property developers were also doing well due to government population policy. High rates of net migration has led to higher property prices.
So, with this latent power of the State, you’d think savvy leaders would aim for outcomes with wider benefit. Policies that could drive growth across a wider array of business activity.
Here’s what we know is needed:
- More exports to drive economic growth.
- Better rates of home ownership and lower household debt.
- Preventing the growth of an underclass.
- Make it easier for a wider range of businesses to succeed.
- Grow the working age population to pay the costs of an ageing population.
Well, the Labour Party came out recently with just one change to the tax system. Should they be re-elected. A 39% rate for earnings above $180,000.
A little above what most members of Parliament earn. How convenient.
It will likely raise little. At this level, many will divert excess earnings into trusts (a 33% rate) or companies (28%). Top-performing employees may look to negotiate other rewards. Share options and capital allocations rather than higher salaries. And in a COVID-sapped environment, many on the upper pay scales are facing reductions anyway.
Driving growth and wealth
This is what we would like to see instead:
- Reduced company taxes to allow for more business investment.
- No GST on residential home construction.
- A tax-free band on the lower part of people’s income — up to $5,000 a year without tax.
- An extra tax-free allowance of $5,000 per child — to make raising children more affordable and encourage families.
- A gradual increase to the retirement age to pay for this.
There is much you can do. We need business growth. More children and young people. More affordable homes for people to own and less investment going into rental speculation.
The courage to incentivise what is needed.
Businesses have to survive in the real economy. Beyond the game board of politics. That is clear from observing businesses — as I have done over 30 years.
That growth garden needs the right fertiliser.
And right now, there seems to be too much acid.
Editor, Wealth Morning